Item 1. Business
Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") is a Delaware limited partnership organized in June 1984. The general partners of the Partnership are Davidson Diversified Properties, Inc., a Tennessee corporation ("Managing General Partner"); Davidson Equities, Limited, ("Associate General Partner"); and David W. Talley ("Individual General Partner") (collectively, the "General Partners"). The Managing General Partner is a wholly-owned subsidiary of Apartment Investment and Management Company (“AIMCO”), a publicly traded real estate investment trust. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2017, unless terminated prior to such date.
The offering of the Partnership's limited partnership units (the "Units") commenced on October 16, 1984, and terminated on October 15, 1985. The Partnership received gross proceeds from the offering of $24,485,000 and net proceeds of $21,761,000. Upon termination of the offering, the Partnership had accepted subscriptions for 1,224.25 Units. Since its initial offering, the Partnership has not received, nor are limited partners required to make, additional capital contributions.
The Partnership was engaged in the business of operating and holding real estate properties for investment. In 1984 and 1985, during its acquisition phase, the Partnership acquired eight existing multifamily residential and commercial properties of which five were sold and two were foreclosed upon by the mortgage holder prior to 2009. During the year ended December 31, 2009, the Partnership sold its last remaining investment property, The Trails Apartments, to a third party.
As of September 30, 2009, the Partnership adopted the liquidation basis of accounting, due to the sale of its remaining investment property in August 2009. The Managing General Partner estimates that the liquidation process will be completed by September 30, 2010. Because the success in realization of assets and settlement of liabilities is based on the Managing General Partner’s best estimates, the liquidation period may be shorter than projected or it may be extended beyond the projected period.
The Partnership has no employees. Management and administrative services are provided by the Managing General Partner. These services were provided by affiliates of the Managing General Partner for the years ended December 31, 2009 and 2008.
A further description of the Partnership's business is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K.
Item 2.
Item 2. Property
On August 25, 2009, the Partnership sold its last remaining investment property, The Trails Apartments, to a third party for a gross sale price of $11,475,000. The net proceeds realized by the Partnership were approximately $2,927,000 after payment of closing costs of approximately $186,000 and the assumption of the mortgage debt encumbering the property of approximately $8,362,000 by the purchaser. As a result of the sale, the Partnership recorded a gain of approximately $8,711,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $95,000 due to the write off of unamortized loan costs.
Capital Improvements
During the nine months ended September 30, 2009, the Partnership completed approximately $144,000 of capital improvements at The Trails Apartments, consisting primarily of exterior painting and floor covering replacement. These improvements were funded from operating cash flow. The Partnership sold The Trails Apartments to a third party on August 25, 2009.
Item 3.
Item 3. Legal Proceedings
As previously disclosed, AIMCO Properties, L.P. and NHP Management Company, both affiliates of the Managing General Partner, were defendants in a lawsuit, filed as a collective action in August 2003 in the United States District Court for the District of Columbia, alleging that they willfully violated the Fair Labor Standards Act (“FLSA”) by failing to pay maintenance workers overtime for time worked in excess of 40 hours per week (“overtime claims”). The plaintiffs also contended that AIMCO Properties, L.P. and NHP Management Company (“the Defendants”) failed to compensate maintenance workers for time that they were required to be "on-call" (“on-call claims”). In March 2007, the court in the District of Columbia decertified the collective action. In July 2007, plaintiffs’ counsel filed individual cases in Federal court in 22 jurisdictions. In the second quarter of 2008, AIMCO Properties, L.P. settled the overtime cases involving 652 plaintiffs and established a framework for resolving the 88 remaining “on-call” claims and the attorneys’ fees claimed by plaintiffs’ counsel. As a result, the lawsuits asserted in the 22 Federal courts have been dismissed. During the fourth quarter of 2008, the Partnership paid approximately $3,000 for settlement amounts for alleged unpaid overtime to employees who had worked at the Partnership’s investment properties. At this time, the 88 remaining “on-call” claims and the attorneys’ fees claimed by plaintiffs’ counsel are not resolved. The parties have selected six “on-call” claims that will proceed forward through the arbitration process and have selected arbitrators. After those arbitrations have been completed, the parties will revisit settling the on-call claims. The first two arbitrations took place in December 2009 and the Defendants received a defense verdict against the first two claimants, and plaintiffs dismissed the claims of the next two claimants. The remaining two arbitrations will take place in April 2010. The Managing General Partner is uncertain as to the amount of any additional loss that may be allocable to the Partnership. Therefore, the Partnership cannot estimate whether any additional loss will occur or a potential range of loss.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
The Partnership, a publicly-held limited partnership, offered and sold 1,224.25 Limited Partnership Units ("Units") aggregating $24,485,000. As of December 31, 2009, there were 584 holders of record owning an aggregate of 1,224.25 Units. Affiliates of the Managing General Partner owned 706 units or 57.67% of the outstanding Units at December 31, 2009. There is no established public trading market for the Units and it is not anticipated that such a market will develop in the future.
The Partnership distributed the following amounts during the years ended December 31, 2009 and 2008 (in thousands, except per unit data):
Per Limited
Per Limited
Year Ended
Partnership
Year Ended
Partnership
December 31,
Unit
December 31,
Unit
Sale (1)
$3,542
$2,891.57
$12,283
$10,027.36
(1) Proceeds from the August 2009 sale of The Trails Apartments, the July 2008 sale of Reflections Apartments and the October 2008 sale of Big Walnut Apartments.
The Partnership’s cash available for distribution will be reviewed on a quarterly basis. Future cash distributions will depend on the amount of cash remaining after fully liquidating the Partnership.
In addition to its indirect ownership of the managing and associate general partner interests in the Partnership, AIMCO and its affiliates owned 706 Units in the Partnership representing 57.67% of the outstanding Units at December 31, 2009. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units 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 Managing General Partner. As a result of its ownership of 57.67% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This item should be read in conjunction with the consolidated financial statements and other items contained elsewhere in this report.
