10-Q 1 f10q_063009-cri2.txt QUARTERLY REPORT -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q --------------------------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2009 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to COMMISSION FILE NUMBER 0-11973 --------------------------- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP Maryland 52-1321492 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11200 Rockville Pike, Rockville, Maryland 20852 (Address of principal executive offices) (Zip Code) (301) 468-9200 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_| Smaller reporting company |X| Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| -------------------------------------------------------------------------------- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009 Page ---- Part I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - June 30, 2009 and December 31, 2008............................. 1 Statements of Operations and Accumulated Losses - for the three and six months ended June 30, 2009 and 2008....... 2 Statements of Cash Flows - for the six months ended June 30, 2009 and 2008................. 3 Notes to Financial Statements - June 30, 2009 and 2008.......................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 11 Item 4. Controls and Procedures............................................. 14 Part II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities..................................... 14 Item 5. Other Information................................................... 14 Item 6. Exhibits............................................................ 15 Signature................................................................... 16 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP BALANCE SHEETS ASSETS

~~March~~June 3130, December 31, 2009 2008 ------------ ------------ (Unaudited) Investment in partnership held for sale or transfer ............................... $ ~~447~~396,~~490~~286 $ 436,484 Cash and cash equivalents ......................................................... 3,~~968~~831,~~310~~468 4,137,701 Other assets ...................................................................... 1,~~206~~118 4,559 ------------ ------------ Total assets .................................................................. $ 4,~~417~~228,~~006~~872 $ 4,578,744 ============ ============ LIABILITIES AND PARTNERS' ~~CAPITAL~~DEFICIT Due on investment in partnership .................................................. $ 1,400,000 $ 1,400,000 Accrued interest payable .......................................................... 3,~~287~~319,~~762~~262 3,256,262 Accounts payable and accrued expenses ............................................. 6253,~~905~~404 64,927 ------------ ------------ Total liabilities ............................................................. 4,~~750~~772,~~667~~666 4,721,189 ------------ ------------ Commitments and contingencies Partners' deficit: Capital paid in: General Partners .............................................................. 2,000 2,000 Limited Partners .............................................................. 50,015,000 50,015,000 ------------ ------------ 50,017,000 50,017,000 ------------ ------------ Less: Accumulated distributions to partners ........................................... (34,752,903) (34,752,903) Offering costs .................................................................. (5,278,980) (5,278,980) Accumulated losses .............................................................. (10,~~318~~528,~~778~~911) (10,127,562) ------------ ------------ Total partners' deficit ....................................................... (~~333~~543,~~661~~794) (142,445) ------------ ------------ Total liabilities and partners' deficit ....................................... $ 4,~~417~~228,~~006~~872 $ 4,578,744 ============ ============

The accompanying notes are an integral part of these financial statements. -1- Part I. FINANCIAL INFORMATION Item 1. Financial Statements CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS AND ACCUMULATED LOSSES (Unaudited)

