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XXAAO.PK > SEC Filings for XXAAO.PK > Form 10-Q on 28-Mar-2008All Recent SEC Filings

Show all filings for AMERICAN TAX CREDIT PROPERTIES II L P | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AMERICAN TAX CREDIT PROPERTIES II L P


28-Mar-2008

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Material Changes in Financial Condition

As of December 30, 2007, American Tax Credit Properties II L.P. (the "Registrant") has not experienced a significant change in financial condition as compared to March 30, 2007. Principal changes in assets are comprised of periodic transactions and adjustments and equity in loss from operations of the local partnerships (the "Local Partnerships"), which own low-income multifamily residential complexes (the "Properties") that qualified for the low-income tax credit in accordance with Section 42 of the Internal Revenue Code (the "Low-income Tax Credit"). During the nine months ended December 30, 2007, Registrant received cash from interest revenue, proceeds in connection with disposals of limited partner interests/local partnership properties (see Local Partnership Matters below) and distributions from Local Partnerships and utilized cash for operating expenses and making advances to a Local Partnership (see Local Partnership Matters below). Cash and cash equivalents and investments in bonds decreased, in the aggregate, by approximately $490,000 during the nine months ended December 30, 2007 (which includes accretion of zero coupon bonds of approximately $28,000 and a net unrealized gain on investment in bonds of approximately $5,000). Notwithstanding circumstances that may arise in connection with the Properties, Registrant does not expect to realize significant gains or losses on its investments in bonds, if any. During the nine months ended December 30, 2007, the investment in local partnerships decreased as a result of Registrant's equity in the Local Partnerships' net loss for the nine months ended September 30, 2007 of $112,718 partially offset by advances to a Local Partnership of $72,322 (see discussion below under Local Partnership Matters). Accounts payable and accrued expenses includes deferred administration fees of $344,665, and payable to general partner and affiliates represents deferred administration and management fees in the accompanying balance sheet as of December 30, 2007.

Results of Operations

Registrant's operating results are dependent upon the operating results of the Local Partnerships and are significantly impacted by the Local Partnerships' policies. In addition, the operating results herein are not necessarily the same for tax reporting. Registrant accounts for its investment in local partnerships in accordance with the equity method of accounting. Accordingly, the investment is carried at cost and is adjusted for Registrant's share of each Local Partnership's results of operations and by cash distributions received. Equity in loss of each investment in Local Partnership allocated to Registrant is recognized to the extent of Registrant's investment balance in each Local Partnership. Equity in loss in excess of Registrant's investment balance in a Local Partnership is allocated to other partners' capital in any such Local Partnership. As a result, the reported equity in loss of investment in local partnerships is expected to decrease as Registrant's investment balances in the respective Local Partnerships become zero. However, the combined statements of operations of the Local Partnerships reflected in Note 3 to Registrant's financial statements include the operating results of all Local Partnerships, irrespective of Registrant's investment balances.

Cumulative losses and cash distributions in excess of investment in local partnerships may result from a variety of circumstances, including a Local Partnership's accounting policies, subsidy structure, debt structure and operating deficits, among other things. In addition, the book value of Registrant's investment in each Local Partnership (the "Local Partnership Carrying Value") may be reduced if the Local Partnership Carrying Value is considered to exceed the estimated value derived by management. Accordingly, cumulative losses and cash distributions in excess of the investment or an adjustment to a Local Partnership's Carrying Value are not necessarily indicative of adverse operating results of a Local Partnership. See discussion below under Local Partnership Matters regarding certain Local Partnerships currently operating below economic break even levels.

Registrant's operations for the three months ended December 30, 2007 and 2006 resulted in net income (loss) of ($247,476) and $108,262, respectively. The increase in net loss from fiscal 2006 to fiscal 2007 is primarily attributable to a gain on disposal of limited partner interests/local partnership properties of approximately $176,000 recognized in fiscal 2006 in connection with Powelton Gardens Associates ("Powelton") (see discussion below under Local Partnership Matters) and an increase in equity in loss of investment in local partnerships of approximately $155,000, which increase is primarily the result of an increase in advances made to a certain Local Partnership in fiscal 2007 that were written off as equity in loss of investment in local partnerships (see discussion below under Local Partnership Matters) and an increase in the net operating losses of certain Local Partnerships in which Registrant continues to have an investment balance. Other comprehensive income (loss) for the three months ended December 30, 2007 and 2006 resulted from a net unrealized gain (loss) on investments in bonds of $1,472 and ($2,310), respectively.


