Item 1. Business
Inland Land Appreciation Fund II, L.P. was formed on June 28, 1989, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, we commenced an offering of 30,000 (subject to an increase to 60,000) limited partnership units or units at $1,000 per unit, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991, we terminated our offering of units, after we sold 50,476.17 units, at $1,000 per unit, resulting in $50,476,170 in gross offering proceeds, not including our general partner's capital contribution of $500. All of the holders of our units were admitted to our partnership. Inland Real Estate Investment Corporation is our general partner. Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held. As of December 31, 2006, we have repurchased a total of 408.65 units for $383,822 from various limited partners through the unit repurchase program. Under this program, limited partners could, under certain circumstances, have their units repurchased for an amount equal to their original capital as reduced by distributions from net sale proceeds.
We purchased on an all-cash basis, 27 parcels of undeveloped land and two buildings and are engaged in the rezoning and resale of the parcels. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). All of the investments were made in the Chicago metropolitan area. The anticipated holding period of the land was approximately two to seven years from the completion of the land portfolio acquisitions. As a result of the lengthy rezoning and entitlement processes and the no growth mentality of the municipalities where the land is located, our holding period has exceeded our original estimates. As of December 31, 2006, we have had multiple sales transactions, through which we have disposed of approximately 3,405 acres of the approximately 4,530 acres originally owned. We continue to market the remaining acres for sale.
We are engaged in the business of real estate investment which management considers being a single operating segment. A presentation of information about operating segments would not be material to an understanding of our business taken as a whole.
We plan to enhance the value of our land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be used for development, and discussions continue with the Village of Montgomery about a Tax Increment Financing District to fund development of the property. Zoning and planning of Parcels 3 and 27 is complete and two contracts for sale of improved single family lots are pending. We have completed our final planning on Parcel 4. Sales of improved lots are proceeding on Parcel 18.
During the year ended December 31, 2006, we sold 49.4 acres of Parcel 3, 62.02 acres of Parcel 18, the remaining 14.013 acres of Parcel 21, and 25.3 acres of Parcel 27. In July 2006, we paid distributions totaling $3,990,000, which included $3,500,000 paid to the limited partners and $490,000 paid to the general partner. In September 2006, we paid an additional distribution totaling $9,000,000, which included $7,400,000 paid to the limited partners and $1,600,000 paid to the general partner. In December 2006, we paid another distribution totaling $4,000,000, which included $3,665,000 paid to the limited partners and $335,000 paid to the general partner. In addition to these sales which occurred in 2006, we anticipate additional sales of over 240 acres of Parcels 3, 18, and 27 during 2007 and 2008. Undistributed net sales proceeds will be used to cover our operations, including property upgrades. We will evaluate our cash needs throughout the year to determine future distributions.
We had no employees during 2006.
Our general partner and its affiliates provide services to us. Our general partner and its affiliates are reimbursed for salaries and expenses of employees of the general partner and its affiliates relating to the administration of the partnership. An affiliate of the general partner performs marketing and advertising services for us and is reimbursed for direct costs. An affiliate of the general partner performs property upgrades, rezoning, annexation and other activities to prepare our parcels for sale and is reimbursed for salaries and direct costs.
Access to Our Information
We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, by responding to requests addressed to our director of investor relations, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practical after such material is electronically filed or furnished to the SEC.
Limited partners wishing to communicate with our general partner can do so by writing to the attention of the general partner care of our partnership at 2901 Butterfield Road, Oak Brook, IL 60523.
Item 1(a). Risk Factors
Pre-Development Stage Land
The net proceeds of the offering were invested in pre-development stage land. An investment in such land involves a number of potential risks, which include the following:
Dependence on Governmental Zoning and Fiscal Policies. We will conduct rezoning and pre-development activities with respect to our land investments. Rezoning may only be effected by appropriate city, county and/or other local authorities. There can be no assurance that our efforts to cause these authorities to change the zoning classification(s) which apply to a given parcel of land owned by the partnership will be successful. Sometimes citizens oppose our efforts. Moreover, these authorities may require us to spend funds to facilitate future development of the land as a condition of rezoning. There can be no assurance that we will have sufficient funds to accomplish the required changes.
Restricted or Limited Access to Utilities and Roadways. The value of our land will be affected by ease of access to utilities and transportation. If public utility providers are not located in sufficient proximity to a parcel owned by the partnership, the cost of arranging for such utility access may be prohibitive to the partnership or a potential purchaser of the parcel, thereby reducing the value of the parcel. Delays and/or postponements in the construction of roads in areas by our parcels likely would adversely affect the value of our parcels.
Environmental Risks. Federal and state environmental laws can impose substantial liability on owners of real estate without regard to fault, even when other parties are or were responsible for the environmental impairment. Environmental liabilities could cause us to incur significant expenses, including (but not limited to) the obligation to remedy or clean up hazardous substances (such as pesticides commonly used on farmland) or other pollutants, regardless of fault. Such liabilities could require us to dispose of a property at a loss, which could be substantial.
In addition, the value of our land is affected by the drainage pattern of such land and the surrounding area, the susceptibility of such land to flooding and the possibility that such land might be classified as "wetlands" by a government agency, thereby inhibiting or precluding development of the parcel.
Nature of Farm Leases and Limited Current Income. With the exception of limited amounts of cash which may be generated from leasing the land as farmland or for other revenue-producing activities, pre-development land does not generate current income. Nevertheless, we incur ongoing expenses in connection with the ownership of such land (for example, real estate taxes). At the same time, our farm rental revenue is subject to a farm tenant's ability to pay the contracted rent, which depends on fluctuations in commodity prices, bad weather, competition from other producers, changes in government farm policy (including price supports), pests and crop diseases.
Lack of Geographic Diversification. All of our land investments are located in the Chicago metropolitan area. The success of the partnership will, therefore, depend to a great extent upon the rate and amount of economic growth in the Chicago metropolitan area.
Partnership-Related Risks
Risk of Installment Sale. We may sell some land parcels on an installment basis (which means that the sale price will be received in installments during the term of the agreement). In the event we find it necessary or desirable to provide such financing upon the resale of our parcels, a liquidation of the partnership may be delayed beyond the time of disposition of the parcels until any such loans are repaid or otherwise liquidated. In the event of a default on an installment sale, we may be forced to reacquire a property.
No Market for Units. Our units are subject to certain restrictions on transferability. As a result of these restrictions, no public trading market is likely to develop for these securities, nor is one intended to develop. Purchasers of units may not, therefore, be able to liquidate their investment, and units may not be readily acceptable as collateral for a loan.
Transfer Limit. In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund, L.P. Partnership Agreement and IRS Regulation Section 1.7704-1(j), we have reached the maximum threshold of partnership units that can be transferred/assigned during 2007. Therefore, no other sales of partnership interests can take place during 2007.
Conflicts of Interest. We may be subject to various conflicts of interest arising out of our relationship with our general partners and its affiliates. If the general partner or its affiliates breach their fiduciary obligations to us, or do not resolve these conflicts of interest to our benefit, we could suffer consequences which we might not otherwise be subject to if such conflicts of interest did not exist.
Federal Income Tax Aspects
Potential Receipt of UBTI. The incurrence of debt in connection with our pre-development and/or sales activities could cause the gain on the sale of parcels to constitute unrelated business taxable income ("UBTI") and affect limited partners that are tax-exempt entities.
Item 1(b). Unresolved Staff Comments
None
Item 2.
