ITEM 1. BUSINESS
Century Pacific Housing Tax Credit Fund-II ("CPTCHF-II "or the "Partnership") was formed on September 2, 1988 as a limited partnership under the laws of the State of California to invest in multi-family housing developments (the "Properties"). The Partnership's business is to invest primarily in other limited partnerships ("Operating Partnerships") that are organized for the purpose of either constructing or acquiring and operating existing affordable multi-family rental apartments (the "Properties") that are eligible for the Low-Income Housing Tax Credit, or to a lesser extent, the Rehabilitation Tax Credit, both enacted by the Tax Reform Act of 1986 (sometimes referred to as "Credits" or "Tax Credits"). The Partnership invested in two Properties, each of which qualifies for the Low-Income Housing Tax Credit. Both of these Properties receive one or more forms of assistance from Federal, state or local governments. A summary of the Partnership's objectives and a summary of the Tax Credits are provided in the Prospectus under "Investment Objectives and Policies" and "Federal Income Tax Aspects" on pages 45 and 79, respectively, and are incorporated herein by reference.
The Partnership does not employ any persons. Alternatively, the Partnership reimburses an affiliate for allocated overhead, consisting primarily of payroll costs.
In order to stimulate private investment in low and moderate income housing of the types in which the Partnership has invested, the federal government, through the Department of Housing and Urban Development (HUD), has provided investors with significant ownership incentives intended to reduce the risks and provide investors/owners with certain tax benefits, limited cash distributions and the possibility of long-term capital gains. The ownership incentives include interest subsidies, rent subsidies, and mortgage insurance and other measures. Long-term investments in real estate limit the ability of the Partnership to vary its portfolio in response to changing economic, financial and investment conditions, and such investments are subject to changes in economic circumstances and housing patterns, rising operating costs and vacancies, rent controls and collection difficulties, costs and availability of energy, as well as other factors which normally affect real estate values. In addition, these Properties usually are rent restricted and are subject to government agency programs, which may or may not require prior consent to transfer ownership.
The Partnership acquired the Properties by investing as the limited partner in the Operating Partnership, which owns the Properties. As a limited partner, the Partnership's liability for obligations of the Operating Partnership is limited to its investment. The Partnership made capital contributions to the Operating Partnerships in amounts sufficient to pay the Operating Partnership's expenses and to reimburse the General Partners for their costs incurred in forming the Operating Partnership, if any, and acquiring the Properties. For each acquisition, this typically included a cash down payment (in one or more installments), acceptance of the Property's mortgage indebtedness, and execution of a Purchase Money Note in favor of the seller of the Property. For a summary of the acquisition financing activities for each Property, see the financial information contained under ITEM 2.
ITEM 2.
The Partnership's primary objective is to provide Low-Income Housing Tax credits to limited partners generally over a 10-year period. Each of the Partnership's Operating Partnerships has been allocated, by the relevant state tax credit agency, an amount of the Low-Income Housing Tax Credit for 10 years from the date the Property is placed-in-service. The required holding period of the Properties is 15 years (the "Compliance Period"). The Properties must satisfy rent restrictions, tenant income limitations and other requirements (the "Low-Income Housing Tax Credit Requirements") in order to maintain eligibility for recognition of the Low-Income Housing Tax Credit at all times during the Compliance Period. Once an
Operating Partnership has become eligible for the Low-Income Housing Tax Credit, it may lose such eligibility and suffer an event of recapture if its Property fails to remain in compliance with the Low-Income Housing Tax Credit Requirements. To date, neither of the Operating Partnerships has suffered an event of recapture of the Low-Income Housing Tax Credit.
ITEM 2. PROPERTIES
As of March 31, 1998, the Partnership had acquired equity interests in the Operating Partnerships set forth in the table below. Each of the Properties acquired by the Operating Partnerships receives benefits under government assistance programs provided by HUD and the Illinois Housing Development Authority (IHDA). The table set forth below summarizes the Operating Partnerships acquired and the government assistance programs benefiting each Property. Further information concerning these Properties may be found in Supplement No. 2 to the Prospectus, pages 4 through 66, which information is incorporated herein by reference and is summarized below.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of June 15, 1998, there were no pending legal proceeding against the Partnership or any Operating Partnership in which it has invested.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during the year ended March 31, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
There is at present no public market for the units of limited partnership interests (the "Units"), and it is unlikely that any public market for the Units will develop. See the Prospectus under "Transferability of Interest" on pages 24 and 52 of the Prospectus, which information is incorporated herein by reference. The number of owners of Units as of June 15, 1998 was approximately 508, holding 5,754 units.