Results of Operations
As of September 30, 2009, the Partnership adopted the liquidation basis of accounting due to the sale of its remaining investment property, The Trails Apartments, on August 25, 2009.
On August 25, 2009, the Partnership sold its last remaining investment property, The Trails Apartments, to a third party for a gross sale price of $11,475,000. The net proceeds realized by the Partnership were approximately $2,927,000 after payment of closing costs of approximately $186,000 and the assumption of the mortgage debt encumbering the property of approximately $8,362,000 by the purchaser. As a result of the sale, the Partnership recorded a gain of approximately $8,711,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $95,000 due to the write off of unamortized loan costs.
The additional gain from sale of discontinued operations for the nine months ended September 30, 2009 is the result of the reversal of a sale commission accrued related to the sale of Shoppes at River Rock in a previous year. The Partnership accrued a real estate commission due to the Managing General Partner of $48,000 upon the sale of Shoppes at River Rock during the year ended December 31, 1999. During 2002, the Partnership paid $30,000 of this amount to an unaffiliated third party as part of a settlement regarding brokerage services. Approximately $18,000 was accrued at December 31, 2008 and is included in other liabilities on the consolidated balance sheet included in “Item 8.
Item 8. Financial Statements and Supplementary Data
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
LIST OF FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Net Assets in Liquidation - December 31,
Consolidated Statement of Changes in Net Assets in Liquidation for the Period from October 1, 2009 to December 31, 2009
Consolidated Balance Sheet - December 31, 2008
Consolidated Statements of Discontinued Operations for the Nine Months ended September 30, 2009 and the Year ended December 31, 2008
Consolidated Statements of Changes in Partners' (Deficiency) Capital/Net Assets in Liquidation for the Nine Months ended September 30, 2009 and the Year ended December 31, 2008
Statements of Cash Flows for the Nine Months ended September 30, 2009 and the Year ended December 31, 2008
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Partners
Davidson Diversified Real Estate II, L.P.
We have audited the accompanying consolidated balance sheet of Davidson Diversified Real Estate II, L.P. as of December 31, 2008, and the related consolidated statements of discontinued operations, changes in partners’ (deficiency) capital/net assets in liquidation, and cash flows for the year then ended, and the consolidated statements of discontinued operations, statement of changes in partners’ (deficiency) capital/net assets in liquidation and cash flows for the period from January 1, 2009 to September 30, 2009. In addition, we have audited the consolidated statement of net assets in liquidation as of December 31, 2009, and the related consolidated statement of changes in net assets in liquidation for the period from October 1, 2009 to December 31, 2009. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those stan­dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note A to the financial statements, the Managing General Partner of Davidson Diversified Real Estate II, L.P. decided to liquidate the Partnership effective September 30, 2009. As a result, the Partnership changed its basis of accounting as of September 30, 2009 from a going concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Davidson Diversified Real Estate II, L.P. at December 31, 2008, and the consolidated results of its discontinued operations and its cash flows for the year then ended and for the period from January 1, 2009 to September 30, 2009, its consolidated net assets in liquidation as of December 31, 2009, and the changes in its consolidated net assets in liquidation for the period from October 1, 2009 to December 31, 2009, in conformity with U.S. generally accepted accounting principles applied on the bases described in the preceding paragraph.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
March 31,
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(in thousands)
December 31,
Assets
Cash and cash equivalents
$
Restricted escrow (Note B)
1,343
Liabilities
Accounts payable
Accrued property taxes
Other liabilities
Taxes payable (Note D)
Estimated costs to liquidate (Note C)
Net assets in liquidation
$
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(in thousands)
For the Period from October 1, 2009 to December 31,
Net assets in liquidation at October 1, 2009
$
Adjustments to receivables
(70)
Write off of accounts payable and other liabilities
Reduction of taxes payable
Reduction of accrued property taxes
Reduction in estimated costs to liquidate
Net assets in liquidation at December 31, 2009
$
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
December 31, 2008
Assets held for Sale:
Cash and cash equivalents
$ 1,980
Receivables and deposits
Restricted escrow (Note B)
Other assets
Investment property (Note F):
Land
$
Buildings and related personal property
10,758
11,344
Less accumulated depreciation
(8,960)
2,384
$ 5,268
Liabilities and Partners' Deficit
Liabilities related to Assets held for Sale:
Accounts payable
$
Tenant security deposit liabilities
Accrued property taxes
Other liabilities
Mortgage note payable
8,431
Partners' Deficit
General partners
$ --
Limited partners (1,224.25 units issued and
outstanding)
(4,672)
(4,672)
$ 5,268
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
(in thousands, except per unit data)
Nine Months Ended
Year Ended
September 30,
December 31,
Loss from continuing operations
$ --
$ --
Loss from discontinued operations:
Revenues:
Rental income
1,250
5,591
Other income
Total revenues
1,371
6,138
Expenses:
Operating
3,089
General and administrative
Depreciation
1,841
Interest
1,248
Property taxes
Loss on early extinguishment of debt (Note F)
Total expenses
1,726
7,556
Loss from discontinued operations before gain
from sale
(355)
(1,418)
Gain from sale of discontinued operations
(Notes E and F)
8,729
19,142
Net income (Note D)
$ 8,374
$ 17,724
Net income allocated to general partners
$ 1
$ 327
Net income allocated to limited partners
8,373
17,397
$ 8,374
$ 17,724
Per limited partnership unit:
Loss from discontinued operations
$ (284.25)
$(1,135.39)
Gain from sale of discontinued operations
7,123.54
15,345.72
Net income
$ 6,839.29
$14,210.33
Distributions per limited
partnership unit
$ 2,891.57
$10,027.36
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' (DEFICIENCY) CAPITAL/NET ASSETS IN LIQUIDATION
(in thousands, except unit data)
Limited
Partnership
General
Limited
Units
Partners
Partners
Total
Original capital contributions
1,224.25
$
$ 24,485
$ 24,486
Partners' deficit at
December 31,
1,224.25
$ (320)
$ (9,793)
$(10,113)
Distributions to partners
--
(7)
(12,276)
(12,283)
Net income for the year ended