Item 2. Properties
We acquired fee ownership of the following real property investments:
Gross Acres
Remaining
Purchase/Sales
Parcel & Location
Purchased/Sold
Acres
Date
Parcel 1, McHenry County, Illinois
372.7590
-
04/25/90
(372.7590
sold 02/23/04)
Parcel 2, Kendall County, Illinois
41.1180
-
07/06/90
(3.473
sold 08/29/03)
(37.645
sold 02/17/05)
Parcel 3, Kendall County, Illinois
120.8170
37.027
11/06/90
(3.3900
sold 05/17/05)
(31.0000
sold 07/14/05)
(49.4000
sold various 2006)
Parcel 4, Kendall County, Illinois
299.0250
299.0250
06/28/91
Parcel 5, Kane County, Illinois
189.0468
-
02/28/91
(189.0468
sold 05/16/01)
Parcel 6, Lake County, Illinois
57.3345
57.0765
04/16/91
(.2580
sold 10/01/94)
Parcel 7, McHenry County, Illinois
56.7094
-
04/22/91
(12.6506
sold various 1997)
(15.7041
sold various 1998)
(19.6296
sold various 1999)
(8.7251
sold various 2000)
Parcel 8, Kane County, Illinois
325.3940
181.5240
06/14/91
(.8700
sold 04/03/96)
(63.0000
sold 01/23/01)
(80.0000
sold 05/11/04)
Parcel 9, Will County, Illinois
9.8670
-
08/13/91
(9.8670
*09/16/02)
Parcel 10, Will County, Illinois
150.6600
-
08/20/91
(150.6600
sold 01/10/05)
Parcel 11, Will County, Illinois
138.4470
-
08/20/91
(138.4470
sold 05/03/93)
Parcel 12, Will County, Illinois
44.7320
-
08/20/91
(44.7320
*09/16/02)
Parcel 13, Will County, Illinois
6.3420
-
09/23/91
(6.3420
sold 05/03/93)
Parcel 14, Kendall County, Illinois
44.4030
-
09/03/91
(15.3920
sold 04/16/01)
(14.2110
sold various 2002)
Gross Acres
Remaining
Purchase/Sales
Parcel & Location
Purchased/Sold
Acres
Date
(13.6000
sold 04/11/03)
(1.2000
sold 02/19/04)
Parcel 15, Kendall County, Illinois
100.3640
-
09/04/91
(5.0000
sold 09/01/93)
(11.0000
sold 12/01/94)
(84.3640
sold 08/14/98)
Parcel 16, McHenry County, Illinois
168.9050
-
09/13/91
(168.9050
sold 08/03/01)
Parcel 17, Kendall County, Illinois
3.4620
-
10/30/91
(2.1130
sold 03/06/01)
(1.3490
sold 08/23/02)
Parcel 18, McHenry County, Illinois
139.1697
34.5800
11/07/91
(9.2500
sold various 2004)
(33.3197
sold various 2005)
(62.0200
sold various 2006)
Parcel 19, Kane County, Illinois
436.2360
-
12/13/91
(436.2360
sold 05/16/01)
Parcel 20, Kane & Kendall Counties, Illinois
400.1290
378.9910
01/31/92
(21.1380
sold 06/30/99)
Parcel 21, Kendall County, Illinois
15.0130
-
05/26/92
(1.0000
sold 03/16/99)
(14.0130
sold 09/06/06)
Parcel 22, Kendall County, Illinois
391.9590
28.9960
10/30/92
(10.0000
sold 01/06/94)
(5.5380
sold 01/05/96)
(2.4000
sold 07/27/99)
(73.3950
sold various 2001)
(136.0000
sold 08/14/02)
(34.1400
sold 05/27/03)
(101.4900
sold various 2004)
Parcel 23, Kendall County, Illinois
133.4750
-
10/30/92
(.2676
sold 03/16/93)
(11.5250
donated 07/16/93)
(44.0700
sold various 1995)
(8.2500
sold various 1996)
(2.6100
sold various 1997)
(10.6624
sold various 1998)
(5.8752
sold various 1999)
(49.0120
sold various 2000)
(.2028
sold various 2001)
(1.0000
sold various 2002)
Parcel 24, Kendall County, Illinois
4.3140
-
01/21/93
(4.3140
sold 04/16/01)
Gross Acres
Remaining
Purchase/Sales
Parcel & Location
Purchased/Sold
Acres
Date
Parcel 25, Kendall County, Illinois
656.6870
-
01/28/93
(656.6870
sold 10/31/95)
Parcel 26, Kane County, Illinois
89.5110
-
03/10/93
(2.1080
sold 12/03/99)
(34.2550
sold various 2000)
(7.8000
sold various 2001)
(29.1200
sold various 2002)
(11.3100
sold various 2003)
(4.9180
sold 01/28/04)
Parcel 27, Kendall County, Illinois
83.5250
58.2250
03/11/93
(25.3000
sold various 2006)
Parcel 28, Kendall County, Illinois
50.0000
50.0000
*09/16/02
* On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).
Our general partner anticipates that the land we acquired will produce sufficient income to pay property taxes, insurance and other miscellaneous expenses. Income will be derived through leases to farmers or from other activities compatible with undeveloped land. Although the general partner believes that leasing our land will generate sufficient revenues to pay these expenses, there can be no assurance that this will in fact occur. Our general partner has agreed to make a supplemental capital contribution to us if and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed the revenue earned by us from leasing our land during such year. Any supplemental capital contribution will be repaid only after limited partners have received, over the life of our partnership, a return of their original capital plus the 15% cumulative return. A majority of the parcels purchased by us consist of land which generates revenue from farming or other leasing activities. It is not expected that we will generate cash distributions to limited partners from farm leases or other leasing activities. Through December 31, 2006, our land has generated sufficient revenues from leasing to cover real estate taxes and insurance expense.
Item 3.
Item 3. Legal Proceedings
We are not subject to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of our security holders during 2006.
Part II
Item 5.
Item 5. Market for the our Limited Partnership Units and Related Security Holder Matters
As of February 26, 2007, there were 4,372 holders of our units. There is no public market for units nor is it anticipated that any public market for units will develop.
For the years ended December 31, 2006 and 2005, we paid the following distributions:
Distributions to:
General partners
$
2,425,000
900,000
Limited partners
14,565,000
9,500,000
Total
$
16,990,000
10,400,000
Item 6.
Item 6. Selected Financial Data
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
For the years ended December 31, 2006, 2005, 2004, 2003 and 2002
(not covered by Report of Independent Registered Public Accounting Firm)
Total assets
$
35,110,184
40,369,857
37,219,501
39,274,559
41,787,000
Total income
$
22,131,560
20,171,792
25,705,324
5,713,191
12,208,392
Net income
$
13,566,862
14,722,791
18,657,525
2,504,880
6,333,833
Net income allocated to the one general partner unit
$
2,434,773
918,818
4,118,355
348,525
1,244,813
Net income allocated per limited partnership unit
$
222.34
275.70
290.39
43.07
101.64
Distributions per limited partnership unit from sales
$
290.90
189.74
341.30
92.50
174.83
Weighted average limited partnership units
50,068
50,068
50,068
50,068
50,068
The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this annual report.
The net income per unit and distributions per unit data is based upon the weighted average number of units outstanding.
All distributions from sales represent a return of original capital until such time as the limited partners have received distributions totaling their original capital. As of March 2004, the limited partners had received distributions in excess of their original capital.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report on Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward looking statements. These factors include, among other things, the ability to obtain annexation and zoning approvals required to develop our properties; the approval of local governing bodies to develop our properties; successful lobbying of local "no growth" or limited development homeowner groups; adverse changes in real estate, financing and general economic or local conditions; eminent domain proceedings; changes in the environmental conditions or changes in the environmental positions of governmental bodies; and potential conflicts of interest between us and our affiliates, including our general partner.
Critical Accounting Policies
On December 12, 2001, the Securities and Exchange Commission issued Financial Reporting Release or FRR No. 60 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgements in certain circumstances. We believe that our most critical accounting policies relate to how we value our investment properties and mortgage loans receivable and revenue recognition. These judgements often result from the need to make estimates about the effect of matters that are inherently uncertain. The purpose of the FRR is to provide investors with an understanding of how management forms these policies. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States of America or GAAP. GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgements known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
Valuation of Investment Properties - On a quarterly basis, in accordance with Statement of Financial Accounting Standards No. 144, we conduct an impairment analysis to ensure that the carrying value of each property does not exceed its estimated fair value. If this were to occur, we would be required to record an impairment loss equal to the excess of carrying value over fair value.
In determining the value of an investment property and whether the property is impaired, management considers several factors such as projected capital expenditures and sales prices. The aforementioned factors are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole. Should the actual results differ from management's judgement, the valuation could be negatively or positively affected.
The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property. For the year ended December 31, 2006, we had recorded no such impairment.
Cost Allocation - We use the area method of cost allocation, which approximates the relative sales method of cost allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price.
Valuation of Mortgage Loans Receivable - On a quarterly basis, we conduct an analysis to ensure that the carrying value of each mortgage loan receivable is recoverable from the borrower. If we determine all or a portion of the receivable is not collectible, we would be required to record an allowance for doubtful accounts equal to the amount estimated to be uncollectible.
In determining the value of mortgage loans receivable, management considers projected sales proceeds available and expenses related to the property associated with the mortgage. Should the actual results differ from management's judgement, the valuation could be negatively or positively affected.
The valuation and possible subsequent allowance for doubtful accounts is a significant estimate that can and does change based on management's continuous process of analyzing each mortgage loan receivable. As of December 31, 2006, the partnership has evaluated the mortgage loans receivables and determined that an allowance for doubtful accounts is not needed.