As of June 15, 1998, there were no cash distributions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following summary of selected financial data should be read in conjunction with ITEM 14, herein, which also includes a summary of the Partnership's significant accounting policies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership offered limited partnership interests to the public during calendar year 1989, pursuant to a Registration Statement filed under the Securities Act of 1933. The Partnership raised $5,754,000 in equity capital and, thereafter, invested in Operating Partnerships, which own multifamily Properties located in Illinois and Massachusetts representing approximately $25,000,000 of Property value. These Properties under Section 42 of the Internal Revenue Code earn low-income housing tax credits, which are passed through to the individual partners of the Partnership. Low-Income housing tax credits earned by the Partnership for calendar years 1997, 1996, and 1995 were $860,539, $861,187, and $859,233, respectively.
As of March 31, 1998, the Partnership's portfolio consists of two Properties totaling 533 units. For a summary of the combined financial status of the Operating Partnerships and the Properties, see the financial information contained under ITEM 14.
The market for multifamily residential properties throughout the country continued to show signs of improvement in 1997, as the ongoing absence of significant new construction activity further improved the market's supply and demand characteristics. Management believes that overall real estate market conditions will improve further in 1998 along with the continued improvement in general economic conditions. In addition, the recent increases in market interest rate levels will make new construction more expensive to finance, which should continue to limit the addition of new multifamily units to the existing supply. However, the effects of the gradually improving market conditions on the Partnership's operating property investments, while positive, are limited by the government restrictions on rental real estate increases. A substantial amount of the revenue generated by these properties comes from rental subsidy payments made by federal or state housing agencies. These features, which are characteristic of all low-income housing properties, limit the pool of potential buyers for these real estate assets. As a limited partner of the Operating Partnerships, the Partnership does not control property disposition decisions, and management is not aware of any plans or intentions of the general partners of these partnerships to sell any of the investment properties in the near future.
The Partnership is currently experiencing a liquidity problem. Under the Partnership Agreement, the Partnership is entitled to receive distributions of surplus cash from the Operating Partnerships, which are to provide the funds necessary for the Partnership to meet its administrative expenses and pay the Partnership management fee. To date, the Operating Partnerships have not provided sufficient cash distributions to enable the Partnership to meet its current obligations. As a result of the foregoing, the Partnership has been dependent upon its General Partners and affiliates for continued financial support to meet its operating costs. Management maintains that the General Partners and/or affiliates, though not required to do so, will continue to fund operations of the Partnership by continuing to fund operating costs and by deferring payment of allocated overhead expenses and repayment of operating cash advances. Allocated administrative expenses paid or accrued to affiliates and the General Partners represent reimbursement of the actual costs of goods and materials used for or by the Partnership, salaries, related payroll costs and other administrative items incurred or allocated, and direct expenses incurred in rendering legal, accounting/bookkeeping, computer, printing and public relations services. Items excluded from the overhead allocation include overhead expenses of the General Partners, including rent and salaries of employees not specifically performing the services described above. Unpaid allocated administrative expenses and partnership management fees, an annual amount up to .5% of invested assets, will accrue for payment in future operating years.
The Partnership is not expected to have access to any significant sources of financing. Accordingly, if unforeseen contingencies arise that cause an Operating Partnership to require additional capital to sustain operations, in addition to that previously contributed by the Partnership, the source of the required capital needs may be from (i) limited reserves from the Partnership (which may include distributions received from the Operating Partnerships that would otherwise be available for distribution to partners), (ii) debt financing at the Operating Partnership level (which may not be available), or (iii) additional equity contributions from the general partner of the Operating Partnerships (which may not be available). There can be no assurance that any of these sources would be readily available to provide for possible additional capital requirements, which may be necessary to sustain the operations of the Operating Partnerships.
TAX REFORM ACT OF 1986, OMNIBUS BUDGET RECONCILIATION ACT OF 1987, TECHNICAL AND MISCELLANEOUS REVENUE ACT OF 1988, OMNIBUS BUDGET RECONCILIATION ACT OF 1989 AND OMNIBUS BUDGET RECONCILIATION ACT OF 1990
The Partnership is organized as a limited partnership and is a "pass through" tax entity which does not, itself, pay federal income tax. However, the partners of the Partnership, who are subject to federal income tax, may be affected by the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation Act of 1989 and the Omnibus Budget Reconciliation Act of 1990 (collectively the "Tax Acts"). The Partnership will consider the effect of certain aspects of the Tax Acts on the partners when making investment decisions. The Partnership does not anticipate that the Tax Acts will have a material adverse impact on the Partnership's business operations, capital resources, plans or liquidity.