December 31,
--
17,397
17,724
Partners' deficit at
December 31,
1,224.25
--
(4,672)
(4,672)
Distributions to partners
(2)
(3,540)
(3,542)
Net income for the nine months
ended September 30, 2009
--
8,373
8,374
Partners’ (deficiency) capital at
September 30,
1,224.25
$ (1)
$
Adjustment to liquidation basis
(Notes A and C)
(105)
Net assets in liquidation at
September 30,
$
See Accompanying Notes to Consolidated Financial Statements
Davidson Diversified Real Estate II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months
Year
Ended
Ended
September 30,
December 31,
Cash flows from operating activities:
Net income
$ 8,374
$ 17,724
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation
1,841
Amortization of loan costs
Gain from sale of discontinued operations
(8,729)
(19,142)
Loss on early extinguishment of debt
Change in accounts:
Receivables and deposits
Other assets
Accounts payable
(139)
(593)
Tenant security deposit liabilities
(46)
(153)
Accrued property taxes
(282)
Other liabilities
(60)
(261)
Due to affiliate
--
(490)
Net cash used in operating activities
(255)
(355)
Cash flows from investing activities:
Property improvements and replacements
(144)
(1,476)
Deposit to restricted escrow
--
(613)
Net proceeds from sale of discontinued operations
2,927
39,045
Net cash provided by investing activities
2,783
36,956
Cash flows from financing activities:
Payments on advances from affiliate
--
(6,332)
Payments on mortgage notes payable
(69)
(330)
Repayment of mortgage notes payable
--
(16,281)
Prepayment penalty paid
--
(122)
Distributions to partners
(3,542)
(12,283)
Net cash used in financing activities
(3,611)
(35,348)
Net (decrease) increase in cash and cash equivalents
(1,083)
1,253
Cash and cash equivalents at beginning of period
1,980
Cash and cash equivalents at end of period
$
$ 1,980
Supplemental disclosure of cash flow information:
Cash paid for interest
$
$ 1,768
Supplemental disclosure of non-cash activity:
Assumption of mortgage note payable by purchaser
$ 8,362
$ --
At December 31, 2007, approximately $98,000 of property improvements and replacements were included in accounts payable and are included in property improvements and replacements for the year ended December 31, 2008.
See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Note A - Basis of Presentation
As of September 30, 2009, Davidson Diversified Real Estate II, L.P. (the "Partnership" or "Registrant") adopted the liquidation basis of accounting due to the sale of its remaining investment property (as discussed in “Note F - Disposition of Investment Properties”).
As a result of the decision to liquidate the Partnership, the Partnership changed its basis of accounting for its consolidated financial statements at September 30, 2009 to the liquidation basis of accounting. Consequently, assets have been valued at estimated net realizable value and liabilities are presented at their estimated settlement amounts, including estimated costs associated with carrying out the liquidation of the Partnership. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than amounts indicated and is based upon the managing general partner’s estimates as of the date of the consolidated financial statements.
The Managing General Partner (as defined below) estimates that the liquidation process will be completed by September 30, 2010. Because the success in realization of assets and the settlement of liabilities is based on the Managing General Partner’s best estimates, the liquidation period may be shorter than projected or it may be extended beyond the projected period.
The accompanying consolidated statements of discontinued operations for the nine months ended September 30, 2009 and the year ended December 31, 2008 reflect the operations of The Trails Apartments as loss from discontinued operations and the balance sheet as of December 31, 2008 reflects the assets and liabilities as held for sale as a result of the property’s sale to a third party on August 25, 2009 (as discussed in “Note F”). The consolidated statement of discontinued operations for the year ended December 31, 2008 also reflects the operations of Reflections Apartments and Big Walnut Apartments as loss from discontinued operations due to their sales on July 31, 2008 and October 22, 2008, respectively.
Note B - Organization and Summary of Significant Accounting Policies
Organization
The Partnership is a Delaware limited partnership organized in June 1984 to acquire and operate residential and commercial real estate properties. The general partners of the Partnership are Davidson Diversified Properties, Inc., a Tennessee corporation ("Managing General Partner"); Davidson Equities, Limited, ("Associate General Partner"); and David W. Talley ("Individual General Partner") (collectively, the "General Partners"). The Managing General Partner is a wholly-owned subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The Partnership commenced operations on October 16, 1984, and completed its acquisition of investment properties prior to December 31, 1985. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2017, unless terminated prior to such date.
Subsequent Events
The Partnership’s management evaluated subsequent events through the time this Annual Report on Form 10-K was filed.
Principles of Consolidation
The Partnership’s consolidated financial statements include all the accounts of the Partnership, one 99.9% owned partnership and one wholly owned partnership. The general partner of these partnerships is Davidson Diversified Properties, Inc. Davidson Diversified Properties, Inc. may be removed as the general partner of these partnerships by the Partnership; therefore, the consolidated partnerships are controlled and consolidated by the Partnership. All significant interpartnership balances have been eliminated.
Allocations of Profits, Gains & Losses
Net income, other than that arising from the occurrence of a sale or refinancing, and net loss shall be allocated 2% to the general partners and 98% to the limited partners.
Cash from sales or refinancings shall be distributed in the following order of priority:
First, to the limited partners, an amount which when added to all prior distributions of cash from sales or refinancings shall equal their original invested capital, plus an amount which, when added to all prior distributions to the limited partners (excluding distributions which are deducted in the calculation of adjusted invested capital), will equal 8% per annum cumulative noncompounded on the adjusted invested capital, commencing the last day of the calendar quarter in which each limited partner is admitted to the Partnership through the date of payment; and second, after payment to an affiliate of the general partners of an amount equal to its subordinated real estate commissions, 85% of the remaining cash from sales or refinancings to the limited partners and 15% of the remaining cash from sales or refinancings to the general partners.