For the three months ended ~~March~~For 31the six months ended June 30, June 30, ---------------------------- ---------------------------- 2009 2008 2009 2008 ------------ ------------ ------------ ------------ Share of ~~income (~~loss) from partnership ..................~~........~~ $ 11(40,~~006~~966) $ (462,744) $ (29,960) $ (2,790) ------------ ------------ ------------ ------------ Other revenue and expenses: Revenue: Interest ....................................~~.................~~ 73,~~656~~690 4530,~~286~~528 11,346 75,814 ------------ ------------ ------------ ------------ Expenses: General and administrative ..................~~.................~~ 8056,~~230~~620 7158,~~128~~540 136,850 129,668 Management fee ..............................~~.................~~ 62,499 62,499 124,998 124,998 Interest ....................................~~.................~~ 31,500 31,500 63,000 63,000 Professional fees ........................... 12,000 23,175 47,649 46,350 Amortization of deferred costs ..............~~...~~ 3510,~~649~~238 23-- 10,~~175~~238 -- ------------ ------------ ~~209~~------------ ------------ 172,~~878~~857 ~~188~~175,~~302~~714 382,735 364,016 ------------ ------------ ------------ ------------ Total other revenue and expenses ..........~~.................~~ (~~202~~169,~~222~~167) (~~143~~145,~~016~~186) (371,389) (288,202) ------------ ------------ ------------ ------------ Net loss ........................................~~.................~~ (~~191~~210,~~216~~133) (~~143~~147,~~062~~930) (401,349) (290,992) Accumulated losses, beginning of period .........~~.................~~ (10,318,778) (9,795,849) (10,127,562) (9,652,787) ------------ ------------ ------------ ------------ Accumulated losses, end of period ...............~~.................~~ $(10,~~318~~528,~~778~~911) $ (9,~~795~~943,~~849~~779) $(10,528,911) $ (9,943,779) ============ ============ ============ ============ Net loss allocated to General Partners (1.51%) ................... $ (23,~~887~~173) $ (2,~~160~~234) $ (6,060) $ (4,394) ------------ ============ ============ ============ Net loss allocated to Initial and Special Limited Partners (1.49%) $ (23,~~849~~131) $ (2,~~132~~204) $ (5,980) $ (4,336) ------------ ============ ============ ============ Net loss allocated to Additional Limited Partners (97%) .......... $ (~~185~~203,~~480~~829) $ (~~138~~143,~~770~~492) $ (389,309) $ (282,262) ------------ ============ ============ ============ Net loss per unit of Additional Limited Partner Interest, ~~Based~~based on 49,910 units outstanding ............. $ (4.08) $ (2.~~...............~~88) $ (37.7280) $ (25.7866) ============ ============ ============ ============

The accompanying notes are an integral part of these financial statements. -2- Part I. FINANCIAL INFORMATION Item 1. Financial Statements CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited)

For the ~~three~~six months ended ~~March~~June 3130, -------------------------- 2009 2008 ----------- ----------- Cash flows from operating activities: Net loss .................................................................. $ (~~191~~401,~~216~~349) $ (~~143~~290,~~062~~992) Adjustments to reconcile net loss to net cash used in operating activities: Share of ~~(income)~~ loss from partnership .......................................... ~~(11~~29,~~006)~~960 462,790 Amortization of deferred costs .......................................... 10,238 -- Changes in assets and liabilities: Decrease in other assets .............................................. 3,~~353~~441 1822,~~605~~504 Increase in accrued interest payable .................................. 3163,~~500~~000 3163,~~500~~000 Decrease in accounts payable and accrued expenses ..................... (211,~~022~~523) (367,~~757~~378) ----------- ----------- Net cash used in operating activities ............................... (~~169~~306,~~391~~233) (96270,~~668~~076) ----------- ----------- Net decrease in cash and cash equivalents ................................... (~~169~~306,~~391~~233) (96270,~~668~~076) Cash and cash equivalents, beginning of period .............................. 4,137,701 4,588,111 ----------- ----------- Cash and cash equivalents, end of period .................................... $ 3,~~968~~831,~~310~~468 $ 4,~~491~~318,~~443~~035 =========== ===========

The accompanying notes are an integral part of these financial statements. -3- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 1. BASIS OF PRESENTATION In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the accompanying unaudited financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position of Capital Realty Investors-II Limited Partnership (the Partnership) as of June 30, 2009, and the results of its operations for the three and six month periods ended June 30, 2009 and 2008, and its cash flows for the six month periods ended June 30, 2009 and 2008. The results of operations for the interim period ended June 30, 2009, are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) and with the instructions to Form 10-Q. Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such instructions. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership's annual report on Form 10-K at December 31, 2008. 