ITEM 1: BUSINESS - ------- --------
The Registrant, Realmark Property Investors Limited Partnership-II ("the Partnership"), is a Delaware limited partnership organized in 1982 pursuant to a First Amended and Restated Agreement and Certificate of Limited Partnership (the "Partnership Agreement"), under the Revised Delaware Uniform Limited Partnership Act. The Partnership's general partners are Realmark Properties, Inc. (the "Corporate General Partner"), a Delaware corporation, and Joseph M. Jayson (the "Individual General Partner").
The Registrant commenced the public offering of its limited partnership units, registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on September 3, 1982, and concluded the offering on August 31, 1983, having raised a total of $10,000,000 before deducting sales commissions and expenses of the offering.
The Partnership's primary business and its only industry segment is to own and operate income-producing real property for the benefit of its partners. At December 31, 2006, the Partnership owned an office complex in Michigan (Northwind Office Park), and is a partner in two joint ventures. It has a 50% interest in Research Triangle Industrial Park Joint Venture and Research Triangle Land Joint Venture, both in Durham County, North Carolina. In July 2006, the land associated with Research Triangle Land Joint Venture was sold to an unaffiliated party. Additionally, in December 2006, the office complex known as Research Triangle in Durham, North Carolina was sold to an unaffiliated party. The only remaining property, Northwind Office Park, is currently being actively marketed for sale.
It is anticipated that the Partnership will be entering into sales contracts related to the remaining Northwind Office Park in the near future (one to six months), which will be subject to sales conditions that are customary for sales contracts, and there is no assurance that the sales will be consummated.
The business of the Partnership is not seasonal and it competes on the basis of rental rates and property operations with similar types of properties in vicinities in which the partnership's properties are located. The Partnership has no real property investments located outside the United States. The Partnership does not segregate revenue or assets by geographic region, since, in management's view, such a presentation would not be significant to an understanding of the Partnership's business or financial results taken as a whole. As of December 31, 2006, the Partnership did not directly employ any persons in a full-time position. All persons who regularly rendered services on behalf of the Partnership through December 31, 2006 were employees of the Corporate General Partner or its affiliates.
Northwind Office Park represents 100% of the Partnership's revenue generated for the last three years, before the Partnership's equity interest in unconsolidated joint ventures.
The Partnership's has a 50% interest in the unconsolidated joint venture in Realmark Research, LLC (known as Research Triangle Industrial Park West). Realmark Research, LLC (Research) advanced a portion of its sales proceeds in the amount of $1,066,719 to an affiliate under a Memorandum of Understanding Agreement dated December 8, 2006. Under the terms of this agreement, the affiliate agrees to repay this loan plus interest at a rate of 8% per annum, upon the sale of a remaining property, which is currently being marketed for sale.
This annual report contains certain forward-looking statements concerning the Partnership's current expectations as to future results. Words such as "believes", "forecasts", "intends", "possible", "expects", "estimates", "anticipates" or "plans" and similar expressions are intended to identify forward-looking statements. Such statements may not ultimately turn out to be accurate due to, among other things, economic or market conditions or the failure of the Partnership to sell an investment that is under contract.
ITEM 1A:
ITEM 1A: RISK FACTORS - -------- ------------
Investors or potential investors in Realmark Property Investors Limited Partnership - II should carefully consider the risks described below. These risks are not the only ones we face. Additional risks of which we are presently unaware or that we currently consider immaterial may also impair our business operations and hinder our financial performance, including our ability to make distributions to our investors. We have organized our summary of these risks into five subsections:
o real estate related risks; o financing risks; o tax risks; o environmental and other legal risks; and o risks for investors.
This section includes forward-looking statements.
Real Estate Related Risks
We face substantial competition
All of our properties are located in developed areas where we face substantial competition from other properties and from other real estate companies that own or may develop or renovate competing properties. The number of competitive properties and real estate companies could have a material adverse effect on our ability to rent our properties and the rents we charge. In addition, the activities of these competitors and these factors could:
o decrease the rental rates that we would be able to charge in the absence of such direct competition; and o reduce the occupancy rates that we would otherwise be able to achieve.