Allocation of Cash Distributions
Cash distributions by the Partnership are allocated between general and limited partners in accordance with the Partnership Agreement. The Partnership Agreement provides that 98% of distributions of adjusted cash from operations are allocated to the limited partners and 2% to the general partners. Cash from operations is defined as the excess of cash received from operations less operating expenses paid, adjusted for certain specified items which primarily include mortgage payments on debt, property improvements and replacements not previously reserved, and the effects of other adjustments to reserves including reserve amounts deemed necessary by the Managing General Partner.
Distributions made from reserves no longer considered necessary by the general partners are considered to be additional adjusted cash from operations for allocation purposes.
Cash from sales or refinancings (as defined in the Partnership Agreement) shall be distributed to the limited partners until each limited partner has received his original invested capital plus an amount equal to a cumulative 8% per annum of the average of the limited partners' adjusted invested capital, less any prior distributions. The general partners are then entitled to receive 3% of the selling price of properties sold where they acted as a broker. The limited partners will then be allocated 85% of any remaining distributions and the general partners will receive 15%.
Investment Property
Investment property consisted of one apartment complex and was stated at cost, less accumulated depreciation, unless the carrying amount of the asset was not recoverable. The Partnership capitalized costs incurred in connection with capital expenditure activities, including redevelopment and construction projects, other tangible property improvements and replacements of existing property components. Costs including interest, property taxes and operating costs associated with redevelopment and construction projects were capitalized during periods in which redevelopment and construction projects were in progress. Costs incurred in connection with capital projects were capitalized where the costs of the project exceeded $250. Included in these capitalized costs were payroll costs associated with time spent by site employees in connection with the planning, execution and control of all capital expenditure activities at the property level. The Partnership did not capitalize any costs related to interest, property taxes or operating costs during the nine months ended September 30, 2009 or the year ended December 31, 2008. Capitalized costs were depreciated over the useful life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs were expensed as incurred.
If events or circumstances indicated that the carrying amount of the property would not be recoverable, the Partnership made an assessment of its recoverability by comparing the carrying amount to the Partnership’s estimate of the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeded the estimated aggregate undiscounted future cash flows, the Partnership recognized an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. No adjustments for impairment of value were necessary for the nine months ended September 30, 2009 or the year ended December 31, 2008.
Depreciation
Depreciation was provided by the straight-line method over the estimated lives of the apartment property and related personal property. For Federal income tax purposes, the modified accelerated cost recovery method was used for depreciation of (1) real property additions over 27 1/2 years, and (2) personal property additions over 5 years.
Deferred Costs
At December 31, 2008, loan costs of approximately $139,000, less accumulated amortization of approximately $35,000, were included in other assets. Amortization expense was approximately $9,000 for the nine months ended September 30, 2009 and approximately $51,000 for the year ended December 31, 2008 and was included in interest expense on the accompanying consolidated statements of discontinued operations. During the nine months ended September 30, 2009, loan costs of approximately $139,000 and accumulated amortization of approximately $44,000 were written off in connection with the sale of The Trails Apartments.
Leasing commissions and other direct costs incurred in connection with successful leasing efforts were deferred and amortized over the terms of the related leases. Amortization of these costs is included in operating expenses.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $730,000 at December 31, 2009 and $1,937,000 at December 31, 2008 that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts.
Tenant Security Deposits
The Partnership required security deposits from lessees for the duration of the lease and such deposits were included in receivables and deposits at December 31, 2008. The security deposits were refunded when the tenant vacated, provided the tenant had not damaged the space and was current on rental payments.
Leases
The Partnership generally leased apartment units for twelve-month terms or less. The Partnership offered rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Rental income attributable to leases, net of any concessions, was recognized on a straight-line basis over the term of the lease. The Partnership evaluated all accounts receivable from residents and established an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants.
Advertising Costs
The Partnership expensed the costs of advertising as incurred. Advertising costs of approximately $32,000 and $134,000 for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively, were charged to operating expense.
Recent Accounting Pronouncement
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162, or SFAS No. 168, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Upon the effective date of SFAS No. 168, the FASB Accounting Standards Codification, or the FASB ASC, became the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission, or SEC, under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB ASC superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the FASB ASC is now non-authoritative. Subsequent to the effective date of SFAS No. 168, the FASB will issue Accounting Standards Updates that serve to update the FASB ASC.
Segment Reporting
FASB ASC Topic 280-10, “Segment Reporting”, established standards for the way public business enterprises reported information about operating segments in annual financial statements and required that those enterprises report selected information about operating segments in interim financial reports. FASB ASC Topic 280-10 also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in FASB ASC Topic 280-10, the Partnership had only one reportable segment.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States required management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Restricted Escrow
Approximately $613,000 at both December 31, 2009 and 2008 is held on deposit with the previous mortgage lender of Reflections Apartments, pending the resolution of the Partnership’s appeal of 2006 Indiana real estate taxes. A corresponding liability of approximately $613,000 is included in accounts payable at both December 31, 2009 and 2008.
Note C - Adjustment to Liquidation Basis of Accounting
At September 30, 2009, in accordance with the liquidation basis of accounting, assets were adjusted to their estimated net realizable value and liabilities were adjusted to their estimated settlement amount. The net adjustment required to convert to the liquidation basis of accounting was a decrease in net assets of approximately $105,000, which is included in the consolidated statement of changes in partners' (deficiency) capital/net assets in liquidation. The net adjustment is summarized as follows:
Decrease in
Net Assets
(in thousands)
Adjustment of other assets and liabilities, net
$(105)
Note D - Income Taxes
The Partnership is classified as a partnership for Federal income tax purposes. Accordingly, no provision for Federal income taxes is made in the consolidated financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners.
The Partnership adopted the liquidation basis of accounting on September 30, 2009 and accordingly, did not have a consolidated statement of operations for the year ended December 31, 2009. The Federal Taxable income for the year ended December 31, 2009 was approximately $8,878,000 ($7,251.82 per limited partnership unit).
The following is a reconciliation of reported net income and Federal taxable income (in thousands, except per unit data):
Net income as reported
$ 17,724
Add (deduct):
Depreciation differences
Gain on disposal of property
(584)
Unearned income
(60)
Minority interest
(891)
Other
Federal taxable income
$ 16,931
Federal taxable income per limited
partnership unit (1)
$11,846.88
(1) For 2008, allocations under the Internal Revenue Code section 704(b) resulted in the limited partners being allocated a non-pro rata amount of taxable income or loss.