RESULTS OF OPERATIONS
The fiscal year of the Partnership ends on March 31 of each year, however, the fiscal year of each Operating Partnership ends on December 31. Therefore, the earnings and losses of the Operating Partnerships reflected on the equity method in the Partnership's financial statements for its current fiscal year are for the calendar year ended December 31, 1997.
1998 COMPARED TO 1997
For the fiscal year ended March 31, 1998, the Partnership recorded a net loss of approximately $430,000, as compared to a net loss of approximately $324,000 for the prior fiscal year. The increase in net loss is the result of an increase in the Partnership's equity in net losses of the Operating Partnerships of approximately $101,000 and an increase in the expenses of approximately $3,500 for the current fiscal year. General and administrative expenses, namely allocated administrative expenses and partnership management fees, continue each fiscal year to comprise an increasing portion of the Partnership's net loss.
In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. One of the two investments has had an equity method basis of zero since March 31, 1993. The Partnership's recorded share of the Operating Partnership's losses in the current fiscal period consists of losses of approximately $248,000 from the Washington Courts Limited Partnership. In the prior fiscal year, losses of approximately $147,000 from the operations of Washington Courts were recorded. The carrying value of the Partnership's investment in Laurel-Clayton was reduced to zero during fiscal 1993.
In the aggregate, combined rental revenue of the Operating Partnerships increased during the current calendar year. The combined total rental revenue increased by approximately $144,000 in the current calendar year, with the largest increase occurring at Laurel-Clayton. The average occupancy levels remained at or above 96% in both calendar years in both properties. Such results reflect the generally improving market conditions referred to above. In addition to the improvement of revenue, the combined total expenses of the two operating properties decreased by approximately $147,000 in the current year primarily due to a decrease in repairs and maintenance.
1997 COMPARED TO 1996
For the fiscal year ended March 31, 1997, the Partnership recorded a net loss of approximately $324,000, as compared to a net loss of approximately $331,000 for the prior fiscal year. The decrease in net loss is the result of an decrease in the Partnership's equity in net losses of the Operating Partnerships of approximately $11,000 and an increase in the expenses of approximately $3,000 for the current fiscal year. General and administrative expenses, namely allocated administrative expenses and partnership management fees, continue each fiscal year to comprise an increasing portion of the Partnership's net loss. This trend results primarily from a decrease in the Partnership's recognition of equity losses from the Operating Partnerships in each subsequent fiscal year.
In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. One of the two investments has had an equity method basis of zero since March 31, 1993. The Partnership's recorded share of the Operating Partnership's losses in the current fiscal period consists of losses of approximately $147,000 from the Washington Courts Limited Partnership. In the prior fiscal year, losses of approximately $158,000 from the operations of Washington Courts were recorded. The carrying value of the Partnership's investment in Laurel-Clayton was reduced to zero during fiscal 1993.
In the aggregate, combined rental revenue of the Operating Partnerships increased during the current calendar year. The combined total rental revenue increased by approximately $63,000 in the current calendar year, with the largest increase occurring at Laurel-Clayton. The average occupancy levels remained at or above 96% in both calendar years in both properties. Such results reflect the generally improving market conditions referred to above. In addition to the improvement of revenue, the combined total expenses of the two operating properties decreased by approximately $410,000 in the current year primarily due to certain nonrecurring maintenance projects that were completed in 1995 and no expenses were recorded for the projects in 1996.
1996 COMPARED TO 1995
For the fiscal year ended March 31, 1996, the Partnership recorded a net loss of approximately $331,000, as compared to a net loss of approximately $420,000 for the prior fiscal year. The decrease in net loss is the result of a decrease in the Partnership's equity in net losses of the Operating Partnerships of approximately $68,000 and a decrease in the expenses of approximately $20,000 for the current fiscal year. General and administrative expenses, namely allocated administrative expenses and partnership management fees, continue each fiscal year to comprise an increasing portion of the Partnership's net loss. This trend results primarily from a decrease in the Partnership's recognition of equity losses from the Operating Partnerships in each subsequent fiscal year.
