ITEM 1. BUSINESS --------
Century Pacific Tax Credit Housing 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 multifamily housing developments (the Properties). The Partnership's business is to invest primarily in other limited partnerships (Operating Partnerships) that are organized for the purposes of either constructing or acquiring and operating existing affordable multifamily 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 has 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 CPTCHF-II has invested, the federal government, through the Department of Housing and Urban Development (HUD), has provided investors with significant ownership incentives, such as interest subsidies, rent supplements, mortgage insurance and other measures, with the intent of reducing the risks and providing the investors/owners with certain tax benefits, limited cash distributions and the possibility of long-term capital gains. However, there are significant risks inherent in this type of housing. Long-term investments in real estate limit the ability of CPTCHF-II to vary its portfolio in response to changing economic, financial and investment conditions, 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 Operating Partnerships which owns the Properties. As a limited partner, CPTCHF-II's liability for obligations of the Operating Partnerships is limited to its investment. The Partnership made capital contributions to the Operating Partnerships in amounts sufficient to pay the Operating Partnerships' expenses and to reimburse the General Partners for their costs incurred in forming the Operating Partnerships, 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.
The Partnership's primary objective is to provide Low-Income Housing Tax Credits to its 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 annual amount of the Low-Income Housing Tax Credits for 10 years from the date the Property was placed in service. The required holding period of the Properties is 15 years (the Compliance Period). The Properties must satisfy rent restriction, 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 Credits at all times during the Compliance Period. Once an Operating Partnership has become eligible for the Low-Income Housing Tax Credits, 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 have suffered an event of recapture of Low-Income Housing Tax Credit.
ITEM 2.
ITEM 2. PROPERTIES ----------
As of March 31, 1999, CPTCHF-II 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 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 22, 1999, there were no pending legal proceedings against CPTCHF-II or any Operating Partnership in which it has invested.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
As of March 31, 1999, there were no submissions of matters to a vote of security holders.
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 Interests" on pages 24 and 52 of the Prospectus, which information is incorporated herein by reference. The number of owners of Units as of June 22, 1999 was approximately 508, holding 5,754 units.
As of June 22, 1999, there were no cash distributions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
The following summary of selected financial date should be read in conjunction with ITEM 14, herein, which also includes a summary of CPTCHF-II'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 1998, 1997 and 1996 were $870,477, $860,539, and $861,187, respectively.
As of March 31, 1999, the Partnership portfolio consists of two Properties totalling 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 1998, 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 1999 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 rate 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 is to provide the funds necessary for the Partnership to meet its administrative expenses and pay the Partnerships management fee. At the present time, the Operating Partnerships have not generated sufficient cash distributions to fund the Partnership's expenses. As a result of the foregoing, the Partnership has been dependent upon its affiliates and the General Partners for continued financial
support to meet its expenses. Though there can be no assurance, management believes that affiliates and/or the General Partners, though not required to do so, will continue to fund operations of the Partnership and defer receipt of payment of allocated overhead administrative expenses and partnership management fees. Allocated administrative expenses paid or accrued to affiliates and the General Partners represent reimbursement of the actual cost 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 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, Ominbus Budget Reconciliation Act of 1987, Technical - ---------------------------------------------------------------------------- and Miscellaneous Revenue Act of 1988, Ominbus Budget Reconciliation Act of - --------------------------------------------------------------------------- 1989 and Ominbus Budget Reconciliation Act of 1990 and all subsequent tax - ------------------------------------------------------------------------- acts. - -----
The Partnership is organized as a limited partnership and is "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 Ominbus Budget Reconciliation Act of 1989 and the Ominbus Budget Reconciliation Act of 1990 and all subsequent tax acts (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, 1998.
1999 Compared to 1998 - ---------------------
For the fiscal year ended March 31, 1999, the Partnership recorded a net loss of approximately $508,000, as compared to a net loss of approximately $430,000 for the prior fiscal year. The increase in net loss is the result of a increase in the Partnership's equity in net losses of the Operating Partnerships of approximately $70,000 and a increase in the expenses of approximately $8,000 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.