The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets and liabilities (in thousands):
The Partnership is subject to Tennessee income taxes as a result of the Partnership’s former property, The Trails Apartments, being located in the state of Tennessee. The Partnership recorded a deferred tax liability of approximately $14,000 at December 31, 2008 as a result of the Tennessee income tax requirements, which is classified in other liabilities. During the nine months ended September 30, 2009, as a result of the sale of The Trails Apartments, the Partnership recorded a deferred tax benefit of approximately $14,000, which is reflected as a reduction of operating expenses. In addition, the Partnership recognized current tax expense of approximately $265,000, as a result of the sale, which is reflected as a reduction of gain from sale of discontinued operations. The corresponding liability is included in taxes payable at December 31, 2009. The Partnership’s deferred tax liability at December 31, 2008 consisted primarily of temporary differences related to land, buildings and accumulated depreciation.
Note E - Transactions with Affiliated Parties
The Partnership has no employees and depends on the Managing General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for payments to affiliates for services and reimbursement of certain expenses incurred by affiliates on behalf of the Partnership.
Affiliates of the Managing General Partner received 5% of gross receipts from all of the Partnership’s properties as compensation for providing property management services. The Partnership paid to such affiliates approximately $69,000 and $305,000 for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively, which are included in operating expenses.
An affiliate of the Managing General Partner charged the Partnership for reimbursement of accountable administrative expenses amounting to approximately $34,000 and $359,000 for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively, which is included in general and administrative expenses, gain from sale of discontinued operations and investment property. The portion of these reimbursements included in investment property and gain from sale of discontinued operations for the nine months ended September 30, 2009 and the year ended December 31, 2008 are construction management services provided by an affiliate of the Managing General Partner of approximately $4,000 and $192,000, respectively.
In accordance with the Partnership Agreement, AIMCO Properties, L.P., an affiliate of the Managing General Partner, advanced the Partnership various funds in prior years to cover capital expenditures, operating expenses, real estate taxes and funds in connection with the refinancing of the mortgage encumbering Big Walnut Apartments. No such advances were received during the nine months ended September 30, 2009 or the year ended December 31, 2008. The Partnership repaid in full the advance balance and accrued interest of approximately $7,046,000 during the year ended December 31, 2008 with proceeds from the sale of Reflections Apartments. Interest on advances was charged at prime plus 1%. Interest expense was approximately $249,000 for the year ended December 31, 2008. At September 30, 2009 and December 31, 2008, there were no advances or associated accrued interest due to AIMCO Properties, L.P.
The Partnership accrued a real estate commission due to the Managing General Partner of $48,000 upon the sale of Shoppes at River Rock during the year ended December 31, 1999. During 2002, the Partnership paid $30,000 of this amount to an unaffiliated third party as part of a settlement regarding brokerage services. Approximately $18,000 was accrued at December 31, 2008 and is included in other liabilities on the consolidated balance sheet. Payment of this commission is subordinate to the limited partners receiving their original invested capital plus a cumulative non-compounded annual return of 8% on their adjusted invested capital. During the nine months ended September 30, 2009, the Managing General Partner determined that the limited partners would not receive both their original capital contribution and applicable cumulative return. Therefore, the Managing General Partner reversed the real estate commission of approximately $18,000 previously accrued associated with the sale of Shoppes at River Rock, which is included in gain from sale of discontinued operations for the nine months ended September 30, 2009.
The Partnership insured its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers’ compensation, property casualty, general liability and vehicle liability. The Partnership insured its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the nine months ended September 30, 2009 and the year ended December 31, 2008, the Partnership was charged by AIMCO and its affiliates approximately $28,000 and $128,000, respectively, for insurance coverage and fees associated with policy claims administration.
In addition to its indirect ownership of the managing and associate general partner interests in the Partnership, AIMCO and its affiliates owned 706 limited partnership units ("Units") in the Partnership representing 57.67% of the outstanding Units at December 31, 2009. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units 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 Managing General Partner. As a result of its ownership of 57.67% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.
Note F - Disposition of Investment Properties
On August 25, 2009, the Partnership sold its last remaining investment property, The Trails Apartments, to a third party for a gross sale price of $11,475,000. The net proceeds realized by the Partnership were approximately $2,927,000 after payment of closing costs of approximately $186,000 and the assumption of the mortgage debt encumbering the property of approximately $8,362,000 by the purchaser. As a result of the sale, the Partnership recorded a gain of approximately $8,711,000 during the nine months ended September 30, 2009. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $95,000 due to the write off of unamortized loan costs.
On July 31, 2008, the Partnership sold Reflections Apartments to a third party for a gross sale price of approximately $31,010,000. The net proceeds received by the Partnership were approximately $30,783,000 after payment of closing costs of approximately $227,000. The Partnership used approximately $11,981,000 to repay the mortgage encumbering the property. As a result of the sale, the Partnership recorded a gain of approximately $15,471,000 during the year ended December 31, 2008, which is included in gain from sale of discontinued operations, and a loss on the early extinguishment of debt of approximately $137,000 due to the write off of unamortized loan costs and a prepayment penalty of approximately $122,000.
On October 22, 2008, the Partnership sold Big Walnut Apartments to a third party for a gross sale price of approximately $8,300,000. The net proceeds received by the Partnership were approximately $8,262,000 after payment of closing costs of approximately $38,000. The Partnership used approximately $4,300,000 to repay the mortgage encumbering the property. As a result of the sale, the Partnership recorded a gain of approximately $3,671,000 during the year ended December 31, 2008, which is included in gain from sale of discontinued operations, and a loss on the early extinguishment of debt of approximately $47,000 due to the write-off of unamortized loan costs.