2. NEW ACCOUNTING PRONOUNCEMENTS FASB Statement No. 165 Subsequent Events establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the company issues financial statements or has them available to issue. SFAS 165 defines (i) the period after the balance sheet date during which a reporting entity's management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 became effective for periods ending after June 15, 2009. Subsequent events have been evaluated through August 11, 2009, which is the issue date of the financial statements. The adoption of SFAS 165 did not have a material impact on our results of operations or financial position. In April 2009, FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" was issued which requires disclosure regarding the fair value of financial instruments for interim reporting periods as well as in annual financial statements. We adopted the FSP during the quarter ended June 30, 2009. In September 2006, the Financial Accounts Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes a formal framework for measuring fair value under US GAAP. Although SFAS No. 157 -4- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 2. NEW ACCOUNTING PRONOUNCEMENTS - Continued applies (amends) the provisions of existing FASB and AICPA pronouncements, it does not require any new fair value measurements, nor does it establish valuation standards. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We adopted the recognition and disclosure provisions of SFAS No. 157 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are re-measured at least annually effective January 1, 2008. The adoption did not have a material impact on our financial position, results of operations or cash flows. In accordance with FSP SFAS No. 157-2, "Effective Date of FASB Statement No. 157", we adopted the provisions of SFAS No. 157 for all other nonfinancial assets and nonfinancial liabilities effective January 1, 2009 and the adoption did not have a material impact on our financial position, results of operations or cash flows. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value as follows: 1. Level 1 Inputs -- quoted prices in active markets for identical assets of liabilities. 2. Level 2 Inputs -- observe inputs other than quoted prices in active markets for identical assets and liabilities. 3. Level 3 Inputs -- unobservable inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The Partnership has determined that the fair value of the purchase money note is de minimus as the note is secured by limited partnership interests only, is non-recourse to the Partnership and is in default. The balance sheet carrying amount for cash and cash equivalents approximates their fair value. 3. PLAN OF LIQUIDATION AND DISSOLUTION On February 4, 2004, the Partnership filed a Definitive Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934, and mailed it to limited partners to solicit consents for approval of the following: -5- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 3. PLAN OF LIQUIDATION AND DISSOLUTION - Continued (1) The sale of all of the Partnership's assets and the dissolution of the Partnership pursuant to a Plan of Liquidation and Dissolution, and the amendment of the Partnership's Limited Partnership Agreement to permit the Managing General Partner, CRI, to be eligible to receive increased property disposition fees from the Partnership on the same basis as such fees may currently be paid to Local General Partners, real estate brokers or other third party intermediaries employed to sell Partnership properties, to the extent that CRI markets and sells the Partnership's properties instead of such persons (a "Disposition Fee"); (2) The amendment of the Partnership's Limited Partnership Agreement to permit CRI to be eligible to receive a partnership liquidation fee in the amount of $500,000, payable only if the Managing General Partner is successful in liquidating all of the Partnership' s investments within 36 months from the date the liquidation is approved [March 22,2004], in recognition that one or more of the properties in which the Partnership holds an interest might not be saleable to parties not affiliated with the respective Local Partnership due to the amount and/or terms of their current indebtedness (the "Partnership Liquidation Fee"); and (3) To authorize the Managing General Partner, in its sole discretion, to elect to extend the period during which Consents of Limited Partners may be solicited and voted, but not beyond sixty (60) days from the date that the Consent Solicitation Statement was sent to the Limited Partners. The matters for which consent was solicited are collectively referred to as the "Liquidation." The record date for voting was December 31, 2003, and the final voting deadline was March 22, 2004. A tabulation of votes received by the voting deadline follows.