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 Partnerships' losses in the current fiscal period consists of losses of approximately $319,000 from the Washington Courts Limited Partnership. In the prior fiscal year, losses of approximately $248,000 from the operations of Washington Courts was 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 only approximately $40,000 in the current calendar year. The average occupancy level for Laurel-Clayton remained at 98% in both calendar years, but Washington Court had a decrease to 92% occupancy level in the current year. This decrease in occupancy level caused part of the small increase in total rental revenue. The combined total expenses of the two operating properties increased by approximately $110,000 in the current year primarily due to an increase in repairs and maintenance and depreciation and a decrease in other operating expenses.
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 in 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 a 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.
Inflation - ---------
Inflation is not expected to have a material adverse impact on the Partnership's operations during its period of ownership of the Properties.
Year 2000 Compliance - --------------------
Background. Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results in "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millennium Bug" or "Year 2000 problem".
Assessment. The Year 2000 problem could affect computers, software and other equipment used, operated, or maintained by the Company. Accordingly, the Company is reviewing its internal computers, software, applications and related equipment and its systems other than information technology systems to ensure that they will be Year 2000 compliant. The Company believes that its Year 2000 plan will be completed in all material respects prior to the anticipated Year 2000 failure dates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS --------------------
The financial statements together with the report of the independent auditors thereon are set forth on the pages indicated in ITEM 14.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------ FINANCIAL DISCLOSURE --------------------
On April 15, 1999, the prior auditors, Novogradac & Company LLP, were dismissed as auditors for the Partnership. The decision to change accountants was approved by the Partnership's Board of Directors. Novogradac & Company LLP's report on the Partnership's financial statements for the years ended March 31, 1998, contained a modification as to uncertainty of the Partnerships to continue as a going concern.
Novogradac & Company 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 April 15, 1999, the Partnership engaged Rubin, Brown, Gornstein & Co., LLP to perform the audit of the Partnership's financial statements as of and for the year ending March 31, 1999.
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 OFFICERS OF THE REGISTRANT --------------------------------------------------
The Partnership has no officers or directors. Management of the Partnership is vested in Irwin Jay Deutch and Century Pacific Capital II Corporation (CPII) (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 investment objectives. Mr. Deutch, the Managing General Partner, has the overall responsibility for 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 58, is Chairman of the Board, President, and Chief Executive Officer of Century Pacific Realty Corporation (CPRC), a General Partner of the Operating Partnerships that own the Properties in which CPTCHF-II 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 multifamily 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 Master of Laws 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 50, is Chief Financial Officer and Chief Operating Officer of CPRC. Prior to joining CPRC in 1988, from 1985-88, 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, builders and managers of luxury hotels, commercial offices and residential units. From 1980-1982, he served as financial officer of Diamond "M" Drilling Company. Mr. Safaie received a BA degree in Business Administration from California State University with a major in accounting.
CHARLES L. SCHWENNESEN, age 53, is Vice President of Acquisition Finance for 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, 1999, 1998, and 1997, CPII, a General Partner of the Partnership, earned $144,440, $140,708, and $136,106, respectively, of partnership management fees. During the fiscal years ended March 31, 1999, 1998 and 1997, 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 1999, the General Partners received no payments from the Operating Partnerships.
ITEM 12.
ITEM 12. PARTNERSHIP INTEREST OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ----------------------------------------------------------- AND MANAGEMENT --------------
No partner in CPTCHF-II 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 CPTCHF-II, and CPII is also a General Partner. Irwin J. Deutch is the sole Director and President of CPII, and the stock of CPII is solely owned by the Deutch Family Trust. Mr. Deutch is also the President, sole Director and the Deutch Family Trust is the sole stockholder of Century Pacific Realty Corporation (CPRC), a General Partner of the Operating Partnerships that own the Properties in which CPTCHF-II has invested. CPII received a partnership management fee for its services in managing and advising the Partnership and its business. CPIC, 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.