Note G - Contingencies
As previously disclosed, AIMCO Properties, L.P. and NHP Management Company, both affiliates of the Managing General Partner, were defendants in a lawsuit, filed as a collective action in August 2003 in the United States District Court for the District of Columbia, alleging that they willfully violated the Fair Labor Standards Act (“FLSA”) by failing to pay maintenance workers overtime for time worked in excess of 40 hours per week (“overtime claims”). The plaintiffs also contended that AIMCO Properties, L.P. and NHP Management Company (“the Defendants”) failed to compensate maintenance workers for time that they were required to be "on-call" (“on-call claims”). In March 2007, the court in the District of Columbia decertified the collective action. In July 2007, plaintiffs’ counsel filed individual cases in Federal court in 22 jurisdictions. In the second quarter of 2008, AIMCO Properties, L.P. settled the overtime cases involving 652 plaintiffs and established a framework for resolving the 88 remaining “on-call” claims and the attorneys’ fees claimed by plaintiffs’ counsel. As a result, the lawsuits asserted in the 22 Federal courts have been dismissed. During the fourth quarter of 2008, the Partnership paid approximately $3,000 for settlement amounts for alleged unpaid overtime to employees who had worked at the Partnership’s investment properties. At this time, the 88 remaining “on-call” claims and the attorneys’ fees claimed by plaintiffs’ counsel are not resolved. The parties have selected six “on-call” claims that will proceed forward through the arbitration process and have selected arbitrators. After those arbitrations have been completed, the parties will revisit settling the on-call claims. The first two arbitrations took place in December 2009 and the Defendants received a defense verdict against the first two claimants, and plaintiffs dismissed the claims of the next two claimants. The remaining two arbitrations will take place in April 2010. The Managing General Partner is uncertain as to the amount of any additional loss that may be allocable to the Partnership. Therefore, the Partnership cannot estimate whether any additional loss will occur or a potential range of loss.
The Partnership is unaware of any other pending or outstanding litigation matters involving it or its former investment properties that are not of a routine nature arising in the ordinary course of business.
Environmental
Various Federal, state and local laws subject property owners or operators to liability for management, and the costs of removal or remediation, of certain hazardous substances present on a property, including lead-based paint. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of the hazardous substances. The presence of, or the failure to manage or remedy properly, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by government agencies, and potential fines, or penalties imposed by such agencies in connection therewith, the presence of hazardous substances on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal, remediation or disposal of hazardous substances through a licensed disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of its former properties, the Partnership could potentially be liable for environmental liabilities or costs associated with its former properties.
Mold
The Partnership is aware of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold, some of which have resulted in substantial monetary judgments or settlements. The Partnership had only limited insurance coverage for property damage loss claims arising from the presence of mold and for personal injury claims related to mold exposure. Affiliates of the Managing General Partner have implemented policies, procedures, third-party audits and training and the Managing General Partner believes that these measures will prevent or eliminate mold exposure and will minimize the effects that mold may have on residents. To date, the Partnership has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change the Managing General Partner can make no assurance that liabilities resulting from the presence of or exposure to mold at its former property will not have a material adverse effect on the Partnership’s consolidated financial condition.
ITEM 9.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A(T).
Item 9A(T). Controls and Procedures
(a) Disclosure Controls and Procedures
The Partnership’s management, with the participation of the principal executive officer and principal financial officer of the Managing General Partner, 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 principal executive officer and principal financial officer of the Managing General Partner, 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.
Management’s Report on Internal Control Over Financial Reporting
The Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the principal executive and principal financial officers of the Managing General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, and effected by the Partnership’s management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets;
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the Partnership’s management; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Partnership’s management assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2009. In making this assessment, the Partnership’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on their assessment, the Partnership’s management concluded that, as of December 31, 2009, the Partnership’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Partnership’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only management’s report in this annual report.
(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 fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Davidson Diversified Real Estate II, L.P. (the “Partnership” or the “Registrant”) has no officers or directors. Davidson Diversified Properties, Inc. (the “Managing General Partner”) manages and controls substantially all of the Partnership’s affairs and has general responsibility in all matters affecting its business.
The names and ages of, as well as the positions and offices held by, the present directors and officers of the Managing General Partner are set forth below. There are no family relationships between or among any officers or directors.
Name
Age
Position
Steven D. Cordes
Director and Senior Vice President
John Bezzant
Director and Senior Vice President
Timothy J. Beaudin
President and Chief Operating Officer
Ernest M. Freedman
Executive Vice President and Chief Financial Officer
Lisa R. Cohn
Executive Vice President, General Counsel and Secretary
Paul Beldin
Senior Vice President and Chief Accounting Officer
Stephen B. Waters
Senior Director of Partnership Accounting
Steven D. Cordes was appointed as a Director of the Managing General Partner effective March 2, 2009. Mr. Cordes has been a Senior Vice President of the Managing General Partner and AIMCO since May 2007. Mr. Cordes joined AIMCO in 2001 as a Vice President of Capital Markets with responsibility for AIMCO’s joint ventures and equity capital markets activity. Prior to joining AIMCO, Mr. Cordes was a manager in the financial consulting practice of PricewaterhouseCoopers. Effective March 2009, Mr. Cordes was appointed to serve as the equivalent of the chief executive officer of the Partnership. Mr. Cordes brings particular expertise to the Board in the areas of asset management as well as finance and accounting.
John Bezzant was appointed as a Director of the Managing General Partner effective December 16, 2009. Mr. Bezzant has been a Senior Vice President of the Managing General Partner and AIMCO since joining AIMCO in June 2006. Prior to joining AIMCO, from 2005 to June 2006, Mr. Bezzant was a First Vice President at Prologis, a Denver, Colorado-based real estate investment trust, and from 1986 to 2005, Mr. Bezzant served as Vice President, Asset Management at Catellus Development Corporation, a San Francisco, California-based real estate investment trust. Mr. Bezzant brings particular expertise to the Board in the areas of real estate finance, property operations, sales and development.