The factors could materially and adversely affect the value of our portfolio, our results of operations and our ability to pay amounts due on our debt and distributions to our investors.
Changes in market or economic conditions may affect our business negatively
General economic conditions and other factors beyond our control may adversely affect real property income and capital appreciation. We are unable to determine the precise effect that the performance of the worldwide or United States economies will have on us or on the value of our property.
Terrorism could impair our business
Terrorist attacks and other acts of violence or war could have a material adverse effect on our business and operating results. Attacks that directly affect one or more of our commercial properties could significantly affect our ability to operate those properties and impair our ability to achieve the results we expect. Our insurance coverage may not cover any losses caused by
a terrorist attack. In addition, the adverse effects that such violent acts and threats of future attacks could have on the United States economy could similarly have a material adverse effect on our business and results of operations.
Our commercial and office tenants may go bankrupt or be unable to make lease payments
Our operating revenues from our commercial and office properties depend on entering into leases with and collecting rents from tenants. Economic conditions may adversely affect tenants and potential tenants in our market and, accordingly, could affect their ability to pay rents and possibly to occupy their space. Tenants may experience bankruptcies and various bankruptcy laws may reject those leases or terminate them. If leases expire or end, replacement tenants may not be available upon acceptable terms and conditions. In addition, if the market rental rates are lower than the previous contractual rates, our cash flows and net income could suffer a negative impact. As a result, if a significant number of our commercial or office tenants fail to pay their rent due to bankruptcy, weakened financial condition or otherwise, it would negatively affect our financial performance.
Real estate properties are illiquid and may be difficult to sell, particularly in a poor market environment
Real estate investments are relatively illiquid, which tends to limit our ability to react promptly to changes in economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions.
Losses from natural catastrophes may exceed our insurance coverage
We carry comprehensive liability, fire, flood, extended coverage and rental loss insurance on our properties, which we believe is customary in amount and type for real property assets. Some losses, however, generally of a catastrophic nature, such as losses from floods, may be subject to limitations. We may not be able to maintain our insurance at a reasonable cost or in sufficient amounts to protect us against potential losses. Further, our insurance costs could increase in future periods. If we suffer a substantial loss, our insurance coverage may not be sufficient to pay the full current market value or current replacement value of the lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical to use insurance proceeds to replace a damaged or destroyed property.
Financing Risks
We may be unable to refinance our existing debt or we may only be able to do so on unfavorable terms
We are subject to the normal risks associated with debt financing, including:
o the risk that our cash flow will be insufficient to meet required payments of principal and interest; and
o the risk that we will not be able to renew, repay or refinance our debt when it matures or that the terms of any renewal or refinancing will not be as favorable as the existing terms of that debt.
Tax Risks
Our operating partnership may fail to be treated as a partnership for federal income tax purposes
Management believes that our operating partnership qualifies, and has qualified since its formation as a partnership for federal income tax purposes and not as a publicly traded partnership taxable as a corporation. We can provide no assurance, however, that the IRS will not challenge the treatment of the operating partnership as a partnership for federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in treating the operating partnership as a corporation for federal income tax purposes, then the taxable income of the operating partnership would be taxable at regular corporate income tax rates.
Environmental and Other Legal Risks
We may have liability under environmental laws
Under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or responsibility, simply because of our current or past ownership or operation of the real estate. Therefore, we may have liability with respect to properties we have already sold. If environmental problems arise, we may have to take extensive measures to remedy the problems, which could adversely affect our cash flow and our ability to pay distributions to our investors because:
o we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;
o the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination;
o even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and
o governmental entities or other third parties may sue the owner or operator of a contaminated site for damages and costs.
These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous or toxic substances or petroleum products and the failure to remediate that contamination properly may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.
We may face risks related to mold and asbestos
Recently, there has been an increasing number of lawsuits against owners and managers of properties alleging personal injury and property damage caused by the presence of mold in real estate.