AMERICAN TAX CREDIT PROPERTIES II L.P.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Local Partnerships' loss from operations of approximately $804,000 for the three months ended September 30, 2007 was attributable to rental and other revenue of approximately $4,624,000, exceeded by operating and interest expenses (including interest on non-mandatory debt) of approximately $4,409,000 and approximately $1,019,000 of depreciation and amortization expense. The Local Partnerships' loss from operations of approximately $517,000 for the three months ended September 30, 2006 was attributable to rental and other revenue of approximately $5,007,000, exceeded by operating and interest expenses (including interest on non-mandatory debt) of approximately $4,425,000 and approximately $1,099,000 of depreciation and amortization expense. The Local Partnerships' operating revenue and expenses have decreased in 2007 as compared to 2006 as the result of recent Property sales and Registrant's withdrawal from certain Local Partnerships. The results of operations of the Local Partnerships for the three months ended September 30, 2007 are not necessarily indicative of the results that may be expected in future periods.

Registrant's operations for the nine months ended December 30, 2007 and 2006 resulted in net income (loss) of $(425,212) and $15,066, respectively. The increase in net loss is primarily attributable to (i) a gain on disposal of limited partner interests/local partnership properties of approximately $321,000 recognized in fiscal 2006 in connection with Powelton Gardens Associates
("Powelton"), 2000-2100 Christian Street Associates ("2000 Christian Street")
and Dermott Villas Limited Partnership ("Dermott") (see discussion below under Local Partnership Matters), (ii) an increase in equity in loss of investment in local partnerships of approximately $45,000, which increase is primarily the result an increase in the net operating losses of certain Local Partnerships in which Registrant continues to have an investment balance and (iii) a reduction in other income from local partnerships of approximately $76,000. Other comprehensive income (loss) for the nine months ended December 30, 2007 and 2006 resulted from a net unrealized gain (loss) on investments in bonds of $5,293 and $(2,722), respectively.

The Local Partnerships' loss from operations of approximately $1,878,000 for the nine months ended September 30, 2007 was attributable to rental and other revenue of approximately $14,209,000, exceeded by operating and interest expense (including interest on non-mandatory debt) of approximately $13,116,000 and approximately $2,971,000 of depreciation and amortization expense. The Local Partnerships' loss from operations of approximately $1,933,000 for the nine months ended September 30, 2006 was attributable to rental and other revenue of approximately $15,060,000, exceeded by operating and interest expense (including interest on non-mandatory debt) of approximately $13,793,000 and approximately $3,200,000 of depreciation and amortization expense. The Local Partnerships' operating revenue and expenses have decreased in 2007 as compared to 2006 as the result of recent Property sales and Registrant's withdrawal from certain Local Partnerships. The results of operations of the Local Partnerships for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected in future periods.

Local Partnership Matters

Registrant's primary objective has been to provide Low-income Tax Credits to limited partners generally over a ten year period. The relevant state tax credit agency has allocated each of Registrant's Local Partnerships an amount of Low-income Tax Credits, which are generally available for a ten year period from the year the Property is placed in service (the "Ten Year Credit Period"). The Ten Year Credit Period was substantially fully exhausted by the Local Partnerships as of December 31, 2001. The required holding period of each Property, in order to avoid Low-income Tax Credit recapture, is fifteen years from the year in which the Low-income Tax Credits commence on the last building of the Property (the "Compliance Period"). In addition, certain of the Local Partnerships have entered into agreements with the relevant state tax credit agencies whereby the Local Partnerships must maintain the low-income nature of the Properties for a period which exceeds the Compliance Period, regardless of any sale of the Properties by the Local Partnerships after the Compliance Period. The Properties must satisfy various requirements including rent restrictions and tenant income limitations (the "Low-income Tax Credit Requirements") in order to maintain eligibility for the recognition of the Low-income Tax Credit at all times during the Compliance Period. Once a Local Partnership has become eligible for the Low-income 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 Tax Credit Requirements. As of December 31, 2006, the Compliance Period of all of the Local Partnerships had expired. It is the General Partner's intention to sell or assign Registrant's interests in Local Partnerships subsequent to the expiration of the respective Compliance Periods. It is uncertain as to the amount, if any, that Registrant will receive with respect to each specific Property from such sales and assignments.