In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. One of the two investments has had an equity method basis of zero since March 31, 1993.
The Partnership's recorded share of the Operating Partnership's losses in the current fiscal period consists of losses of approximately $158,000 from the Washington Courts Limited Partnership. In the prior fiscal year, losses of approximately $226,000 from the operations of Washington Courts were recorded. The carrying value of the Partnership's investment in Laurel-Clayton was reduced to zero during fiscal 1993.
In the aggregate, combined rental revenue of the Operating Partnerships increased during the current calendar year. The combined total rental revenue increased by approximately $442,000 in the current calendar year, with the largest increase occurring at Laurel-Clayton. The average occupancy levels remained at or above 97% in both calendar years in both properties. Such results reflect the generally improving market conditions referred to above. In addition to the improvement of revenue, the combined total expenses of the two operating properties increased by approximately $227,000 in the current year primarily due to an increase in repairs and maintenance, management fees, depreciation and other operating expenses.
INFLATION
Inflation is not expected to have a material adverse impact on the Partnership's operations during its period of ownership of the Properties.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements at March 31, 1998 and 1997 together with the report of the independent auditors thereon are incorporated by reference from the Registrant's Financial Statements on the pages indicated in ITEM 14.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 30, 1997, the prior auditors, Rubin, Brown, Gornstein & Co., LLP, were dismissed as auditors for the Partnership. The decision to change accountants was approved by the Partnership's Board of Directors. Rubin, Brown, Gornstein & Co., LLP's report on the Partnership's financial statements for the years ended March 31, 1997 and 1996 contained a modification as to uncertainty of the Partnership to continue as a going concern. Rubin, Brown, Gornstein & Co., LLP's report on the above mentioned financial statements contained no adverse opinions or disclaimer of opinions, and was not qualified as to uncertainty, audit scope or accounting principles, other than those previously discussed.
Effective September 30, 1997, the Partnership engaged Novogradac & Company LLP to perform the audit of the Partnership's financial statements as of and for the year ended March 31, 1998.
There are no known disagreements on any matter of accounting principles or practices or financial statement disclosure with current or predecessor auditors.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE COMPENSATION OF THE REGISTRANT
The Partnership has no officers or directors. Management of the Partnership is vested in Irwin Jay Deutch and Century Pacific Capital Corporation ("CPCC") (the "general partners"). The general partners will involve themselves in the day-to-day affairs of the Partnership as required to protect the limited partners' investment and advance the Partnership's tax investment objectives. Mr. Deutch, the managing general partner, has the overall responsibility of the preparation and transmittal of periodic reports to the limited partners, preparation and filing of the Partnership's tax returns with the IRS and the appropriate state tax authorities, and the preparation and filing of reports to HUD and other government agencies.
Following is biographical information on Mr. Deutch and the Executive Officers of CPII:
IRWIN JAY DEUTCH
IRWIN JAY DEUTCH, age 57, is Chairman of the Board, President, and Chief Executive Officer of Century Pacific Realty Corporation ("CPRC"), a general partner of the Operating Partnerships that owns the Properties in which CPHF-I has invested, and its affiliates. Mr. Deutch has been involved with low-income housing investments since 1968. He is the individual general partner in 62 private limited partnerships and two public limited partnerships investing in 209 properties, including 196 multi-family properties with 33,700 apartment units, 10 commercial projects, and 3 hotel properties. Fifty-eight of the 62 private limited partnerships have invested in affordable housing. In his capacity as general partner and officer of CPRC, he oversees the management of these partnerships and assumes overall responsibility for the development, direction, and operation of all affiliated CPRC companies. Mr. Deutch is recognized as an expert in the field of affordable housing and frequently addresses professional groups on topics of real estate investment, syndication, tax law, and the Low-Income Housing Tax Credit program.
Mr. Deutch received a B.B.A. with distinction from the University of Michigan School of Business Administration in 1962 and a Juris Doctor degree with honors from the University of Michigan Law School in 1965. He is a member of the Order of the Coif. Mr. Deutch served in the Honors Program in the Office of the Chief Counsel of the Internal Revenue Service from 1965 to 1967, where he was assigned to the Interpretative Division in Washington, D.C. He attended Georgetown Law Center and received his Masters of Law degree in taxation in 1967. Mr. Deutch is a member of the State Bars of Michigan and California, as well as the American, Federal, Los Angeles, and Beverly Hills Bar Associations.