Some of these lawsuits have resulted in substantial monetary judgments or settlements. Although our insurance policy currently does not exclude
mold-related claims, we cannot provide any assurance that we will be able to obtain coverage in the future for those claims at a commercially reasonable price or at all. The presence of significant mold could expose us to liability to tenants and others if allegations regarding property damage, health concerns or similar claims arise.
Environmental laws also govern the presence, maintenance and removal of asbestos. Those laws require that owners or operators of buildings containing asbestos:
o properly manage and maintain the asbestos;
o notify and train those who may come into contact with asbestos; and
o undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.
Those laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow others to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.
We face risks in complying with Section 404 of the Sarbanes-Oxley Act of 2002
To comply with Section 404 of the Sarbanes-Oxley Act of 2002, we must furnish a report by our management on our internal controls over financial reporting with our annual report on Form 10-K for our fiscal year ending December 31, 2007. The report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of that fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting. Material weakness in internal controls over financial reporting is defined as "a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected." The report will also contain a statement that our auditors have issued an attestation report on management's assessment of our internal controls.
Testing of our internal controls would begin no later than the second quarter of fiscal 2007. This testing will include documenting our procedures and an analysis of the segregation of duties. In the course of our evaluation and testing of internal controls, we may identify areas for improvement in the documentation, design and effectiveness of our internal controls, and these areas of improvement may be material. We may elect or be required to disclose those weaknesses before we have remediated them. We cannot assure you that we will not discover material weaknesses in the course of our testing and be required to disclose them. Given the risks inherent in the design and operation of internal controls over financial reporting, we can provide no assurance regarding our conclusions, or regarding the conclusions of our independent auditor, as of December 31, 2007 with respect to the effectiveness of our internal controls over financial reporting.
Failure to comply with the Americans with Disabilities Act or other similar laws could result in substantial costs
A number of federal, state and local laws and regulations (including the Americans with Disabilities Act) may require modifications to existing
buildings or restrict certain renovations by requiring improved access to such buildings by disabled persons and may require other structural features that add to the cost of buildings under construction. Legislation or regulations adopted in the future may impose further burdens or restrictions on us with respect to improved access by disabled persons. The costs of compliance with these laws and regulations may be substantial, and restrictions on construction or completion of renovations may limit implementation of our investment strategy in certain instances or reduce overall returns on our investments, which could have a material adverse effect on us and our ability to pay distributions to investors and to pay amounts due on our debt.
Risks for Investors
We do not pay regular distributions, and we do not anticipate making any distributions to investors for the indefinite future, other than in the winding down of the Partnership
Unlike other Partnerships that pay regular distributions, we have not paid regular distributions, and we presently have no plans to pay regular distributions. Since 2001, we have paid distributions only out of the proceeds of property sales as a result of the winding down of the Partnership.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS - -------- -------------------------
None.
ITEM 2:
ITEM 2: PROPERTIES - ------- ----------
As of December 31, 2006, the Partnership owned Northwind Office Park, an office complex located in East Lansing, Michigan. The property consists of five office buildings containing a total of 89,200 gross square feet, and 70,713 net rentable square feet. At December 31, 2006, Northwind was 71 % occupied. The 2005 and 2004 year-end occupancy rates were 62% and 67%, respectively. As of December 31, 2006 there is no mortgage loan on the Northwind property.
The Research Triangle Industrial Park Joint Venture owned a 117,000 square foot office/warehouse distribution building in Raleigh, North Carolina. The property's sole tenant, whose lease expired June 30, 2006 vacated the facility upon expiration of the lease. In December 2006, the property was sold and the first mortgage on the property was paid in full.
The Research Triangle Land Joint Venture owned unencumbered land near the site of Research Triangle Industrial Park Joint Venture's building. In July 2006, the land was sold for a purchase price of $1,371,704.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS - ------- -----------------
As previously reported, the Partnership, as a nominal defendant, the general partners of the Partnership and of affiliated public partnerships, (the "Realmark Partnerships") and the officers and directors of the Corporate General Partner, as defendants, had been involved in a class action litigation at the state court level regarding the payment of fees and other management issues.