Timothy J. Beaudin was appointed President and Chief Operating Officer of AIMCO and the Managing General Partner in February 2009. He joined AIMCO and the Managing General Partner as Executive Vice President and Chief Development Officer in October 2005 and was appointed Executive Vice President and Chief Property Operating Officer of the Managing General Partner and AIMCO in October 2008. Mr. Beaudin oversees conventional and affordable property operations, transactions, asset management, and redevelopment and construction services for AIMCO and the Managing General Partner. Prior to joining AIMCO and beginning in 1995, Mr. Beaudin was with Catellus Development Corporation. During his last five years at Catellus, Mr. Beaudin served as Executive Vice President, with management responsibility for development, construction and asset management.
Ernest M. Freedman was appointed Executive Vice President and Chief Financial Officer of the Managing General Partner and AIMCO in November 2009. Mr. Freedman joined AIMCO in 2007 as Senior Vice President of Financial Planning and Analysis and has served as Senior Vice President of Finance since February 2009, responsible for financial planning, tax, accounting and related areas. Prior to joining AIMCO, from 2004 to 2007, Mr. Freedman served as chief financial officer of HEI Hotels and Resorts.
Lisa R. Cohn was appointed Executive Vice President, General Counsel and Secretary of the Managing General Partner and AIMCO in December 2007. From January 2004 to December 2007, Ms. Cohn served as Senior Vice President and Assistant General Counsel of AIMCO. Ms. Cohn joined AIMCO in July 2002 as Vice President and Assistant General Counsel. Prior to joining AIMCO, Ms. Cohn was in private practice with the law firm of Hogan and Hartson LLP.
Paul Beldin joined AIMCO in May 2008 and has served as Senior Vice President and Chief Accounting Officer of AIMCO and the Managing General Partner since that time. Prior to joining AIMCO, Mr. Beldin served as controller and then as chief financial officer of America First Apartment Investors, Inc., a publicly traded multifamily real estate investment trust, from May 2005 to September 2007 when the company was acquired by Sentinel Real Estate Corporation. Prior to joining America First Apartment Investors, Inc., Mr. Beldin was a senior manager at Deloitte and Touche LLP, where he was employed from August 1996 to May 2005, including two years as an audit manager in SEC services at Deloitte’s national office.
Stephen B. Waters was appointed Senior Director of Partnership Accounting of AIMCO and the Managing General Partner in June 2009. Mr. Waters has responsibility for partnership accounting with AIMCO and serves as the principal financial officer of the Managing General Partner. Mr. Waters joined AIMCO as a Director of Real Estate Accounting in September 1999 and was appointed Vice President of the Managing General Partner and AIMCO in April 2004. Prior to joining AIMCO, Mr. Waters was a senior manager at Ernst & Young LLP.
The Registrant is not aware of the involvement in any legal proceedings with respect to the directors and executive officers listed in this Item 10.
One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act: Further, one or more of the above persons are also officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act.
The board of directors of the Managing General Partner does not have a separate audit committee. As such, the board of directors of the Managing General Partner fulfills the functions of an audit committee. The board of directors has determined that Steven D. Cordes meets the requirement of an "audit committee financial expert".
The directors and officers of the Managing General Partner with authority over the Partnership are all employees of subsidiaries of AIMCO. AIMCO has adopted a code of ethics that applies to such directors and officers that is posted on AIMCO's website (www.AIMCO.com). AIMCO's website is not incorporated by reference to this filing.
Item 11.
Item 11. Executive Compensation
None of the directors or officers of the Managing General Partner received any remuneration from the Partnership during the years ended December 31, 2009 and 2008.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except as noted below, no person or entity was known by the Partnership to be the beneficial owner of more than 5% of the Limited Partnership Units of the Partnership as of December 31, 2009.
Entity
Number of Units
Percentage
Cooper River Properties, LLC
122.75
10.03%
(an affiliate of AIMCO)
AIMCO IPLP, L.P.
35.75
2.92%
(an affiliate of AIMCO)
Davidson Diversified Properties, Inc.
0.25
0.02%
(an affiliate of AIMCO)
AIMCO Properties, L.P.
547.25
44.70%
(an affiliate of AIMCO)
Cooper River Properties, LLC, AIMCO IPLP, L.P. and Davidson Diversified Properties, Inc., are indirectly ultimately owned by AIMCO. Their business address is 55 Beattie Place, Greenville, SC 29601.
AIMCO Properties, L.P. is indirectly ultimately controlled by AIMCO. Its business address is 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237.
No director or officer of the Managing General Partner owns any Units.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Partnership has no employees and depends on the Managing General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for payments to affiliates for services and reimbursement of certain expenses incurred by affiliates on behalf of the Partnership.
Affiliates of the Managing General Partner received 5% of gross receipts from all of the Partnership’s properties as compensation for providing property management services. The Partnership paid to such affiliates approximately $69,000 and $305,000 for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively, which are included in operating expenses on the consolidated statements of discontinued operations included in “Item 8. Financial Statements and Supplementary Data”.
An affiliate of the Managing General Partner charged the Partnership for reimbursement of accountable administrative expenses amounting to approximately $34,000 and $359,000 for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively, which is included in general and administrative expenses, gain from sale of discontinued operations and investment property on the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”. The portion of these reimbursements included in investment properties and gain from sale of discontinued operations for the nine months ended September 30, 2009 and the year ended December 31, 2008 are construction management services provided by an affiliate of the Managing General Partner of approximately $4,000 and $192,000, respectively.
In accordance with the Partnership Agreement, AIMCO Properties, L.P., an affiliate of the Managing General Partner, advanced the Partnership various funds in prior years to cover capital expenditures, operating expenses, real estate taxes and funds in connection with the refinancing of the mortgage encumbering Big Walnut Apartments. No such advances were received during the nine months ended September 30, 2009 or the year ended December 31, 2008. The Partnership repaid in full the advance balance and accrued interest of approximately $7,046,000 during the year ended December 31, 2008 with proceeds from the sale of Reflections Apartments. Interest on advances was charged at prime plus 1%. Interest expense was approximately $249,000 for the year ended December 31, 2008. At September 30, 2009 and December 31, 2008, there were no advances or associated accrued interest due to AIMCO Properties, L.P.
