Note 2 - Investments in and Advances To Local Limited Partnerships

12 Months Ended

Dec. 31, 2015

Note 2 - Investments in and Advances To Local Limited Partnerships

NOTE 2 – INVESTMENTS IN AND ADVANCES TO THE LOCAL LIMITED PARTNERSHIP

As of December 31, 2015 and 2014, the Partnership holds limited partnership interests in one Local Limited Partnership. As of December 31, 2015, the Local Limited Partnership owns a residential low income rental project consisting of 48 apartment units. The mortgage loans of the project are payable to or insured by various governmental agencies.

The Partnership, as a limited partner, does not have a contractual relationship with the Local Limited Partnership or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Limited Partnership that would require or allow for consolidation. Accordingly, the Partnership accounts for its investment in the Local Limited Partnership using the equity method. The Partnership is allocated profits and losses of the Local Limited Partnership based upon its respective ownership percentage of 99%. Distributions of surplus cash from operations from the Local Limited Partnership are restricted by the Local Limited Partnership’s Regulatory Agreements with the United States Department of Housing and Urban Development (“HUD”) and/or are restricted by the terms of the mortgages encumbering the Projects. These restrictions limit the distribution to a portion, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Limited Partnership. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Limited Partnerships’ partnership agreements. These agreements usually limit the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Limited Partnership.

The individual investments are carried at cost plus the Partnership’s share of the Local Limited Partnership’s profits less the Partnership’s share of the Local Limited Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Limited Partnership and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Limited Partnership reaches zero. Distributions from the Local Limited Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations. Operating distributions from the Local Limited Partnerships in which the Partnership’s investment in the Local Limited Partnerships has been reduced to zero were approximately $4,000 and $5,000 for the years ended December 31, 2015 and 2014, respectively.

At times, advances are made to the Local Limited Partnership. Advances made by the Partnership to the Local Limited Partnership are considered part of the Partnership’s investment in the limited partnership. Advances made to Local Limited Partnership for which the investment has been reduced to zero are generally charged to expense.

While not obligated to make advances to the Local Limited Partnership, the Partnership made this advance in order to protect its economic investment in the Local Limited Partnership. There were no advances made during the years ended December 31, 2015 and 2014, respectively.

For investments where the Partnership has determined that the carrying value of its investment approximates the estimated fair value of the investment, the Partnership’s policy is to recognize equity in income of the Local Limited Partnership only to the extent of distributions received and amortization of acquisition costs from the Local Limited Partnership. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

The Partnership has no carrying value in the investment in Local Limited Partnership as of December 31, 2015 and 2014.

The difference between the investment per the accompanying balance sheets at December 31, 2015 and 2014 and the partners’ deficiency per the Local Limited Partnership’s condensed combined financial statements is due primarily to cumulative unrecognized equity in losses of the Local Limited Partnership, costs capitalized to the investment account, cumulative distributions recognized as income and recognition of impairment losses.

Although the Partnership’s recorded value of its investments and its equity in distributions from the Local Limited Partnership are not individually material to the overall financial position of the Partnership, the unaudited condensed combined balance sheets of the aforementioned Local Limited Partnership as of December 31, 2015 and 2014, and the unaudited condensed combined results of operations for each of the two years in the periods ended December 31, 2015 and 2014 are as follows:


Condensed Combined Balance Sheets of the Local Limited Partnership
	December 31,
	2015	2014
	(in thousands – unaudited)
Assets:
Land	$ 102	$ 102
Buildings and improvements	2,108	2,108
Accumulated depreciation	1,781	(1,755)
Other assets	439	394
Total Assets	$ 868	$ 849
Liabilities and Partners’ Deficiency:
Liabilities:
Mortgage notes payable	$ 1,401	$ 1,435
Other liabilities	81	108
Total Liabilities	1,482	1,543

Partners’ Deficiency	(614)	(694)
Total Liabilities & Partners' Deficiency	$ 868	$ 849


Condensed Combined Results of Operations of the Local Limited Partnership	Years Ended December 31,
	2015	2014
	(in thousands – unaudited)

Revenues
Rental income	$ 443	$ 430
Other income	28	14
Total revenues	471	444
Expenses
Depreciation and amortization	28	31
Interest	56	57
Operating	303	317
Total expenses	387	405

Income (loss) from continuing operations	$ 84	$ 39

Real Estate and Accumulated Depreciation of the Local Limited Partnership

The following unaudited data is a summary of real estate, accumulated depreciation and encumbrances of the Local Limited Partnership. (in thousands-unaudited)

Description	Encumbrances	Land	Buildings and Related Personal Property	Total	Accumulated Depreciation	Date of Construction


Lakeside Apartments	$ 1,401	$ 102	$ 2,108	$ 2,210	$ 1,781	10/80-6/81

Reconciliation of real estate (unaudited)

	Years Ended December 31,
	2015	2014
	(in thousands)

Balance at beginning of year	$ 2,210	$ 2,208
Additions during the year	--	2
Disposal of property	--	--
Balance at end of year	$ 2,210	$ 2,210

Reconciliation of accumulated depreciation (unaudited)

	Years Ended December 31,
	2015	2014
	(in thousands)

Balance at beginning of year	$ 1,755		$ 1,726
Disposal of property	--		--
Depreciation expense for the year	26		29
Balance at end of year	$ 1,781		$ 1,755

The current policy of the United States Department of Housing and Urban Development (“HUD”) is to not renew the Housing Assistance Payment (“HAP”) Contracts on a long term basis on the existing terms. In connection with renewals of the HAP Contracts under current law and policy, the amount of rental assistance payments under renewed HAP Contracts will be based on market rentals instead of above market rentals, which may not be the case under existing HAP Contracts. The payments under the renewed HAP Contracts may not be in an amount that would provide sufficient cash flow to permit owners of properties subject to HAP Contracts to meet the debt service requirements of existing loans insured by the Federal Housing Administration of HUD (“FHA”) unless such mortgage loans are restructured. In order to address the reduction in payments under HAP Contracts as a result of current policy, the Multi-family Assisted Housing Reform and Affordability Act of 1997 (“MAHRAA”) provides for the restructuring of mortgage loans insured by the FHA with respect to properties subject to the Section 8 program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a first mortgage loan which will be amortized on a current basis and a low interest second mortgage loan payable to FHA which will only be payable on maturity of the first mortgage loan. This restructuring results in a reduction in annual debt service payable by the owner of the FHA-insured mortgage loan and is expected to result in an insurance payment from FHA to the holder of the FHA-insured loan due to the reduction in the principal amount. MAHRAA also phases out project-based subsidies on selected properties serving families not located in rental markets with limited supply, converting such subsidies to a tenant-based subsidy.

When the HAP Contracts are subject to renewal, there can be no assurance that the Local Limited Partnerships in which the Partnership has an investment will be permitted to restructure its mortgage indebtedness under MAHRAA. In addition, the economic impact on the Partnership of the combination of the reduced payments under the HAP Contracts and the restructuring of the existing FHA-insured mortgage loans under MAHRAA is uncertain.

REAL ESTATE ASSOCIATES LTD II 10-K