FOR AGAINST ABSTAIN TOTAL ------------------- -------------------- -------------------- ------------------- Units of Units of Units of Units of limited limited limited limited partner partner partner partner Description interest Percent interest Percent interest Percent interest Percent ----------- -------- ------- -------- ------- -------- ------- -------- ------- Sale, dissolution and five percent Disposition Fee 28,699 57.6% 1,264 2.5% 268 0.5% 30,231 60.6% $500,000 Partnership Liquidation Fee 25,841 51.8% 3,546 7.1% 844 1.7% 30,231 60.6% Extension of solicitation per 27,975 56.1% 1,767 3.5% 489 1.0% 30,231 60.6%

The Partnership was not liquidated within 36 months from the approved liquidation date of March 22, 2004, therefore no liquidation fee was taken by the Partnership. The Managing General Partner is continuing towards liquidation of all the Partnership's investments. -6- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 3. PLAN OF LIQUIDATION AND DISSOLUTION - Continued There can be no assurance that the Liquidation will be completed pursuant to the Plan of Liquidation and Dissolution. 4. INVESTMENT IN PARTNERSHIP a. Due on investment in partnerships and accrued interest payable -------------------------------------------------------------- Westgate -------- The Partnership defaulted on its one remaining purchase money note, related to Westgate Limited Dividend Housing Association (Westgate), on September 1, 2003, when the note (as extended) matured and was not paid. The default amount included principal and accrued interest of $1,400,000 and $2,584,492, respectively. As of August 11, 2009, principal and accrued interest of $1,400,000 and $3,333,243, respectively, were due. In conjunction with the approved Plan of Liquidation and Dissolution of the Partnership, the Managing General Partner and the representatives of the purchase money noteholders have signed a contract for the assignment of the Partnership's interest in Westgate in satisfaction of the purchase money note's principal and accrued interest. The representatives of the purchase money note holders must obtain renewal consent to the transaction from regulatory authorities. The Michigan State Housing Development Authority will not allow a transfer to occur until after December 4, 2009, due to a refunding of the bonds securing the mortgage on the property owned by the Local Partnership. The gain on this assignment would be taxed at a federal tax rate of up to 35 percent. There can be no assurance that a transfer of the Partnerships interest in Westgate will occur. Interest expense on the Partnership's Westgate purchase money note was $31,500 and $63,000 and each of the three and six month periods ended June 30, 2009 and 2008. The accrued interest payable on the purchase money note of $3,319,262 and $3,256,262 as of June 30, 2009 and December 31, 2008, respectively, is in default. Due to the likelihood of the transfer of Westgate, the Partnership's basis in the Local Partnership, along with the net unamortized amount of acquisition fees and property purchase costs, which totaled $396,286 and $436,484 as of June 30, 2009 and December 31, 2008, respectively, has been reclassified to investment in partnership held for sale or transfer in the accompanying balance sheets. -7- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 4. INVESTMENT IN PARTNERSHIP - Continued b. Asset held for sale or transfer ------------------------------ Westgate -------- See Note 4.a., above. c. Summarized financial information -------------------------------- Statements of operations for the one Local Partnership in which the Partnership was invested as of June 30, 2009 and 2008 follow. The statements have been compiled from information supplied by the management agent of the property and are unaudited. Appended after the statements is information concerning the Partnership's share of income from the Local Partnership. COMBINED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended June 30, -------------------------- 2009 2008 -------- ------- Equity Equity Method Method -------- ------- Number of Local Partnerships 1 1 = = Revenue: Rental $165,564 $151,141 Other 6,523 26,174 -------- -------- Total revenue 172,087 177,315 -------- -------- Expenses: Operating 186,195 149,068 Interest (12,225) (9,753) Depreciation and amortization 39,925 40,800 -------- -------- Total expenses 213,895 180,115 -------- -------- Net loss $(41,808) $ (2,800) ======== ======== Partnership's share of Local Partnership net income (loss) (40,966) (2,744) -------- --------- Share of loss from partnerships $(40,966) $ (2,744) ======== ======== -8- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 4. INVESTMENT IN PARTNERSHIP - Continued For the six months ended June 30, --------------------------- 2009 2008 ---------- ---------- Equity Equity Method Method ---------- ---------- Number of Local Partnerships 1 1 = = Revenue: Rental $ 336,611 $ 326,638 Other 16,525 33,269 ---------- ---------- Total revenue 353,136 359,907 ---------- ---------- Expenses: Operating 328,312 300,660 Interest (24,451) (19,506) Depreciation and amortization 79,849 81,600 ---------- ---------- Total expenses 383,710 