On August 29, 2001, the parties entered into a Stipulation of Settlement (the "Settlement"). On October 4, 2001, the Court issued an "Order Preliminary Approving Settlement" (the "Hearing Order") and on November 29, 2001, the Court issued an "Order and Final Judgment Approving Settlement and Awarding Fees and Expenses" and dismissing the complaints with prejudice. The
Settlement provided, among other things, that all of the Realmark Partnerships' properties be disposed of. The general partners will continue to have primary authority to dispose of the Partnerships' properties. If either (i) the general partners have not sold or contracted to sell 50% of the Partnerships' properties (by value) by April 2, 2002 or (ii) the general partners have not sold or contracted to sell 100% of the Partnerships' properties by September 29, 2002, then the primary authority to dispose of the Partnerships' properties will pass to a sales agent designated by plaintiffs' counsel and approved by the Court. On October 4, 2002, the Court appointed a sales agent to work with the general partners to continue to sell the Partnership's remaining properties.
The settlement also provided for the payment by the Partnerships of fees to the plaintiffs' attorneys. These payments, which are not calculable at this time but may be significant, are payable out of the proceeds from the sale of all of the properties owned by all of the Realmark Partnerships, following the sale of the last of these properties in each partnership. Plaintiff's counsel will receive 15% of the amount by which the sales proceeds distributable to limited partners in each partnership exceeds the value of the limited partnership units in each partnership (based on the weighted average of the units' trading prices on the secondary market as reported by Partnership Spectrum for the period May through June 2001). In no event may the increase on which the fees are calculated exceed 100% of the market value of the units as calculated above.
ITEM 4:
ITEM 4: SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II -------
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S UNITS OF LIMITED PARTNERSHIP INTEREST - ------- -------------------------------------------------------------
There is currently no active trading market for the units of limited partnership interest of the Partnership and it is not anticipated that any will develop in the future. Accordingly, information as to the market value of a unit at any given date is not available. As of December 31, 2006, there were 1,026 record holders of units of limited partnership interest.
The Partnership is a limited partnership and, accordingly, does not pay dividends. It does, however, make distributions of cash to its partners. The partnership agreement provides for the distribution to the partners of net cash flow from operations. In connection with the pending sale of the Partnership's properties (Item 3), it is anticipated that there will be no future distributions of net cash flow from operations. All future distributions of net cash from sales proceeds will be distributed, to the extent available, 100% to the limited partners until there has been a return of the limited partner's capital contribution plus an amount sufficient to provide a 7%, not compounded, return on their adjusted capital contributions for all years following the termination of the offering of the units. It is anticipated that there will not be sufficient cash flow from the sale of the Partnership's remaining properties to provide this return to the limited partners. There were no distributions to partners made in 2006, 2005 or 2004.
The gain on the sale of the properties will be allocated in the same proportions as distributions of distributable cash from sale proceeds (anticipated to be 100% to the limited partners). In the event there is no distributable cash from sale proceeds, taxable income will be allocated 86% to the limited partners and 14% to the general partners. Any tax loss arising from a sale will be allocated 97% to the limited partners and 3% to the general partners. The above is subject to tax laws that were applicable at the time of the formation of the Partnership and may be adjusted due to subsequent changes in the Internal Revenue Code.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS -------------
Liquidity and Capital Resources: - --------------------------------
Effective January 1, 2001, management began formally marketing all remaining properties in the Partnership for sale. The Partnership made no distributions to limited partners in 2006, 2005 or 2004. In accordance with the settlement of the lawsuit (Item 3), it is anticipated that with the sale of the remaining property and joint ventures, the Partnership may be in a position to make distributions to the limited partners. These distributions will be reduced by the amount of fees payable to the plaintiffs' legal counsel in connection with the settlement agreement (Item 3), any outstanding liabilities and any mortgage prepayment penalties incurred with regard to the sale of the Partnership's properties.