The Partnership accrued a real estate commission due to the Managing General Partner of $48,000 upon the sale of Shoppes at River Rock during the year ended December 31, 1999. During 2002, the Partnership paid $30,000 of this amount to an unaffiliated third party as part of a settlement regarding brokerage services. Approximately $18,000 was accrued at December 31, 2008 and is included in other liabilities on the consolidated balance sheet included in “Item 8. Financial Statements and Supplementary Data”. Payment of this commission is subordinate to the limited partners receiving their original invested capital plus a cumulative non-compounded annual return of 8% on their adjusted invested capital. During the nine months ended September 30, 2009, the Managing General Partner determined that the limited partners would not receive both their original capital contribution and applicable cumulative return. Therefore, the Managing General Partner reversed the real estate commission of approximately $18,000 previously accrued associated with the sale of Shoppes at River Rock, which is included in gain from sale of discontinued operations for the nine months ended September 30, 2009.
The Partnership insured its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers’ compensation, property casualty, general liability and vehicle liability. The Partnership insured its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the nine months ended September 30, 2009 and the year ended December 31, 2008, the Partnership was charged by AIMCO and its affiliates approximately $28,000 and $128,000, respectively, for insurance coverage and fees associated with policy claims administration.
In addition to its indirect ownership of the managing and associate general partner interests in the Partnership, AIMCO and its affiliates owned 706 Units in the Partnership representing 57.67% of the outstanding Units at December 31, 2009. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units 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 Managing General Partner. As a result of its ownership of 57.67% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.
Neither of the Managing General Partner’s directors is independent under the independence standards established for New York Stock Exchange listed companies as both directors are employed by the parent of the Managing General Partner.
Item 14.
Item 14. Principal Accounting Fees and Services
The Managing General Partner has reappointed Ernst & Young LLP as independent auditors to audit the consolidated financial statements of the Partnership for 2010. The aggregate fees billed for services rendered by Ernst & Young LLP for 2009 and 2008 are described below.
Audit Fees. Fees for audit services totaled approximately $40,000 and $58,000 for 2009 and 2008, respectively. Fees for audit services also include fees for the reviews of the Partnership’s Quarterly Reports on Form 10-Q.
Tax Fees. Fees for tax services totaled approximately $21,000 and $30,000 for 2009 and 2008, respectively.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a) The following consolidated financial statements of the Partnership are included in Item 8:
Consolidated Statement of Net Assets in Liquidation - December 31, 2009.
Consolidated Statement of Changes in Net Assets in Liquidation for the period from October 1, 2009 to December 31, 2009.
Consolidated Balance Sheet - December 31, 2008.
Consolidated Statements of Discontinued Operations for the Nine Months ended September 30, 2009 and the Year ended December 31, 2008.
Consolidated Statements of Changes in Partners' (Deficiency) Capital/Net Assets in Liquidation for the Nine Months ended September 30, 2009 and the Year ended December 31, 2008.
Statements of Cash Flows for the Nine Months ended September 30, 2009 and the Year ended December 31, 2008.
Notes to Consolidated Financial Statements.
Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
(b) Exhibits:
See Exhibit Index.
The agreements included as exhibits to this Form 10-K contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to an investor; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. The Partnership acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-K not misleading. Additional information about the Partnership may be found elsewhere in this Form 10-K and the Partnership’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/Steven D. Cordes
Steven D. Cordes
Senior Vice President
By: /s/Stephen B. Waters
Stephen B. Waters
Senior Director of Partnership Accounting
Date: March 31,
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/John Bezzant
Director and Senior
Date: March 31,
John Bezzant
Vice President
/s/Steven D. Cordes
Director and Senior
Date: March 31,
Steven D. Cordes
Vice President
/s/Stephen B. Waters
Senior Director of Partnership
Date: March 31,
Stephen B. Waters
Accounting
DAVIDSON DIVERSIFIED REAL ESTATE II, LP
EXHIBIT INDEX
Exhibit Number Description of Exhibit
Partnership Agreement dated June 11, 1984, as amended is incorporated by reference to Exhibit A to the Prospectus of the Registrant dated October 16, 1984 as filed with the Commission pursuant to Rule 424(b) under the Act.
3B Amendment No. 1 to the Partnership Agreement dated August 1, 1985 is incorporated by reference to Exhibit 3B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985.
3C First Amendment to the Partnership Agreement of Registrant, dated May 21, 2008, incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008.
3D Second Amendment to the Partnership Agreement of Registrant, dated December 29, 2008, incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Certificate of Limited Partnership dated June 11, 1984 is incorporated by reference to Exhibit 4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
4A Certificate of Amendment to Limited Partnership dated July 17, 1984 is incorporated by reference to Exhibit 4A to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
4B Restated Certificate of Limited Partnership dated October 5, 1984 is incorporated by reference to Exhibit 4B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.
10GG Assignment of Limited Partnership Interest of Freeman Equities, Limited, dated December 31, 1991 between Davidson Diversified Properties, Inc. and Insignia Jacques-Miller, L.P. is incorporated by reference to Exhibit 10KKK to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
10HH Assignment of General Partner Interests of Freeman Equities, Limited, dated December 31, 1991 between Davidson Diversified Properties, Inc. and MAE GP Corporation is incorporated by reference to Exhibit 10LLL to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
10II Stock certificate, dated December 31, 1991 showing ownership of 1,000 shares of Davidson Diversified Properties, Inc. by MAE GP Corporation is incorporated by reference to Exhibit 10MMM to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
10.22 Purchase and Sale Contract between The Trails, L.P., a South Carolina limited partnership, and White Eagle Property Group, LLC, a New York limited liability company, dated June 24, 2009. (Incorporated by reference to the Partnership’s Current Report on Form 8-K dated June 24, 2009).
10.23 First Amendment of Purchase and Sale Contract between The Trails, L.P., a South Carolina limited partnership, and White Eagle Property Group, LLC, a New York limited liability company, dated August 7, 2009. (Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 7, 2009).
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 the equivalent of the 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.