Revenue Recognition - We recognize income from the sale of land parcels in accordance with Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate”.
Liquidity and Capital Resources
On October 25, 1989, we commenced an offering of 30,000 (subject to increase to 60,000) limited partnership units or units pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991, we terminated our offering of units, with total sales of 50,476.17 units, at $1,000 per unit, resulting in $50,476,170 in gross offering proceeds, not including the general partner's capital contribution of $500. All of the holders of these units were admitted to the partnership. Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held.
We used $41,314,301 of gross offering proceeds to purchase, on an all-cash basis, 27 parcels of undeveloped land and two buildings. These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties. Three of the parcels were purchased during 1990, sixteen during 1991, four during 1992, and four during 1993. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). As of December 31, 2006, we have had multiple sales and exchange transactions through which we have disposed of the buildings and approximately 3,405 acres of the approximately 4,530 acres originally owned. As of December 31, 2006, cumulative distributions have totaled $85,330,834 to the limited partners (which exceeds the original capital) and $10,813,195 to the general partner. Of the $85,330,834 distributed to the limited partners, $84,609,834 was net sales proceeds and $721,000 was from operations. As of December 31, 2006, we have used $39,922,302 of working capital for rezoning and other activities. Such amounts have been capitalized and are included in investment properties.
Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from leasing. As of December 31, 2006, we own, in whole or in part, nine parcels, the majority of which are leased to local tenants and are generating sufficient cash flow from leases to cover property taxes and insurance. We continue to market the remaining acres for sale.
At December 31, 2006, we had cash and cash equivalents of $4,698,542 which is available to be used for our costs and liabilities, cash distributions to partners and other activities with respect to some or all of our land parcels.
In 2006, we received net sales proceeds of approximately $20,131,591 from the sales of Parcels 3,18, 21 and 27. In July 2006, we paid distributions totaling $3,990,000, which included $3,500,000 paid to the limited partners and $490,000 paid to the general partner. In September 2006, we paid distributions totaling $9,000,000, which included $7,400,000 paid to the limited partners and $1,600,000 paid to the general partner. In December 2006, we paid distributions totaling $4,000,000, which included $3,665,000 paid to the limited partners and $335,000 paid to the general partner. In addition to these sales which occurred in 2006, we anticipate additional sales of over 240 acres of Parcels 3, 18, and 27 during 2007 and 2008. See Subsequent Events for sales which have occurred in 2007. Undistributed net sales proceeds will be used to cover our operations, including property upgrades. We will evaluate our cash needs throughout the year to determine future distributions.
We plan to enhance the value of our land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments. Parcel 20 has been granted rezoning which will permit additional land to be useable for development, and discussions continue with the Village of Montgomery about a Tax Increment Financing District to fund development of the property. Zoning and planning of Parcels 3 and 27 is complete and two contracts for sale of improved single family lots are pending. We have completed our final planning on Parcel 4. Sales of improved lots are proceeding on Parcel 18.
Transactions with Related Parties
Our general partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the general partner and its affiliates relating to our administration. Such costs of $91,219, $63,327 and $64,788 are included in professional services to affiliates and general and administrative expenses to affiliates for the years ended December 31, 2006, 2005 and 2004, respectively, of which $12,352 and $8,511 was unpaid as of December 31, 2006 and 2005, respectively.
An affiliate of our general partner performed marketing and advertising services for us and was reimbursed for direct costs. Such costs of $44,070, $35,818 and $28,048 have been incurred and paid and are included in marketing expenses to affiliates for the years ended December 31, 2006, 2005 and 2004, respectively, of which $10,137 and $0 was unpaid at December 31, 2006 and 2005.
An affiliate of our general partner performed property upgrades, rezoning, annexation and other activities to prepare our land investments for sale and was reimbursed for salaries and direct costs. For the years ended December 31, 2006 and 2005, we incurred $229,186 and $236,691, respectively, of such costs. The affiliate did not recognize a profit on any project. Such costs are included in investment properties, of which $61,641 and $62,716 was unpaid as of December 31, 2006 and 2005, respectively.
Results of Operations
Income from the sale of investment properties of $20,131,591 and cost of investment properties sold of $8,446,175 recorded for the year ended December 31, 2006 is the result of the sale of 49.4 acres of Parcel 3, the sale of 62.02 acres of Parcel 18, the sale of the remaining 14.013 acres of Parcel 21 and the sale of 25.3 acres of Parcel 27. Income from the sale of investment properties of $18,404,697 and cost of investment properties sold of $6,133,357 recorded for the year ended December 31, 2005 is the result of the sale of the remaining 37.645 acres of Parcel 2, the sale of 34.4 acres of Parcel 3, the sale of the remaining 150.66 acres of Parcel 10 and the sale of 33.3 acres of Parcel 18. Income from the sale of investment properties of $23,345,650 and cost of investment properties sold of $6,573,355 recorded for the year ended December 31, 2004 is the result of the sale of the remaining 372 acres of Parcel 1, the sale of 80 acres of Parcel 8, the sale of 1.2 acres of Parcel 14, the sale of 9.25 acres of Parcel 18, the sale of 101 acres of Parcel 22 and the sale of the 10 remaining lots of Parcel 26. The sales activity for the years ended December 31, 2006, 2005 and 2004, respectively, are the result of favorable zoning and a change in our marketing approach to target homebuilders, commercial users and land developers.
During 2001, we sold 189 acres of Parcel 5 and 436 acres of Parcel 19 for $17,500,000 and recorded deferred gain of $10,203,634. We received a deferred down payment note in the amount of $1,500,000, due December 31, 2001. The note had an interest rate of 6%, however the note provided for the interest to be waived if the principal was paid in full by December 1, 2001. We received payment of the deferred down payment note on December 1, 2001 and recognized $875,923 of deferred gain. We also received an installment note in the amount of $16,000,000 at the time of closing. The installment note matures July 1, 2011 and has an interest rate of 6%. During 2006, we received principal payments totaling $1,544,287 and recognized deferred gain of $904,127. As of December 31, 2006, the balance of the mortgage loan receivable was $10,160,728. The remaining deferred gain will be recognized as payments are received.
As of December 31, 2006, we owned nine parcels of land consisting of approximately 1,125 acres. Of the approximately 1,125 acres owned, 757 acres are tillable, leased to local farmers and generate sufficient cash flow to cover property taxes, insurance and other miscellaneous expenses. Rental income was $76,813, $79,969 and $127,291 for the years ended December 31, 2006, 2005 and 2004, respectively. Rental income continues to decrease due to a decrease in the tillable acres as a result of sales.
Interest income was $946,826, $1,055,516 and $979,905 for the years ended December 31, 2006, 2005 and 2004, respectively. Interest income is primarily a result of cash available to invest on a short term basis during the year as a result of sales proceeds received.
Other income was $72,203, $61,972 and $12,525 for the years ended December 31, 2006, 2005 and 2004, respectively. Other income for 2006 and 2005 was greater than 2004 due to extension fees, non-refundable deposits and tender offer fees.
Professional services to affiliates were $68,729, $35,051 and $40,156 for the years ended December 31, 2006, 2005 and 2004, respectively. Professional services to affiliates increased in 2006 due to an increase in legal services and accounting costs.
General and administrative expenses to affiliates were $22,490, $28,276 and $24,632 for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in 2006 is due to a decrease in supplies, postage and printing. General and administrative expenses to non-affiliates were $62,060, $50,172 and $53,113 for the years ended December 31, 2006, 2005 and 2004, respectively. The increase in 2006 was due to an increase in the printing and postage for the tender offer expenses.
Income tax expenses were $107,995, $121,561 and $144,677 for the years ended December 31, 2006, 2005 and 2004, respectively. Income tax expenses include Illinois state taxes paid and accrued for at the partnership level. Income tax expenses fluctuate in accordance with land sales gains.
Marketing expenses to affiliates were $44,070, $35,818 and $28,048 for the years ended December 31, 2006, 2005 and 2004, respectively. Marketing expenses to affiliates are costs incurred for preparing and marketing parcels for sale. Marketing expenses to non-affiliates were $58,664, $49,949 and $75,440 for the years ended December 31, 2006, 2005 and 2004, respectively. In 2004, we fully implemented the change in our marketing approach to target homebuilders, industrial users and land developers through direct mailings, newspaper and trade publication advertising and an enhanced website. In 2005, marketing expenses decreased as we took advantage of our established marketing plans. In 2006, marketing expenses increased due to final expenses related to Parcel 26, a development known as Bliss Woods.