KEY OFFICERS OF CPII AND AFFILIATES
ESSIE SAFAIE, age 49, is Chief Financial Officer and Chief Operating Officer of CPRC. Prior to joining CPRC in 1988, from 1985 to 1988, he was Vice President and Chief Financial Officer of Sunrise Investments, Inc., a real estate syndication firm with $450 million of real estate under management. During this period, Mr. Safaie was also President of an affiliated property management firm, S&L Property Management, Inc., with over 12,000 residential units and 800,000 square feet of commercial office space under direct management. From 1982 to 1985, Mr. Safaie was assistant controller of Standard Management Company, builder and managers of luxury hotels, commercial offices and residential units. From 1980 to 1982, he served as financial officer of Diamond "M" Drilling Company. Mr. Safaie received a B.A. degree in Business Administration from California State University with a major in accounting.
CHARLES L. SCHWENNESEN, age 52, is Vice President of Acquisition Finance of CPRC and is responsible for financial analysis and "due diligence" reviews of all properties acquired by CPRC. Prior to joining CPRC in 1987, he was a consultant to companies, which provided investment opportunities through private placements. From 1984 to 1985, Mr. Schwennesen was Vice President of Cranston Securities Company and was responsible for the structuring of more than $30 million of mortgage revenue bond financing for affordable housing projects. From 1977 to 1984, Mr. Schwennesen was a manager with the accounting firm of Price Waterhouse where he specialized in providing auditing and consulting services to publicly held California real estate development companies involved in the affordable housing industry. Mr. Schwennesen is a Certified Public Accountant and holds a Masters degree in Business Administration from the UCLA Graduate School of Management and a B.A. degree in Mathematics from UCLA.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no officers or directors. However, in connection with the operations of the Partnership and the Operating Partnerships, the General Partners and their affiliates will or may receive certain fees, compensation, income and other payments which are described in the Prospectus under "Compensation, Fees and Reimbursements" on page 17, the terms of which are incorporated herein by reference.
During the fiscal years ended March 31, 1998, 1997 and 1996, CPII, a General Partner of the Partnership, earned $140,708, $136,106 and $132,097, respectively, of partnership management fees. During the fiscal years ended March 31, 1998, 1997 and 1996, the Partnership accrued $37,600, $37,600 and $37,600, respectively, for the reimbursement of overhead allocation from Century Pacific Investment Corporation ("CPIC"). During fiscal year 1998, the General Partners received no payments from the Operating Partnerships.
ITEM 12.
ITEM 12. PARTNERSHIP INTEREST OWNERSHIP OF CERTAIN BENEFCIAL OWNERS AND MANAGEMENT
No partner in the Partnership owns more than 5% of the total number of partnership interests outstanding. Irwin J. Deutch, the Managing General Partner, holds a one-half percent General Partnership Interest.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Irwin J. Deutch is the Managing General Partner of the Partnership, and CPII is also a General Partner. Irwin J. Deutch is the sole Director and President of CPII, and the Deutch Family Trust solely owns the stock of CPII. Mr. Deutch is also the President, sole Director and the Deutch Family trust is the sole stockholder of CPRC, the General Partner of the Operating Partnerships that own the Properties in which the Partnership is invested. The General Partners were allocated their proportionate share of the Partnership's tax losses and allocated tax credits. CPII received a partnership management fee for its services in managing and advising the Partnership and its business. CPII, an affiliate, provides all the services and materials necessary for the operation of the Partnership and is reimbursed for actual costs. These transactions are more particularly set forth in the financial statements found under ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits - See the Exhibit Index at page 14 of this report. The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this annual report.
(b)(1) Financial Statements:
The financial statements listed in the following index as set forth in ITEM 8 of this report on Form 10-K are filed or incorporated by reference as part of this annual report.
Report of Independent Auditors'
Balance Sheets as of March 31, 1998 and 1997
Statements of Operations for the Years Ended March 31, 1998, 1997 and 1996
Statements of Partners' Equity (Deficit) for the Years Ended March 31, 1998, 1997 and 1996
Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996
Notes to Financial Statements
(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation of Operating Partnerships in which the Partnership has Limited Partnership Interests
Notes to Schedule III - Real Estate and Accumulated Depreciation of Operating Partnerships in which the Partnership has Limited Partnership Interests
Schedule IV - Mortgage Loans on Real Estate of Operating Partnerships in which the Partnership has Limited Partnership Interests
Notes to Schedule IV - Mortgage Loans on Real Estate of Operating Partnerships in which the Partnership has Limited Partnership Interests
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(c) Reports on Form 8-K
Registrant has not filed with the Securities and Exchange Commission a Current Report on Form 8-K during the year ended March 31, 1998, as there were no transactions that required the filing.