362,754 ---------- ---------- Net loss $ (30,574) $ (2,847) ========== ========== Partnership's share of Local Partnership net loss $ (29,960) (2,790) ---------- ---------- Share of loss from partnerships $ (29,960) $ (2,790) ========== ========== 5. RELATED PARTY TRANSACTIONS In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the Managing General Partner or its affiliates for direct expenses in connection with managing the Partnership. The Partnership paid $53,851 and $103,588, for the three and six month periods ended June 30, 2009, respectively and $62,647 and $106,329 for the three and six month periods ended June 30, 2008, respectively. Such expenses are included in general and administrative expenses in the accompanying statements of operations. In accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the Managing General Partner an annual incentive management fee (Management Fee) after all other expenses of the Partnership are paid. The Partnership paid the Managing General Partner a Management Fee of $62,499 for each of the three month periods ended June 30, 2009 and 2008, and $124,998 for each of the six month periods ended June 30, 2009 and 2008. -9- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 (Unaudited) 5. RELATED PARTY TRANSACTIONS - Continued Pursuant to approval of the Partnership's Consent Solicitation Statement on March 22, 2004, the Managing General Partner is eligible to receive a fee of not more than five percent of the sale price of an investment in a Local Partnership or the property it owns, payable upon the sale of an investment in a Local Partnership or the property it owns, to the extent the Managing General Partner markets and sells a property instead of a real estate broker or unrelated Local General Partner. The disposition fee on sales of partnership interests (as opposed to sales of real property) is calculated as up to five percent of the imputed sale price, which is the amount the Local Partnership's property would have to be sold for to produce the same distribution to the investors as the sale of the partnership interests. In addition, the Managing General Partner was authorized pursuant to the approved proxy statement to receive a partnership liquidation fee in the amount of $500,000, payable only if the Managing General Partner is successful in liquidating all of the Partnership's investments within 36 months from the date the liquidation was approved. As the liquidation was not completed by March 22, 2007, the Managing General Partner did not earn the liquidation fee. 6. CASH DISTRIBUTION On August 6, 2009, the Partnership made a cash distribution of $2,245,950 ($45 per Unit) to the Limited Partners who are holders of record as of July 22, 2009. The distribution consisted of cash accumulated from operations. 7. CASH CONCENTRATION RISK Financial instruments that potentially subject the Partnership to concentrations of risk consist primarily of cash. The Partnership maintains four cash accounts. As of June 30, 2009, the uninsured portion of the cash balances was $4,020,000. Number of Bank Balance Insured Uninsured Bank Accounts 06/30/09 06/30/09 06/30/09 ---------------------- -------- ------------ -------- ---------- Dreyfus Inst Preferred Money Market Fund 2 $4,020,000 $0 $4,020,000 SunTrust Bank 2 $18,692 $18,692 $0 # # # -10- Part I. FINANCIAL INFORMATION Item 2. Management's Discussion Analysis of Financial Condition and Results of Operations Capital Realty Investors-II Limited Partnership's (the Partnership) Management's Discussion and Analysis of Financial Condition and Results of Operations section is based on the financial statements, and contains information that may be considered forward looking, including statements regarding the effect of governmental regulations. Actual results may differ materially from those described in the forward looking statements and will be affected by a variety of factors including national and local economic conditions, the general level of interest rates, governmental regulations affecting the Partnership and interpretations of those regulations, the competitive environment in which the Partnership operates, and the availability of working capital. Critical Accounting Policies ---------------------------- The Partnership has disclosed its selection and application of significant accounting policies in Note 1 of the notes to financial statements included in the Partnership's annual report on Form10-K at December 31, 2008. The Partnership accounts for its remaining investment in partnership (Local Partnership) using the equity method because the Partnership is a limited partner in the Local Partnership. As such, the Partnership has no control over the selection and application of accounting policies, or the use of estimates, by the Local Partnership. Environmental and operational trends, events and uncertainties that might affect the property owned by the Local Partnership would not necessarily have a significant impact on the Partnership's application of the equity method of accounting. New Accounting Pronouncements ----------------------------- FASB Statement No. 165 Subsequent Events establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the