Land operating expenses to non-affiliates were $120,014, $66,892 and $50,465 for the years ended December 31, 2006, 2005 and 2004, respectively. These costs primarily include real estate tax expense, ground maintenance and insurance expense on the parcels owned. The increase in 2006 is due to the final lighting and landscaping expenditures for Parcel 26, a development known as Bliss Woods, and an increase in grounds maintenance expenses.
We determined that the maximum value of Parcel 15 could be realized if the parcel was developed and sold as individual lots. However, if we had followed that plan, there is a possibility that the limited partners may have been subject to unrelated business taxable income. Therefore, we sold the parcel to a third party developer whereby 100% of the sales price was represented by a note receivable from the buyer. This transaction was deemed an installment sale. After the sale, the developer, through a limited liability company or LLC, secured third party financing to cover the deferred down payment owed to us as well as provide proceeds to begin the development of the project. This sale was structured so that the deferred down payment received at the time of the sale was sufficient to provide a distribution to our limited partners that equated to the parcel capital allocated to the parcel plus approximately a 6% return per annum on the capital invested in the parcel (parcel capital) through the date of the distribution.
The velocity of the developer's individual lot sales was slower than was originally projected and consequently the developer's carrying costs were higher. As a result of the slower lot sales, the net sale proceeds available to us were lower than anticipated. As of December 31, 2005, we had recorded an allowance for doubtful accounts of $85,992, relating to the mortgage receivable and $336,712 relating to the accrued interest receivable, both relating to the sale of Parcel 15. The related deferred gain of $747,454 was written off. During 2006, the Partnership received principal and interest payments of $422,395 for the remaining portion of the mortgage and accrued interest which was previously written off. For 2006, the Partnership recorded a recovery for loan losses and bad debt expense in the amount of $422,395. During 2005, we received principal payments of $1,122,386 for a portion of the mortgage which was previously written off. We recorded a recovery for loan losses and bad debt expense in the amount of $1,122,386.
The General Partner guaranteed the third party development loans owed by the LLC. In reviewing the development’s financial situation, our General Partner determined that it would be in its best interest to have an affiliate acquire the interest in the LLC. The General Partner and its affiliates concluded that they could better control the continuing costs to complete the development and would therefore have the best opportunity to limit their exposure under the guarantee agreements and possibly recover a portion of the amount owed to the Partnership. An affiliate of our General Partner acquired the interests in the LLC and paid off the debt under its guarantee of the LLC loans. The affiliate of the General Partner will complete the development and sale of this project.
Our Partnership Agreement
Our partnership agreement defines the allocation of profits and losses, and available cash. If and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed our revenues, our general partner will make a supplemental capital contribution of such amount to us to ensure that we have sufficient funds to make such payments.
Profits and losses from operations (other than capital transactions) will be allocated 99% to the limited partners and 1% to the general partner. The net gain from sales of our properties is first allocated among the partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the general partner in an amount equal to the proceeds distributed to the general partner from such sale and the balance of any net gain is allocated to the limited partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the general partner from such sale, we will allocate income or gain to the general partner in an amount equal to the excess of the cash distributed to the general partner with respect to such sale as quickly as permitted by law. Any net loss from a sale will be allocated to the limited partners.
Distributions of net sale proceeds will be allocated between the general partner and the limited partners based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.
As a general rule, net sale proceeds will be distributed 90% to the limited partners and 10% to the general partner until the limited partners have received from net sale proceeds (i) a return of their original capital
plus (ii) a noncompounded cumulative preferred return of 15% of their invested capital. However, with respect to each parcel of land, the general partner's 10% share will be subordinated until the limited partners receive a return of the original capital attributed to such parcel ("parcel capital") plus a 6% per annum noncompounded cumulative preferred return thereon.
After the amounts described in items (i) and (ii) above and any previously subordinated distributions to the general partner have been paid, and the amount of any supplemental capital contributions have been repaid to the general partner, subsequent distributions shall be paid 75% to the limited partners and 25% to the general partner without considering parcel capital. If, after all net sale proceeds have been distributed, the general partner has received more than 25% of all net sale proceeds (exclusive of distributions made to the limited partners to return their original capital), the general partner shall contribute to us for distribution to the limited partners an amount equal to such excess.
Any distributions from net sales proceeds at a time when invested capital is greater than zero shall be deemed applied first to reduction of such invested capital before application to payment of any deficiency in the 15% cumulative preferred return.
Subsequent Events
On January 4, 2007, we sold 5 lots of Parcel 27 for approximately $328,000 and recorded a gain of approximately $126,000.
On January 10, 2007, the Partnership received a $335,350 payment on the mortgage receivable for Parcels 5 and 19 comprised of $50,368 of principal and $284,982 of interest.
On February 8, 2007, we sold 3 lots of Parcel 18 for approximately $182,000 and recorded a gain of approximately $31,000.
On February 20, 2007, we sold 9 lots of Parcel 3 for approximately $612,000 and recorded a gain of approximately $246,000.
On February 22, 2007, we sold an additional 3 lots of Parcel 27 for approximately $197,000 and recorded a gain of approximately $75,000.
On February 22, 2007, we sold an additional 3 lots of Parcel 18 for approximately $182,000 and recorded a gain of approximately $31,000.
Other
In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund, L.P. Partnership Agreement and IRS Regulation Section 1.7704-1(j), we have reached the maximum threshold of partnership units that can be transferred/assigned during 2007. Therefore, no other sales of partnership interests can take place during 2007.
Off-Balance Sheet Arrangements, Contractual Obligations, Liabilities and Contracts and Commitments
None
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Index
Page
Report of Independent Registered Public Accounting Firm
Financial Statements:
Balance Sheets, December 31, 2006 and 2005
Statements of Operations, for the years ended December 31, 2006, 2005 and 2004
Statements of Partners' Capital, for the years ended December 31, 2006, 2005 and 2004
Statements of Cash Flows, for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
Schedules not filed:
All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
Report of Independent Registered Public Accounting Firm
To the Partners of
Inland Land Appreciation Fund II, L.P.