AMERICAN TAX CREDIT PROPERTIES II L.P.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Properties are principally comprised of subsidized and leveraged low-income multifamily residential complexes located throughout the United States and Puerto Rico. Many of the Local Partnerships receive rental subsidy payments, including payments under Section 8 of Title II of the Housing and Community Development Act of 1974 ("Section 8"). The subsidy agreements expire at various times during and after the Compliance Periods of the Local Partnerships. Since October 1997, the United States Department of Housing and Urban Development ("HUD") has issued a series of directives related to project based Section 8 contracts that define owners' notification responsibilities, advise owners of project based Section 8 properties of what their options are regarding the renewal of Section 8 contracts, provide guidance and procedures to owners, management agents, contract administrators and HUD staff concerning renewal of
Section 8 contracts, provide policies and procedures on setting renewal rents and handling renewal rent adjustments and provide the requirements and procedures for opting-out of a Section 8 project based contract. Registrant cannot reasonably predict legislative initiatives and governmental budget negotiations, the outcome of which could result in a reduction in funds available for the various federal and state administered housing programs including the Section 8 program. Such changes could adversely affect the future net operating income before debt service ("NOI") and debt structure of any or all Local Partnerships currently receiving such subsidy or similar subsidies. Eleven Local Partnerships' Section 8 contracts, certain of which cover only certain rental units, are currently subject to renewal under applicable HUD guidelines. In addition, two Local Partnerships have entered into restructuring agreements, resulting in changes to both rent subsidy and mandatory debt service.

The Local Partnerships have various financing structures which include (i) required debt service payments ("Mandatory Debt Service") and (ii) debt service payments which are payable only from available cash flow subject to the terms and conditions of the notes, which may be subject to specific laws, regulations and agreements with appropriate federal and state agencies ("Non-Mandatory Debt Service or Interest"). During the nine months ended September 30, 2007, revenue from operations of the Local Partnerships was generally sufficient to cover operating expenses and Mandatory Debt Service. Most of the Local Partnerships were effectively operating at or above break even levels, although certain Local Partnerships' operating information reflects operating deficits that do not represent cash deficits due to their mortgage and financing structure and the required deferral of property management fees. However, as discussed below, certain Local Partnerships' operating information indicates below break even operations after taking into account their mortgage and financing structure and any required deferral of property management fees.

In a series of two separate transactions in September 2006 and October 2006, the Property owned by Powelton was sold, in connection with which Registrant received $240,502, which amount is included in gain on disposal of limited partner interests/local partnership properties in the accompanying statement of operations of Registrant for the nine months ended December 30, 2006. Powelton has since been dissolved; the Compliance Period for Powelton expired prior to such sale. Registrant's investment balance in Powelton, after cumulative equity losses, became zero during the year ended March 30, 2002.

The Property owned by Dermott Villas Limited Partnership ("Dermott") was sold in October 2006, in connection with which Registrant received $40,000 during the nine months ended December 30, 2007 and which amount is reflected as due from local partnership in the accompanying balance sheet of Registrant as of March 30, 2007. Registrant withdrew from Dermott effective December 31, 2006; the Compliance Period for Dermott expired prior to such sale. Registrant's investment balance in Dermott, after cumulative equity losses, became zero during the year ended March 30, 2000.

In June 2006, Registrant withdrew from 2000 Christian Street and received consideration of $40,000, which is included in gain on disposal of limited partner interests/local partnership properties in the accompanying statement of operations of Registrant for the nine months ended December 30, 2007. The Compliance Period for 2000 Christian Street expired prior to such withdrawal. Registrant's investment balance in 2000 Christian Street, after cumulative equity losses, became zero during the year ended March 30, 1997.

The non-mandatory second mortgage of Ann Ell Apartments Associates, Ltd. ("Ann Ell") matured in February 2006 but has not been repaid. Unpaid principal and accrued interest as of December 2007 total approximately $773,000. The Local General Partner represents that the lender has not declared a default and that payments on the first mortgage and real estate taxes are current. Registrant has made cumulative advances to Ann Ell of $605,867 as of December 30, 2007 to fund operating deficits, $72,322 of which was advanced during the nine months then ended. Registrant's investment balance in Ann Ell, after cumulative equity losses, became zero during the year ended March 30, 1994 and advances made by Registrant were recorded as investment in local partnerships and have been offset by additional equity in loss of investment in local partnerships. The Compliance Period for Ann Ell has expired.