company issues financial statements or has them available to issue. SFAS 165 defines (i) the period after the balance sheet date during which a reporting entity's management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 became effective for periods ending after June 15, 2009. Subsequent events have been evaluated through August 11, 2009, which is the issue date of the financial statements. The adoption of SFAS 165 did not have a material impact on our results of operations or financial position. In April 2009, FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" was issued which requires disclosure regarding the fair value of financial instruments for interim reporting periods as well as in annual financial statements. We adopted the FSP during the quarter ended June 30, 2009, and have included the additional disclosures in Note 2 to the financial statements. Plan of Liquidation and Dissolution ----------------------------------- On February 4,2004, the Partnership filed a Definitive Proxy Statement, pursuant to Section 14(a) of the Securities Exchange Act of 1934, to solicit -11- Part I. FINANCIAL INFORMATION Item 2. Management's Discussion Analysis of Financial Condition and Results of Operations - Continued consent for, among other things, the sale of all of the Partnership' s assets and the dissolution of the Partnership pursuant to a Plan of Liquidation and Dissolution. As of the voting deadline, March 22, 2004, the holders of 28,699 units of limited partner interest (57.6%) voted "for" such sale and dissolution. General ------- The Managing General Partner has sold certain properties by utilizing opportunities presented by federal affordable housing legislation, favorable financing terms and preservation incentives available to tax credit and not-for-profit purchasers. The remaining rental property owned by the Local Partnership is financed by a state housing agency. Programs developed by the agency may include opportunities to sell a property to a qualifying purchaser who would agree to maintain the property as low to moderate income housing. The Managing General Partner continues to monitor certain state housing agency programs, and/or programs provided by certain lenders, to ascertain whether the property would qualify within the parameters of a given program and whether these programs would provide an appropriate economic benefit to the Limited Partners of the Partnership. However, it appears unlikely that a sale under any of the agency's current programs would produce sufficient cash to pay off the Partnership's purchase money note secured by its interest in the Local Partnership. The Managing General Partner continues to seek strategies to deal with affordable housing requirements. While the Managing General Partner cannot predict the outcome at this time, the Managing General Partner will continue to work with the Local Partnership to develop strategies that maximize the benefits to investors. Financial Condition/Liquidity ----------------------------- The Partnership's liquidity, with unrestricted cash resources of $3,831,468 as of June 30, 2009, is expected to be adequate to meet its current and anticipated operating cash needs. As of August 11, 2009, there were no material commitments for capital expenditures. The Managing General Partner currently intends to retain all of the Partnership's remaining undistributed cash for operating cash reserves pending further distributions under its Plan of Liquidation and Dissolution. The Partnership's remaining obligation with respect to its investment in Westgate Tower Limited Dividend Housing Associates (Westgate), in the form of a nonrecourse purchase money note which matured September 1, 2003, has a principal balance of $1,400,000 plus accrued interest of $3,319,262 as of June 30, 2009, and is payable in full upon the earliest of: (i) sale or refinancing of the respective Local Partnership's rental property; (ii) payment in full of the respective Local Partnership's permanent loan; or (iii) maturity. The purchase money note, which is nonrecourse to the Partnership, is secured by the Partnership's interest in the Westgate Local Partnership, which owns Westgate Tower Apartments. The underlying property does not have sufficient appreciation and equity to enable the Partnership to pay the purchase money note's principal and accrued interest. In conjunction with the approved Plan of Liquidation and Dissolution of the Partnership, the Managing General Partner and the representatives of the purchase money noteholders have signed a contract for -12- Part I. FINANCIAL INFORMATION Item 2. Management's Discussion Analysis of Financial Condition and Results of Operations - Continued the assignment of the Partnership's interest in Westgate in satisfaction of the purchase money note's principal and accrued interest. The gain on this assignment would be taxed at a federal tax rate of up to 35 percent. There can be no assurance that a transfer of the Partnership interest in Westgate will occur. The Managing General Partner has received consent from a majority of Unit Holders for the liquidation of the Partnership. (See Note 3 of the notes to financial