We have audited the accompanying balance sheets of Inland Land Appreciation Fund II, L.P. (a limited partnership) (“the Partnership”) as of December 31, 2006 and 2005, and the related statements of operations, partners’ capital, and cash flows for the years then ended. The financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inland Land Appreciation Fund II, L.P. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Grant Thornton LLP
Chicago, Illinois
March 22, 2007
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Balance Sheets
December 31, 2006 and 2005
Assets
Current assets:
Cash and cash equivalents (Note 1)
$
4,698,542
6,129,127
Accounts and accrued interest receivable (net of allowance for doubtful accounts of $0 and $336,712 at December 31, 2006 and 2005) (Note 6)
315,965
268,897
Other current assets
279,836
278,182
Total current assets
5,294,343
6,676,206
Mortgage loans receivable (net of allowance for doubtful accounts of $0 and $85,992 at December 31, 2006 and 2005,
respectively) (Note 6)
10,160,728
11,705,015
Investment properties (including acquisition fees paid to Affiliates of $469,365 and $585,834 at December 31, 2006 and 2005, respectively) (Notes 1, 3 and 4):
Land and improvements
19,655,113
21,988,636
Total assets
$
35,110,184
40,369,857
See accompanying notes to financial statements.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
December 31, 2006 and 2005
Liabilities and Partners' Capital
Current liabilities:
Accounts payable
$
1,412,790
2,377,965
Accrued real estate taxes
48,990
29,126
Due to Affiliates (Note 3)
84,130
71,227
Total current liabilities
1,545,910
2,478,318
Deferred gain on sale of investment properties (Note 6)
5,937,343
6,841,470
Total liabilities
7,483,253
9,319,788
Partners' capital:
General Partner:
Capital contribution
Cumulative net income
11,222,780
8,788,007
Cumulative cash distributions
(10,813,195)
(8,388,195)
410,085
400,312
Limited Partners:
Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding at December 31, 2006 and 2005, (net of offering costs of $7,532,439, of which $2,535,445 was paid to Affiliates)
42,559,909
42,559,909
Cumulative net income
69,987,771
58,855,682
Cumulative cash distributions
(85,330,834)
(70,765,834)
27,216,846
30,649,757
Total Partners' capital
27,626,931
31,050,069
Total liabilities and Partners' capital
$
35,110,184
40,369,857
See accompanying notes to financial statements.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Statements of Operations
For the years ended December 31, 2006, 2005 and 2004
Income:
Sale of investment properties (Notes 1 and 3)
$
20,131,591
18,404,697
23,345,650
Recognition of deferred gain on sale of investment properties (Note 6)
904,127
569,638
1,239,953
Rental income (Note 5)
76,813
79,969
127,291
Interest income
946,826
1,055,516
979,905
Other income
72,203
61,972
12,525
22,131,560
20,171,792
25,705,324
Expenses:
Cost of investment properties sold
8,446,175
6,133,357
6,573,355
Professional services to Affiliates
68,729
35,051
40,156
Professional services to non-affiliates
56,896
50,311
57,913
General and administrative expenses to Affiliates
22,490
28,276
24,632
General and administrative expenses to non-affiliates
62,060
50,172
53,113
Income tax expense
107,995
121,561
144,677
Marketing expenses to Affiliates
44,070
35,818
28,048
Marketing expenses to non-affiliates
58,664
49,949
75,440
Land operating expenses to non-affiliates
120,014
66,892
50,465
Recovery of bad debt expense
(422,395)
(1,122,386)
-
8,564,698
5,449,001
7,047,799
Net income
$
13,566,862
14,722,791
18,657,525
Net income allocated to (Note 2):
General Partner
$
2,434,773
918,818
4,118,355
Limited Partners
11,132,089
13,803,973
14,539,170
Net income
$
13,566,862
14,722,791
18,657,525
Net income allocated to the one General Partner Unit
$
2,434,773
918,818
4,118,355
Net income per Unit allocated to Limited Partners per weighted average Limited Partnership Units (50,068 for the years ended December 31, 2006, 2005 and 2004)
$
222.34
275.70
290.39
See accompanying notes to financial statements.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Statements of Partners' Capital
For the years ended December 31, 2006, 2005 and 2004
General
Limited
Partner
Partners
Total
Balance January 1, 2004
$
375,041
28,894,712
29,269,753
Distributions to Partners ($341.30 per weighted average Limited Partnership Units of 50,068) (Note 2)
(4,111,902)
(17,088,098)
(21,200,000)
Net income (Note 2)
4,118,355
14,539,170
18,657,525
Balance December 31, 2004
381,494
26,345,784
26,727,278
Distributions to Partners ($189.74 per weighted average Limited Partnership Units of 50,068) (Note 2)
(900,000)
(9,500,000)
(10,400,000)
Net income (Note 2)
918,818
13,803,973
14,722,791
Balance December 31, 2005
400,312
30,649,757
31,050,069
Distributions to Partners ($290.90 per weighted average Limited Partnership Units of 50,068) (Note 2)
(2,425,000)
(14,565,000)
(16,990,000)
Net income (Note 2)
2,434,773
11,132,089
13,566,862
Balance December 31, 2006
$
410,085
27,216,846
27,626,931
See accompanying notes to financial statements.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
See accompanying notes to financial statements.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(1) Organization and Basis of Accounting
The Registrant, Inland Land Appreciation Fund II, L.P. (the "Partnership"), is a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, the Partnership commenced an Offering of 30,000 (subject to increase to 60,000) Limited Partnership Units pursuant to a Registration under the Securities Act of 1933. The Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") provides for Inland Real Estate Investment Corporation to be the General Partner. On October 24, 1991, the Partnership terminated its Offering of Units, with total sales of 50,476.17 Units, at $1,000 per Unit, resulting in $50,476,170 in gross offering proceeds, not including the General Partner's capital contribution of $500. All of the holders of these Units have been admitted to the Partnership. As of December 31, 2006, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through the Unit Repurchase Program. Under this program, Limited Partners could, under certain circumstances, have their Units repurchased for an amount equal to their Invested Capital.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Offering costs have been offset against the Limited Partners' capital accounts.
The Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents and are carried at cost, which approximates market.
The Partnership recognizes income from the sale of land parcels in accordance with Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate".
For vacant land parcels and parcels with insignificant buildings and improvements, the Partnership uses the area method of allocation, which approximates the relative sales method of allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price. For parcels with significant buildings and improvements (Parcel 24, described in Note 4), the Partnership records the buildings and improvements at a cost based upon the appraised value at the date of acquisition. Buildings and improvements are depreciated using the straight-line method of depreciation over a useful life of thirty years. Repair and maintenance expenses are charged to operations as incurred.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
The Partnership is required to pay a withholding tax to the Internal Revenue Service with respect to a Partner's allocable share of the Partnership's taxable net income, if the Partner is a foreign person. The Partnership will first pay the withholding tax from the distributions to any foreign partner, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to the foreign partner. Withholding tax payments are made every April, June, September and December.
No provision for Federal income taxes has been made, as the liability for such taxes is that of the Partners rather than the Partnership.
The Partnership records are maintained on the accrual basis of accounting in accordance with GAAP. The Federal income tax return has been prepared from such records after making appropriate adjustments, if any, to reflect the Partnership's accounts as adjusted for Federal income tax reporting purposes. Such adjustments are not recorded in the records of the Partnership. The net effect of these items is summarized as follows:
The net income per Unit is based upon the weighted average number of Units of 50,068 during 2006 and 2005.
New Accounting Pronouncements
In April 2006, the FASB issued FASB Staff Position ("FSP") 46R-6: Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R). This FSP addresses certain implementation issues related to FIN 46(R). Specifically, FSP FIN 46R-6 addresses how a reporting enterprise would determine the variability to be considered in applying FIN 46(R). The variability that is considered in applying FIN 46(R) affects the determination of (a) whether an entity is a variable interest entity (VIE), (b) which interests are "variable interests" in the entity, and (c) which party, if any, is the primary beneficiary of the VIE. That variability affects any calculation of expected losses and expected residual returns, if such a calculation is necessary. The Partnership is required to apply the guidance in this FSP prospectively to all entities (including newly created entities) with which it first becomes involved and to all entities previously required to be analyzed under FIN 46(R) when a "reconsideration event" has occurred, beginning July 1, 2006. The Partnership will evaluate the impact of this FSP at the time any such "reconsideration event" occurs, and for any new entities with which the Partnership becomes involved in future periods.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
In June 2006, the FASB ratified the EITF's consensus on Issue No. 06-3: How Taxes Collected from Customers and Remitted to Governmental Authorities should be Presented in the Income Statement (That is, Gross versus Net Presentation). Specifically, EITF No. 06-3 addresses any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. An accounting policy decision determines if the presentation should be on a gross or a net basis in the income statement. The consensus in this issue is to be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. The Partnership primarily accounts for the sales taxes and other taxes subject to the consensus in EITF No. 06-3 on the gross basis in its statement of operations.
Also in June 2006, the FASB issued Interpretation No. 48: Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. This Interpretation defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Partnership is currently evaluating and has not yet completed our evaluation on whether the adoption of Interpretation No. 48 will have a material effect on our financial statements.
In September 2006, the SEC's staff issued SAB No. 108: Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006. The Partnership has applied this guidance in its assessment of the materiality of prior year misstatements on its current year financials and determined that the adoption of SAB 108 did not have a material impact on its financial statements.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(2) Partnership Agreement
The Partnership Agreement defines the allocation of profits and losses, and available cash. If and to the extent that real estate taxes and insurance payable with respect to the Partnership's land during a given year exceed revenues of the Partnership, the General Partner will make a Supplemental Capital Contribution of such amount to the Partnership to ensure that it has sufficient funds to make such payments.
Profits and losses from operations (other than capital transactions) will be allocated 99% to the Limited Partners and 1% to the General Partner. The net gain from sales of Partnership properties is first allocated among the Partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the General Partner in an amount equal to the proceeds distributed to the General Partner from such sale and the balance of any net gain is allocated to the Limited Partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the General Partner from such sale, the Partnership will allocate income or gain to the General Partner in an amount equal to the excess of the cash distributed to the General Partner with respect to such sale as quickly as permitted by law. Any net loss from a sale will be allocated to the Limited Partners.
Distributions of Net Sale Proceeds will be allocated between the General Partner and the Limited Partners based upon both an aggregate overall return to the Limited Partners and a separate return with respect to each parcel of land purchased by the Partnership.
As a general rule, Net Sale Proceeds will be distributed 90% to the Limited Partners and 10% to the General Partner until the Limited Partners have received from Net Sale Proceeds (i) a return of their Original Capital plus (ii) a noncompounded Cumulative Preferred Return of 15% of their Invested Capital. However, with respect to each parcel of land, the General Partner's 10% share will be subordinated until the Limited Partners receive a return of the Original Capital attributed to such parcel ("Parcel Capital") plus a 6% per annum noncompounded Cumulative Preferred Return thereon.