AMERICAN TAX CREDIT PROPERTIES II L.P.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Local General Partner of Queen Lane Investors ("Queen Lane") represents that, as a result of a dispute between the local housing agency (the "Agency") and the Local General Partner regarding the adequacy of certain unit repairs mandated by the Agency, the Local General Partner requested that the Agency cancel the Section 8 voucher contract in connection with the Property. As a result, the Property has been vacant since October 2007. Two of Queen Lane's mortgages matured in 2007 but have not been repaid, representing principal and accrued interest in excess of $1,740,000 as of December 2007. The Local General Partner further represents that the lender has not issued a notice of default. The Local General Partner is examining the potential to sell the Property. Registrant's investment balance in Queen Lane, after cumulative equity losses, became zero during the year ended March 30, 2001. The Compliance Period for Queen Lane has expired.

The non-mandatory mortgages of Littleton Avenue Community Village, L.P. ("Littleton") matured in October 2006 but have not been repaid. Unpaid principal and accrued interest as of December 2007 total approximately $7,843,000. The Local General Partner represents that neither lender has declared a default and that negotiations are ongoing in an effort to refinance the mortgages. The Local General Partner further represents that payments on the real estate taxes are current. Registrant's investment balance in Littleton, after cumulative equity losses, became zero during the year ended March 30, 1999. The Compliance Period for Littleton has expired.

One of the mortgages of The Pendleton (A Louisiana Partnership in Commendam) ("Pendleton"), which was scheduled to commence amortization in May 2004, is over three years in arrears (approximately $123,000) as of December 2007. The Local General Partner represents that it is negotiating with the lender, that the lender has not commenced foreclosure proceedings and that payments on the other mortgage and the real estate taxes are current. Registrant has made cumulative advances to Pendleton of $3,300 as of December 30, 2007 to fund operating deficits, none of which was advanced during the nine months then ended; such advances were recorded as investment in local partnerships and have been offset by additional equity in loss of investment in local partnerships. Registrant's investment balance in Pendleton, after cumulative equity losses, became zero during the year ended March 30, 2002. The Compliance Period for Pendleton has expired.

The terms of the partnership agreement of Patton Place Limited Partnership ("Patton Place") require the Local General Partners to cause the management agent to defer property management fees in order to avoid a default under the mortgage. During the nine months ended September 30, 2007, Patton Place reported an operating deficit of approximately $17,000, which includes property management fees of approximately $7,000. The Local General Partners represent that payments on the mortgage and real estate taxes are current. The Compliance Period for Patton Place has expired.


AMERICAN TAX CREDIT PROPERTIES II L.P.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Critical Accounting Policies and Estimates

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires Registrant to make certain estimates and assumptions. The following section is a summary of certain aspects of those accounting policies that may require subjective or complex judgments and are most important to the portrayal of Registrant's financial condition and results of operations. Registrant believes that there is a low probability that the use of different estimates or assumptions in making these judgments would result in materially different amounts being reported in the financial statements.

Registrant accounts for its investment in local partnerships in accordance with the equity method of accounting since Registrant does not control the operations of a Local Partnership.

If the book value of Registrant's investment in a Local Partnership exceeds the estimated value derived by management, Registrant reduces its investment in any such Local Partnership and includes such reduction in equity in loss of investment in local partnerships. Registrant makes such assessment at least annually in the fourth quarter of its fiscal year or whenever there are indications that a permanent impairment may have occurred. A loss in value of an investment in a Local Partnership other than a temporary decline would be recorded as an impairment loss. Impairment is measured by comparing the investment carrying amount to the sum of the total amount of the remaining tax credits to be allocated to Registrant and the estimated residual value of the investment.

Registrant does not consolidate the accounts and activities of the Local Partnerships, which are considered Variable Interest Entities under Financial Accounting Standards Board Interpretation No. 46 - Revised, "Consolidation of Variable Interest Entities," because Registrant is not considered the primary beneficiary. Registrant's balance in investment in local partnerships represents the maximum exposure to loss in connection with such investments. Registrant's exposure to loss on the Local Partnerships is mitigated by the condition and financial performance of the underlying Properties as well as the strength of the Local General Partners.

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