EXHIBIT INDEX
These exhibits are numbered in accordance with the exhibit table of Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Date: 7-23-98 /s/ Irwin Jay Deutch ------------------- -------------------------------------------------- By: Irwin Jay Deutch, as Managing General Partner
and
Century Pacific Capital II Corporation, as Corporate General Partner and as Attorney-in-Fact for all Investor Limited Partners
Date: 7-23-98 /s/ Irwin Jay Deutch ------------------- -------------------------------------------------- By: Irwin Jay Deutch, President
REPORT OF INDEPENDENT AUDITORS'
To the Partners of Century Pacific Tax Credit Housing Fund-II
We have audited the accompanying balance sheet of Century Pacific Tax Credit Housing Fund-II (the "Partnership"), as of March 31, 1998, and the related statements of operations, changes in partners' equity (deficit) and cash flows for the year then ended. 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 audit. We did not audit the financial statements of Washington Courts Apartments and Plumley Village Apartments, which statements reflect total assets and revenues constituting 100 percent of the Operating Partnerships. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Washington Courts Apartments and Plumley Village Apartments, is based solely on the report of the other auditors. The financial statements of Century Pacific Tax Credit Housing Fund-II for the years ended March 31, 1997 and 1996 were audited by other auditors, whose reports dated May 30, 1997 and June 13, 1996, respectively, included an explanatory paragraph describing conditions that raised substantial doubt about the Partnership's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Century Pacific Tax Credit Housing Fund-II as of March 31, 1998, and the results of its operations, changes in partners' equity (deficit), and cash flows for the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 6 to the financial statements, the Partnership's Operating Partnerships have suffered recurring operating losses, have not provided sufficient cash distributions and the Partnership has a net capital deficiency, which raises substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, from information audited by us and other auditors, the related financial statement schedules listed in Item 14(b)(2) as of December 31, 1997. In our opinion, the financial statement schedules present fairly, in all material respects, the information required to be set forth therein.
Atlanta, Georgia June 15, 1998
CENTURY PACIFIC TAX CREDIT HOUSING FUND - II STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31,
CENTURY PACIFIC TAX CREDIT HOUSING FUND - II STATEMENTS OF PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
CENTURY PACIFIC TAX CREDIT HOUSING FUND - II STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31,
CENTURY PACIFIC TAX CREDIT HOUSING FUND - II Notes to the Financial Statements For the years ended March 31, 1998, 1997 and 1996
1. ORGANIZATION
Century Pacific Tax Credit Housing Fund-II, a California limited partnership (the "Partnership"), was formed on September 2, 1988 for the purpose of raising capital by offering and selling limited partnership interests and then acquiring limited partnership interests in partnerships (the "Operating Partnerships"), owning and operating existing residential apartment rental properties (the "Properties").
The general partners of the Partnership are Century Pacific Capital II Corporation, a California corporation ("CPII"), and Irwin Jay Deutch, an individual (collectively, the "general partners"). The general partners and affiliates of the general partners (the "general partners and affiliates") have interests in the Partnership and receive compensation from the Partnership and the Operating Partnerships (Note 3).
The Properties qualify for the Low-Income Housing Tax Credit established by Section 42 of the Tax Reform Act of 1986 (the "Low-Income Housing Tax Credit"). The Properties are leveraged low-income multi-family residential complexes and receive one or more forms of assistance from federal, state or local government agencies (the "Government Agencies").
In September 1988, the Partnership began raising capital from sales of limited partnership interests, at $1,000 per unit, to limited partners. The Partnership authorized the issuance of a maximum of 25,000 units of which 5,754 were subscribed and issued. The limited partnership interest offering closed as of December 31, 1989.
As of March 31, 1998, the Partnership has acquired limited partnership interests of 90% in Washington Courts Limited Partnership and 60% in Laurel-Clayton Limited Partnership, two existing Operating Partnerships which own apartment rental properties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
BASIS OF ACCOUNTING
The Partnership prepares its financial statements on the tax basis of accounting. Memorandum entries, while not recorded in the records of the Partnership, have been made in order to prepare the financial statements in accordance with generally accepted accounting principles.