After the amounts described in items (i) and (ii) above and any previously subordinated distributions to the General Partner have been paid, and the amount of any Supplemental Capital Contributions have been repaid to the General Partner, subsequent distributions shall be paid 75% to the Limited Partners and 25% to the General Partner without considering Parcel Capital. If, after all Net Sale Proceeds have been distributed, the General Partner has received more than 25% of all Net Sale Proceeds (exclusive of distributions made to the Limited Partners to return their Original Capital), the General Partner shall contribute to the Partnership for distribution to the Limited Partners an amount equal to such excess.
Any distributions from Net Sales Proceeds at a time when Invested Capital is greater than zero shall be deemed applied first to reduction of such Invested Capital before application to payment of any deficiency in the 15% Cumulative Preferred Return.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(3) Transactions with Affiliates
The General Partner and its Affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its Affiliates relating to the administration of the Partnership. Such costs are included in professional services to Affiliates and general and administrative expenses to Affiliates, of which $12,352 and $8,511 was unpaid as of December 31, 2006 and 2005, respectively.
An Affiliate of the General Partner performed marketing and advertising services for the Partnership and was reimbursed (as set forth under term of the Partnership Agreement) for direct costs. Such costs of $44,070, $35,818 and $28,048 have been incurred and are included in marketing expenses to Affiliates for the years ended December 31, 2006, 2005 and 2004, respectively, of which $10,137 and $0 was unpaid as of December 31, 2006 and 2005.
An Affiliate of the General Partner performed property upgrades, rezoning, annexation and other activities to prepare the Partnership's land investments for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs. For the years ended December 31, 2006 and 2005, the Partnership incurred $229,186 and $236,691, respectively, of such costs. The Affiliate did not recognize a profit on any project. Such costs are included in investment properties, of which $61,641 and $62,716 was unpaid as of December 31, 2006 and 2005, respectively.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(4) Investment Properties
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(4) Investment Properties (continued)
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(4) Investment Properties (continued)
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(4) Investment Properties (continued)
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(4) Investment Properties (continued)
(a)
Included in the purchase of Parcel 23 was a newly constructed 2,500 square foot house. The house was sold in March 1993.
(b)
Included in the purchase of Parcel 24 was a 2,400 square foot office building. The building was sold in 2001.
(c)
On September 16, 2002, the Partnership completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).
(d)
Reconciliation of investment properties owned:
Balance at January 1,
$
21,988,636
19,821,907
Additions during year
6,112,652
8,300,086
Sales during year
(8,446,175)
(6,133,357)
Balance at December 31,
$
19,655,113
21,988,636
(e)
The aggregate cost of investment properties owned at December 31, 2006 for Federal income tax purposes was approximately $19,500,000 (unaudited).
(f)
On a quarterly basis, in accordance with Statement of Financial Accounting Standards No. 144, the Partnership conducts an impairment analysis to ensure that the carrying value of each property does not exceed its estimated fair value. If this were to occur, the Partnership would be required to record an impairment loss equal to the excess of carrying value over fair value.
In determining the value of an investment property and whether the property is impaired, management considers several factors such as projected capital expenditures and sales prices. The aforementioned factors are considered by management in determining the value of any particular property. The value of any particular property is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole. Should the actual results differ from management's judgment, the valuation could be negatively or positively affected.
The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property. For the year ended December 31, 2006, the Partnership had recorded no such impairment.
(5) Rental Income
The Partnership has determined that all leases relating to the farm parcels are operating leases. Accordingly, rental income is reported when earned.
As of December 31, 2006, the Partnership had leases of generally one year in duration, for approximately 757 acres of the approximately 1,125 acres owned.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
(6) Mortgage Loans Receivable
Mortgage loans receivable are the result of sales of parcels, in whole or in part. The Partnership has recorded a deferred gain on these sales. The deferred gain will be recognized over the life of the related mortgage loan receivable as principal payments are received. The fair market value of the mortgage loans receivable was approximately $11,100,000 and $12,400,000, at December 31, 2006 and 2005, respectively.
On May 16, 2001, the Partnership sold 189 acres of Parcel 5 and 436 acres of Parcel 19 for $17,500,000 and recorded deferred gain of $10,203,634. The Partnership received a deferred down payment note in the amount of $1,500,000, due December 31, 2001. The note had an interest rate of 6%, however the note provided for the interest to be waived if the principal was paid in full by December 1, 2001. The Partnership received payment of the deferred down payment note on December 1, 2001 and recognized $875,923 of deferred gain. The Partnership also received an installment note in the amount of $16,000,000 at the time of closing. The installment note matures July 1, 2011 and has an interest rate of 6%. The remaining deferred gain will be recognized as payments are received.
The General Partner determined that the maximum value of Parcel 15 could be realized if the parcel was developed and sold as individual lots. However, if we had followed that plan, there is a possibility that the Limited Partners may have been subject to unrelated business taxable income. Therefore, the Partnership sold the parcel to a third party developer whereby 100% of the sales price was represented by a note receivable from the buyer. This transaction was deemed an installment sale. After the sale, the developer, through a limited liability company or LLC, secured third party financing to cover the deferred down payment owed to us as well as provide proceeds to begin the development of the project. This sale was structured so that the deferred down payment received at the time of the sale was sufficient to provide a distribution to our Limited Partners that equated to the parcel capital allocated to the parcel plus approximately a 6% return per annum on the capital invested in the parcel (parcel capital) through the date of the distribution.
INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
The velocity of the developer's individual lot sales was slower than was originally projected and consequently the developer's carrying costs were higher. As a result of the slower than anticipated lot sales, the net sale proceeds available to the Partnership were lower than anticipated. As of December 31, 2005, the Partnership had recorded an allowance for doubtful accounts of $85,992 relating to the mortgage receivable and $336,712 relating to the accrued interest receivable relating to the sale of Parcel 15 and has written off the related deferred gain of $747,454. During 2006, the Partnership received principal and interest payments of $422,395 for the remaining portion of the mortgage and accrued interest which was previously written off. For 2006, the Partnership recorded a recovery for loan losses and bad debt expense in the amount of $422,395. During 2005, the Partnership received principal payments of $1,122,386 for a portion of the mortgage which was previously written off. The Partnership recorded a recovery for loan losses and bad debt expense in the amount of $1,122,386.
The General Partner guaranteed the third party development loans owed by the limited liability company. In reviewing the development’s financial situation, our General Partner determined that it would be in its best interest to have an affiliate acquire the interest in the LLC. The General Partner and its affiliates concluded that they could better control the continuing costs to complete the development and would therefore have the best opportunity to limit their exposure under the guarantee agreements and possibly recover a portion of the amount owed to the Partnership. An affiliate of our General Partner acquired the interests in the LLC and paid off the debt under its guarantee of the LLC loans. The affiliate of the General Partner will complete the development and sale of this project.
(7) Selected Quarterly Financial Data (unaudited)
The following represents the results of operations for each quarter during the years ended December 31, 2006, 2005 and 2004.
12/31/06
09/30/06
06/30/06
03/31/06
Total income
$
1,321,759
10,521,327
8,629,714
1,658,760
Net income
394,865
7,815,673
4,690,983
665,341
Net income allocated to the limited partners
58,612
5,723,795
4,685,246
664,436
Net operating income per limited partnership
unit, basic and diluted
1.17
114.32
93.58
13.27
12/31/05
09/30/05
06/30/05
03/31/05
Total income
$
1,485,846
5,783,322
2,062,900
10,839,724
Net income
561,284
4,970,323
802,595
8,388,589
Net income allocated to the limited partners
158,516
4,964,997
300,351
8,380,109
Net operating income per limited partnership unit, basic and diluted
3.16
99.17
6.00
167.37
12/31/04
09/30/04
06/30/04
03/31/04
Total income
$
2,663,652
450,949
2,168,230
20,422,493
Net income
1,790,731
372,079
921,678
15,573,037
Net income allocated to the limited partners
1,788,915
370,015
920,723
11,459,517
Net operating income per limited partnership unit, basic and diluted
35.73
7.39
18.39
228.88
(8) Subsequent Events
On January 4, 2007, we sold 5 lots of Parcel 27 for approximately $328,000 and recorded a gain of approximately $126,000.
On January 10, 2007, the Partnership received a $335,350 payment on the mortgage receivable for Parcels 5 and 19 comprised of $50,368 of principal and $284,982 of interest.