statements contained in Part I, Item 1, hereof.) It is anticipated that the Partnership's obligation, discussed above, would be retired in conjunction with such Liquidation. There can be no assurance that the Liquidation will be completed pursuant to the Plan of Liquidation and Dissolution. The Partnership closely monitors its cash flow and liquidity position in an effort to ensure that sufficient cash is available for operating requirements. For the six month period ended June 30, 2009, existing cash resources was adequate to support operating cash requirements. Cash and cash equivalents decreased $306,233 during the six month period ended June 30, 2009, primarily due to operating expenses paid in cash. On August 6, 2009, the Partnership made a cash distribution of $2,245,950 ($45 per Unit) to the Limited Partners who are holders of record as of July 22, 2009. The distribution consisted of cash accumulated from operations. Results of Operations --------------------- The Partnership's net loss for the three month period ended June 30, 2009 increased from the corresponding period in 2008, primarily due increased share of loss from partnership and amortization of deferred costs and decreased interest revenue, partially offset by decreased professional fees. Share of loss from partnership increased primarily due to higher operating expenses at the property. Interest revenue decreased due to lower rates in 2009. The Partnership's net loss for the six month period ended June 30, 2009 increased from the corresponding period in 2008, primarily due to increases in share of loss from partnership, amortization of deferred costs and general and administrative expenses and decreased interest revenue. Share of loss from partnership increased primarily due to higher operating expenses at the property. Interest revenue decreased due to lower interest rates in 2009. No other significant changes in the Partnership's operations have taken place during the three month period ended June 30, 2009. Certain states may assert claims against the Partnership for failure to withhold and remit state income tax on operating profit or where the sale(s) of property in which the Partnership was invested failed to produce sufficient cash proceeds with which to pay the state tax and/or to pay statutory partnership filing fees. The Partnership is unable to quantify the amount of such potential claims at this time. The Partnership has consistently advised its Partners that they should consult with their tax advisors as to the necessity of filing non-resident returns in such states with respect to their proportional taxes due. -13- Part I. FINANCIAL INFORMATION Item 4. Controls and Procedures In June 2009, representatives of the Managing General Partner of the Partnership carried out an evaluation of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15 and 15d-15. The Managing General Partner does not expect that the Partnership's disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2009, our disclosure controls and procedures were effective to ensure that (i) the information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized or reported within the time periods specified in the SEC's rules and forms and (ii) such information was accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In addition, there have been no significant changes in the Partnership's internal control over financial reporting that occurred during the Partnership's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting. Part II. OTHER INFORMATION Item 3. Defaults Upon Senior Securities See Note 4. a. of the notes to financial statements contained in Part I, Item 1, hereof, for information concerning the Partnership's default on one purchase money note. Item 5. Other Information There has not been any information required to be disclosed in a report on Form 8-K during the quarter ended June 30, 2009, but not reported, whether or not otherwise required by this Form 10-Q at June 30, 2009. There is no established market for the purchase and sale of units of additional limited partner interest (Units) in the Partnership, although various informal secondary market services exist. Due to the limited markets, however, investors may be unable to sell or otherwise dispose of their Units. On August 6, 2009, the Partnership made a cash distribution of $2,245,950 ($45 per Unit) to the Limited Partners who are holders of record as of July 22, 2009. The distribution consisted of cash accumulated from operations. -14- Part II. OTHER INFORMATION Item 6. Exhibits Exhibit No. Description ----------- ----------- 31.1 Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. All other Items are not applicable. -15- SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP ------------------------------------------------- (Registrant) by: C.R.I., Inc. -------------------------------------------- Managing General Partner August 11, 2009 by: /s/ H. William Willoughby --------------- --------------------------------------- DATE H. William Willoughby, Director, President, Secretary, Principal Financial Officer, and Principal Accounting Officer -16-

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