On August 7, 1991, management changed from a calendar year end to a fiscal year end of March 31 for financial reporting purposes. Accordingly, the Partnership's quarterly periods end June 30, September 30 and December 31. The Operating Partnerships, for financial reporting purposes, have a calendar year end. The Partnership, as well as the Operating Partnerships, has a calendar year-end for income tax purposes.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
F - 6
CENTURY PACIFIC TAX CREDIT HOUSING FUND - II Notes to the Financial Statements For the years ended March 31, 1998, 1997 and 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED)
INCOME TAXES
In accordance with federal and state income tax regulations, no income taxes are levied on the Partnership. Federal and state income taxes on partnership income are levied on the partners in their individual capacity. The tax returns, the qualification of the Partnership as such for tax purposes and the amount of distributable income or loss are subject to examination by federal and state taxing authorities. If such examination results in changes in the Partnership qualification or in distributable income or loss, the tax liability of the partners could change.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid investments with a maturity of three months or less. Restricted cash is not considered a cash equivalent.
ECONOMIC CONCENTRATIONS
The Partnership operates Properties in Chicago, Illinois and Boston, Massachusetts. Future operations could be affected by changes in the economic or other conditions in that geographical area or by changes in federal low-income housing subsidies or the demand for such housing.
CONCENTRATION OF CREDIT RISK
The Partnership deposits its cash in financial institutions. At times, deposits may exceed federally insured limits. The Partnership has not experienced losses in such accounts.
INVESTMENTS IN OPERATING PARTNERSHIPS
The Partnership uses the equity method to account for its investment in the Operating Partnerships (Note 4). Under the equity method of accounting, the investment is carried at cost and adjusted for the Partnership's share of the Operating Partnerships' results of operations and by cash distributions received. Equity in the loss of each Operating Partnership allocated to the Partnership is not recognized to the extent that the investment balance would become negative. Costs paid by the Partnership for organization of the Operating Partnerships as well as direct costs of acquiring Properties, including acquisition fees and reimbursable acquisition expenses paid to the general partner, have been capitalized as investments in Operating Partnerships.
NET LOSS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Net loss per unit of limited partnership interest is calculated based upon the weighted average number of units outstanding, which is 5,754 for the years ended March 31, 1998, 1997 and 1996.
SYNDICATION COSTS
Public offering costs have been recorded as a direct reduction to the capital accounts of the Limited Partners.
F - 7
CENTURY PACIFIC TAX CREDIT HOUSING FUND - II Notes to the Financial Statements For the years ended March 31, 1998, 1997 and 1996
3. RELATED PARTY TRANSACTIONS
The General Partners of the Partnership are CPII and Irwin Jay Deutch. Century Pacific Placement Corporation ("CPPC"), an affiliate of the general partners, served as the broker-dealer-manager for sales of the limited partnership interests in the Partnership. Century Pacific Realty Corporation ("CPRC"), an affiliate of CPII, is a general partner in each of the Operating Partnerships.
The general partners have an aggregate one percent interest in the Partnership. CPRC has a one-half percent interest in each of the Operating Partnerships.
The general partners and affiliates receive compensation and reimbursement of expenses from the Partnership, as set forth in the limited partnership agreement, for their services in managing the Partnership and its business. Pursuant to the partnership agreement, the Partnership is required to pay CPII an annual management fee for its services in connection with the management of the affairs of the Partnership. The annual management fee is equal to .5% of invested assets (as defined by the partnership agreement). The general partners and affiliates also receive compensation and reimbursement of expenses for the Operating Partnerships. This compensation and reimbursement includes services provided to the Partnership during its offering stage, acquisition stage and operational stage.
The general partners and affiliates earned the following fees for services provided to the Partnership and were entitled to reimbursement for costs incurred by the general partners and affiliates on behalf of the Partnership and the Operating Partnerships for the years ended March 31, 1998, 1997 and 1996 as follows:
At March 31, 1998 and 1997, amounts due to affiliates consist of fees and certain general and administrative costs payable by the Partnership to the general partners and affiliates totaling $1,284,224 and $1,098,220, respectively.
At March 31, 1998 and 1997, CPII owed the Partnership for an unsecured, noninterest bearing advance of $871 and $870, respectively.
At March 31, 1998 and 1997, CPRC was owed $40,594 and $40,593, respectively, for a noninterest bearing, demand, cash advance to the Partnership.