On February 8, 2007, we sold 3 lots of Parcel 18 for approximately $182,000 and recorded a gain of approximately $31,000.
On February 20, 2007, we sold 9 lots of Parcel 3 for approximately $612,000 and recorded a gain of approximately $246,000.
On February 22, 2007, we sold an additional 3 lots of Parcel 27 for approximately $197,000 and recorded a gain of approximately $75,000.
On February 22, 2007, we sold an additional 3 lots of Parcel 18 for approximately $182,000 and recorded a gain of approximately $31,000.
Item 9.
Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure
There were no disagreements on accounting or financial disclosure matters during 2006.
Item 9(a) Controls and Procedures
The general partner conducted, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information that is required to be disclosed in the periodic reports that we must file with the Securities and Exchange Commission.
There were no significant changes in our internal controls over financial reporting during the fourth quarter of 2006 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9 (b). Other Information
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Our general partner, Inland Real Estate Investment Corporation, was organized in 1984 for the purpose of acting as general partner of limited partnerships formed to acquire, own and operate real properties. The general partner is a wholly-owned subsidiary of The Inland Group, Inc. The general partner has responsibility for all aspects of our operations.
During 2004, the board of directors of our general partner formalized the audit committee. The Audit Committee is not independent of our general partner and consists of Catherine L. Lynch, committee chair and financial expert, Brenda G. Gujral, Roberta S. Matlin and Gary Pechter. The audit committee is responsible for engaging our independent registered public accounting firm, reviewing the plans and results of the audit engagement with our independent registered public accounting firm and consulting with the independent registered public accounting firm regarding the adequacy of our internal accounting controls.
During 2004, our general partner adopted a Code of Ethics that applies to all of its employees.
Officers and Directors
The officers, directors, and key employees of IREIC and its affiliates that are likely to provide services to the Partnership are as follows. Ages are listed as of January 1, 2007.
Functional Title
Daniel L. Goodwin
Director
Robert H. Baum
Director, General Counsel of IREIC
Robert D. Parks
Chairman
Brenda G. Gujral
Director, President and principal executive officer of the Partnership
Catherine L. Lynch
Treasurer
Roberta S. Matlin
Director, Senior Vice President-Investments
Guadalupe Griffin
Vice President-Asset Management
Kelly Tucek
Vice President-Partnership Accounting and principal financial officer of the Partnership
Cathleen M. Hrtanek
Assistant Counsel, The Inland Real Estate Group, Inc., Counsel to the Partnership
DANIEL L. GOODWIN (age 63) has been with Inland since 1968 and is a founding and controlling stockholder of, and the chairman of the board and chief executive officer of, The Inland Group. Mr. Goodwin also serves as a director or officer of entities wholly owned or controlled by The Inland Group. In addition, Mr. Goodwin is the chairman of the board of Inland Real Estate Corporation, chairman of the board and chief executive officer of Inland Mortgage Investment Corporation and chairman of the board and chief executive officer of Inland Bancorp Holding Company, a bank holding company. Mr. Goodwin also serves on the management committee of Inland Real Estate Corporation.
Mr. Goodwin is a member of the National Association of Realtors, the Illinois Association of Realtors and the Northern Illinois Commercial Association of Realtors. He is also the author of a nationally recognized real estate reference book for the management of residential properties. Mr. Goodwin serves on the Board of the Illinois State Affordable Housing Trust Fund. He has served as an advisor for the Office of Housing Coordination Services of the State of Illinois, and as a member of the Seniors Housing Committee of the National Multi-Housing Council. He has served as Chairman of the DuPage County Affordable Housing Task Force and presently serves as chairman of New Directions Affordable Housing Corporation.
Mr. Goodwin obtained his bachelor's and master's degrees from Illinois state universities. Following graduation, he taught for five years in the Chicago public schools system. More recently, Mr. Goodwin has served as a member of the board of governors of Illinois State Colleges and Universities. He is vice chairman of the board of trustees of Benedictine University, vice chairman of the board of trustees of Springfield College and chairman of the board of Northeastern Illinois University.
ROBERT H. BAUM (age 63) has been with Inland since 1968 and is one of the founding stockholders. Mr. Baum is vice chairman and executive vice president and general counsel of The Inland Group. In his capacity as general counsel, Mr. Baum is responsible for the supervision of the legal activities of The Inland Group and its affiliates. This responsibility includes the supervision of The Inland Law Department and serving as liaison with outside counsel. Mr. Baum has served as a member of the North American Securities Administrators Association Real Estate Advisory Committee and as a member of the Securities Advisory Committee to the Secretary of State of Illinois. He is a member of the American Corporation Counsel Association and has also been a guest lecturer for the Illinois State Bar Association. Mr. Baum has been admitted to practice before the Supreme Court of the United States, as well as the bars of several federal courts of appeals and federal district courts and the State of Illinois. He is also a licensed real estate broker. He has served as a director of American National Bank of DuPage and currently serves as a director of Inland Bancorp Holding Company and of Westbank. Mr. Baum also is a member of the Governing Council of Wellness House, a charitable organization that exists to improve the quality of life for people whose lives have been affected by cancer and its treatment by providing psychosocial and educational support for cancer patients, their families and friends.
ROBERT D. PARKS (age 63) has been with Inland since 1968 and is one of the founding stockholders. He also is chairman of Inland Real Estate Investment Corporation, director of Inland Securities Corporation and a director of Inland Investment Advisors, Inc. Mr. Parks is president, chief executive officer, and a director of Inland Real Estate Corporation and serves on its management committee. He is also chairman and an affiliated director of Inland Western Retail Real Estate Trust, Inc. He is chairman and an affiliated director of Inland American Real Estate Trust, Inc. Mr. Parks is responsible for the ongoing administration of existing investment programs, corporate budgeting and administration for Inland Real Estate Investment Corporation. He oversees and coordinates the marketing of all investments and investor relations.
Prior to joining Inland, Mr. Parks was a school teacher in Chicago's public schools. He received his B.A. Degree from Northeastern Illinois University and his M.A. Degree from the University of Chicago. He is a registered Direct Participation Program Limited Principal with the National Association of Securities Dealers, Inc. He is also a member of the Real Estate Investment Association, the Financial Planning
Association, the Foundation for Financial Planning, as well as a member of the National Association of Real Estate Investment Trusts.
BRENDA G. GUJRAL (age 64) is president, chief operating officer and a director of Inland Real Estate Investment Corporation (IREIC). She is also president, chief operating officer and a director of Inland Securities Corporation (ISC), a member firm of the National Association of Securities Dealers (NASD). Mrs. Gujral is also a director of Inland Investment Advisors, Inc., an investment advisor. She is also Chief Executive Officer and an affiliated director of Inland Western Retail Real Estate Trust, Inc., chairperson of the board of Inland Real Estate Exchange Corporation and President and an affiliated director of Inland American Retail Real Estate Trust, Inc.
Mrs. Gujral has overall responsibility for the operations of IREIC, including the distribution of checks to over 70,000 investors, review of periodic communications to those investors, the filing of quarterly and annual reports for Inland’s publicly registered investment programs with the Securities and Exchange Commission, compliance with other SEC and NASD securities regulations both for IREIC and ISC, review of asset management activities, and marketing and communications with the independent broker/dealer firms selling Inland’s current and prior programs. Mrs. Gujral works with internal and outside legal counsel in structuring and registering the prospectuses for IREIC’s investment programs and in connection with the preparation of its offering documents and registering the related securities with the Securities and Exchange Commission and state securities commissions.
Mrs. Gujral has been with the Inland organization for more than 20 years, becoming an officer in 1982. Prior to joining Inland, she worked for the Land Use Planning Commission establishing an office in Portland, Oregon, to implement land use legislation for that state.
She is a graduate of California State University. She holds Series 7, 22, 39 and 63 licenses with the NASD. Mrs. Gujral is a member of the National Association of Real Estate Investment Trusts (NAREIT) and the National Association for Female Executives.
CATHERINE L. LYNCH (age 48) joined Inland in 1989 and is the treasurer of Inland Real Estate Investment Corporation. Ms. Lynch is responsible for managing the corporate accounting department. Prior to joining Inland, Ms. Lynch worked in the field of public accounting for KPMG LLP since 1980. She received her B.S. Degree in Accounting from Illinois State University. Ms. Lynch is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. She is registered with the National Association of Securities Dealers as a Financial Operations Principal.
ROBERTA S. MATLIN (age 62) joined Inland Real Estate Investment Corporation (IREIC) in 1984 as director of investor administration and currently serves as senior vice president of IREIC, directing the day-to-day internal operations. Ms. Matlin is a director of IREIC and president and director of Inland Investment Advisors, Inc., and Intervest Southern Real Estate Corporation, and a director and vice president of Inland Securities Corporation. She is the president of Inland American Advisory Services, Inc. Since 2003, she has been vice president of administration of Inland Western Retail Real Estate Trust, Inc., and since 2004, vice president of administration of Inland American Real Estate Trust, Inc. She was vice president of administration of Inland Real Estate Corporation from 1995 until 2000 and of Inland Retail Real Estate Trust, Inc from 1998 until 2004. From June 2001 until April 2004, she was a trustee and executive vice president of Inland Mutual Fund Trust. Prior to joining Inland, she worked for the Chicago Region of the Social Security Administration of the Untied States Department of Health and Human Services. Ms. Matlin is a graduate of the University of Illinois. She holds Series 7, 22, 24, 39, 63 and 65 licenses with the National Association of Securities Dealers.
GUADALUPE GRIFFIN (age 42) joined Inland in 1994. Ms. Griffin serves as vice president of Inland Real Estate Investment Corporation and assistant vice president of Inland Midwest Investment Corporation. Ms. Griffin is responsible for the asset management and day-to-day operations of the public and private partnerships which include the development of operating and disposition strategies for the partnerships and investor communications. Prior to joining Inland, Ms. Griffin was employed by the University of Illinois at Chicago Center for Urban Educational Research and Development as Assistant to the Director of the Nation of Tomorrow Program; a privately funded multi-million dollar program, which provided educational and empowerment services to youths and their families in four inner-city schools. Ms. Griffin holds an Illinois Real Estate Sales License.
KELLY TUCEK (age 44) joined Inland in 1989 and is a vice president of Inland Real Estate Investment Corporation and beginning in 2006, vice president, controller of Inland Western Retail Real Estate Advisory Services, Inc. As of August 1996, Ms. Tucek is responsible for the investment accounting department which includes all public partnership accounting functions along with quarterly and annual SEC filings. Prior to joining Inland, Ms. Tucek was on the audit staff of Coopers and Lybrand since 1984. She received her B.A. Degree in Accounting and Computer Science from North Central College.
CATHLEEN M. HRTANEK (age 30) joined Inland in 2005 and is an Assistant Counsel of The Inland Real Estate Group, Inc., and a member of the Audit Committee for all public partnerships sponsored by IREIC. In her capacity as their counsel, Ms. Hrtanek has been admitted to practice law in the State of Illinois. She is also a licensed real estate broker. Ms. Hrtanek received her undergraduate degree from the University of Notre Dame and her law degree from Loyola University of Chicago School of Law.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors, executive officers and beneficial owners of more than ten percent of our partnership units to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission and to provide us with copies of such reports. Based solely on a review of the copies provided to us and written representations from such reporting persons, we believe that all applicable Section 16(a) filing requirements have been met for such reporting persons.
Item 11.
Item 11. Executive Compensation
Our general partner is entitled to receive a share of cash distributions of net sale proceeds based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.
Our partnership agreement defines the allocation of profits and losses, and available cash. If and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed our revenues, our general partner will make a supplemental capital contribution of such amount to us to ensure that we have sufficient funds to make such payments.
Profits and losses from operations (other than capital transactions) will be allocated 99% to the limited partners and 1% to the general partner. The net gain from sales of our properties is first allocated among the partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the general partner in an amount equal to the proceeds distributed to the general partner from such sale and the balance of any net gain is allocated to the limited partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the general partner from such sale, we will allocate income or gain to the general partner in an amount equal to the excess of the cash distributed to the general partner with respect to such sale as quickly as permitted by law. Any net loss from a sale will be allocated to the limited partners.
Distributions of net sale proceeds will be allocated between the general partner and the limited partners based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.
As a general rule, net sale proceeds will be distributed 90% to the limited partners and 10% to the general partner until the limited partners have received from net sale proceeds (i) a return of their original capital plus (ii) a noncompounded cumulative preferred return of 15% of their invested capital. However, with respect to each parcel of land, the general partner's 10% share will be subordinated until the limited partners receive a return of the original capital attributed to such parcel ("parcel capital") plus a 6% per annum noncompounded cumulative preferred return thereon.
After the amounts described in items (i) and (ii) above and any previously subordinated distributions to the general partner have been paid, and the amount of any supplemental capital contributions have been repaid to the general partner, subsequent distributions shall be paid 75% to the limited partners and 25% to the general partner without considering parcel capital. If, after all net sale proceeds have been distributed, the general partner has received more than 25% of all net sale proceeds (exclusive of distributions made to the limited partners to return their original capital), the general partner shall contribute to us for distribution to the limited partners an amount equal to such excess.
Any distributions from net sales proceeds at a time when invested capital is greater than zero shall be deemed applied first to reduction of such invested capital before application to payment of any deficiency in the 15% cumulative preferred return.
We are permitted to engage in various transactions involving affiliates of our general, as described below.
Our general partner and its affiliates may be reimbursed for its expenses or out-of-pocket costs relating to our administration. For the year ended December 31, 2006, such costs, included in general and administrative expenses to affiliates and professional services to affiliates, were $91,219, of which $12,352 was unpaid as of December 31, 2006.
An affiliate of our general partner performed marketing and advertising services for us and was reimbursed (as set forth under terms of the partnership agreement) for direct costs. For the year ended December 31, 2006, such costs were $44,070, of which $10,137 was unpaid at December 31, 2006.
An affiliate of our general partner performed property upgrades, rezoning, annexation and other activities to prepare our land investments for sale and was reimbursed (as set forth under terms of the partnership agreement) for salaries and direct costs. The affiliate did not recognize a profit on any project. For the year ended December 31, 2006, we incurred $229,186 of such costs, of which $61,641 was unpaid as of December 31, 2006, and which are included in investment properties.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a)
No person or group is known by us to own beneficially more than 5% of the outstanding units of our partnership.
(b)
The officers and directors of our general partner own as a group the following units of our partnership:
Amount and Nature
of Beneficial
Percent
Title of Class
Ownership
of Class
Limited partnership units
234 Units directly
Less than 1/2%
No officer or director of our general partner possesses a right to acquire beneficial ownership of units of our partnership.
All of the outstanding shares of our general partner are owned by an affiliate or its officers and directors as set forth above in Item 10.
(c)
There exists no arrangement, known us, the operation of which may, at a subsequent date, result in a change in our control.
Item 13.
Item 13. Certain Relationships and Related Transactions
There were no significant transactions or business relationships with the general partner, affiliates or their management other than those described in Items 10 and 11 above. Reference is made to Note 3 of the Notes to Financial Statements (Item 8 of this annual report) for information regarding related party transactions.
Item 14:
Item 14: Principal Accountant Fees and Services
Fees. Aggregate fees for professional services rendered by our independent registered public account firm were as follows:
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
The financial statements listed in the index at page 17 of this annual report are filed as part of this annual report.
(b)
Exhibits. The following exhibits are incorporated herein by reference:
3 Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership, included as Exhibits A and B of the Prospectus dated October 25, 1989, as amended, are incorporated herein by reference thereto.
31.1 Rule 13a-14(a)/15d-14(a) Certification by principal executive officer
31.2 Rule 13a-14(a)/15d-14(a) Certification by principal financial officer
32.1 Section 1350 Certification by principal executive officer
32.2 Section 1350 Certification by principal financial officer
(c)
Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(d)
Reports on Form 8-K.
None.
No annual report or proxy material for the year 2006 has been sent to our limited partners. An annual report will be sent to the limited partners subsequent to this filing and we will furnish copies of such report to the Commission when it is sent to the limited partners.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INLAND LAND APPRECIATION FUND II, L.P.
Inland Real Estate Investment Corporation
General Partner
/s/
Brenda G. Gujral
By:
Brenda G. Gujral
President and Director
Date:
March 22, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
By:
Inland Real Estate Investment Corporation
General Partner
/s/
Brenda G. Gujral
By:
Brenda G. Gujral
President and Director
Date:
March 22, 2007
/s/
Guadalupe Griffin
By:
Guadalupe Griffin
Vice President
Date:
March 22, 2007
/s/
Kelly Tucek
By:
Kelly Tucek
Vice President
Date:
March 22, 2007
/s/
Robert D. Parks
By:
Robert D. Parks
Chairman
Date:
March 22, 2007
/s/
Daniel L. Goodwin
By:
Daniel L. Goodwin
Director
Date:
March 22, 2007