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II Notes to the Financial Statements For the years ended March 31, 1998, 1997 and 1996
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The general partners may advance funds to the Partnership to fund operating deficits, but are not obligated to do so. Such advances shall be evidenced by a promissory note of a term no more than 12 months in length and at a rate of interest no lower than the prime rate. All such loans shall be repaid prior to any distributions of net cash flow. At March 31, 1998 and 1997, the Partnership had no outstanding advances due to the general partners.
4. INVESTMENTS IN OPERATING PARTNERSHIPS
At March 31, 1998 and 1997, the Partnership owned limited partnership interests in two Operating Partnerships, each of which has invested in a multi-family rental property.
Investments in Operating Partnerships consist of the following:
The names and locations of the Properties in which the Operating Partnerships hold beneficial interests are as follows:
NAME OF NAME AND OPERATING PARTNERSHIP LOCATION OF PROPERTY
Washington Courts Limited Partnership Washington Courts Chicago, Illinois
Laurel-Clayton Limited Partnership Plumley Village Boston, Massachusetts
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II Notes to the Financial Statements For the years ended March 31, 1998, 1997 and 1996
4. INVESTMENTS IN OPERATING PARTNERSHIPS (CONTINUED)
A summary of the combined balance sheet as of December 31, 1997 and 1996 and statements of operations of the aforementioned Operating Partnerships for the years then ended follows:
COMBINED BALANCE SHEET
ASSETS
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II Notes to the Financial Statements For the years ended March 31, 1998, 1997 and 1996
5. COMMITMENTS AND CONTINGENCIES
The Federal Housing Administration (FHA) and the Housing and Urban Development (HUD) exercise control over the projects through provisions of Regulatory Agreements (the "Agreements"). The Agreements restrict the Projects, without prior written approval from HUD, from encumbering, acquiring, altering or disposing of land, buildings and equipment; using the Property for any other purpose other than the use originally intended; engaging in any other business or activity; and paying distributions to partners, compensation to officers or directors, or for any purpose other than reasonable operating expenses. The Agreements also stipulate that FHA and HUD shall control the rental rates, rate of return on investment and method of operation.
In addition, the Agreements require Properties to make cash deposits on a monthly basis into a reserve fund for replacements. The respective mortgages are the designated custodians of the reserve funds and withdrawals can only be made with HUD approval.
6. GOING CONCERN
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Partnership as a going concern. However, the Partnership's Operating Partnerships have not achieved the operating results required to provide the Partnership with sufficient cash distributions to fund the Partnership's administrative costs. Additionally, the Partnership has incurred allocated losses from all but one of its Operating Partnerships to the extent of the Partnership's cash contributions. As a result of the foregoing, the Partnership is dependent upon the general partners and affiliates for continued financial support.
Management maintains that the general partners and affiliates, though not required to do so, will continue to fund operations by deferring payment to related parties of allocated overhead expenses, and by funding any Partnership operating costs. Unpaid allocated overhead expenses will accrue and become payable when the Operating Partnerships generate sufficient cash distributions to the Partnership to cover such expenses. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II
Schedule III Page 1 of 1
REAL ESTATE AND ACCUMULATED DEPRECIATION OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTEREST DECEMBER 31, 1997
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 1997
NOTE 1 - DESCRIPTION OF PROPERTIES
The Properties held by the Operating Partnerships in which CPTCHF-II has invested are housing projects, primarily for families and elderly or handicapped individuals of low and moderate income.
NOTE 2 - SCHEDULE OF ENCUMBRANCES
NOTE 3 - RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II
MORTGAGE LOANS ON REAL ESTATE OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 1997
Schedule IV ----------- Page 1 of 1
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CENTURY PACIFIC TAX CREDIT HOUSING FUND - II
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 1997
NOTE 1 - DESCRIPTION
Each Operating Partnership has invested in a Property.
Laurel-Clayton Limited Partnership assumed a mortgage loan obligation from the seller of the Property. The mortgage loan obligation is insured by the United States Department of Housing and Urban Development and is secured by the land and buildings of the Property.
Washington Courts Limited Partnership has obtained permanent financing in the principal amount of $5,165,400 which is insured by the Federal Housing Administration. The loan bears interest at 9.25% per annum. The note will be amortized over a period of 40 years. Prepayment is prohibited during the construction period and for ten years from the date of completion of construction.
NOTE 2 - RECONCILIATION OF MORTGAGES
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