Limited partners should be aware that it is possible that they will receive an allocation of income from gain on sale of properties on which they will be required to pay income taxes and there is no assurance that distributions from the sale of the properties will be sufficient to satisfy these obligations.
Except as described above and in the consolidated financial statements, the general partner is not aware of any trends or events, commitments or uncertainties that may impact liquidity in a material way.
Results of Operations: - ----------------------
The results of operations of the Partnership, excluding equity in earnings from joint ventures for the year ended December 31, 2006, produced net income of $32,595. The results compare to a net loss of $83,017 in 2005 and a net income of $9,252 in 2004.
Inflation has been consistently low during the periods presented in the consolidated financial statements and, as a result, has not had a significant effect on the operations of the Partnership or its properties.
2006 as compared to 2005 - ------------------------
Rental income increased approximately $60,000 due to a small increase in occupancy while other income increased approximately $3,000 due to an increase in interest income and other property fees.
Total expenses decreased approximately 6% for the year ended December 31, 2006. Property operations decreased approximately $25,000 due to decreases in repairs and maintenance of $4,000, utilities of $8,500, and insurance of $27,000 offset by increases in payroll and employee benefits, leasing services, and taxes of approximately $9,500, $3,500, and $1,500, respectively. Administrative expense to affiliates increased by $8,000 due to an increase in management fees of $13,000 relating to the increase in income, offset by an decrease in portfolio management fees of $5,500. Other administrative expenses decreased approximately $36,000 due to an increase in other administrative expenses of $4,500, offset by a decrease of professional fees of $40,500.
2005 as compared to 2004 - ------------------------
Rental income decreased approximately $114,000 due to a decrease in occupancy while other income decreased approximately $7,000 due to a decrease in interest income and other property fees.
Total expenses decreased approximately 3% for the year ended December 31, 2005. Property operations decreased approximately $44,000 due to decreases in payroll and employee benefits of $27,000, repairs and maintenance of $16,000, utilities of $10,000 and leasing service of $13,000 offset by increase in tax and insurance of approximately $5,000 and $17,000, respectively. Administrative expense to affiliates decreased by $5,000 due to a decrease in management fees of $7,000 relating to the decrease in income, offset by an increase in portfolio management fees of $2,000. Other administrative expenses increased approximately $21,000 due to increases in advertising, professional fees and other administrative expenses of $11,000, $5,000 and $5,000, respectively.
Joint Ventures - --------------
The Research Triangle Industrial Park Joint Venture experienced 100% occupancy in 2005 and 2004. Its 2006 net income decreased by approximately $700,000 from the 2005 net income of $307,000. Rental income decreased as a result of the property's sole tenant, whose lease expired June 30, 2006, vacating the facility upon expiration of the lease. Total expenses increased approximately 38% primarily due to approximately $169,000 in deferred mortgage costs that were written off as a result of paying off the property's mortgage and various cleaning and other expenses incurred associated with getting the building ready for sale. In 2006 and 2005, the Venture used cash from operations to reduce long-term debt and outstanding accounts payable and accrued expenses.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ----------------------------------------------------------
The Partnership invests only in short term money market instruments, in amounts in excess of daily working cash requirements. The rates of earnings on those investments increase or decrease in line with the general movement of interest rates. The mortgage loans on the Partnership's properties are fixed rate and therefore, are not subject to market risk.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Listed under Item 15 of this report.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES - -------- -----------------------
The Partnership maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Partnership in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Partnership's management, including the Partnership's Individual General Partner and Principal Financial Officer, of the effectiveness of the Partnership's disclosure controls and procedures. Based on that evaluation, the Partnership's Individual General Partner and Principal Financial Officer concluded that the Partnership's disclosure controls and procedures are effective.
Subsequent to the date of their most recent evaluation, there have been no significant changes in the Partnership's internal control over financial reporting or in other factors that could significantly affect the internal control over financial reporting.
ITEM 9B:
ITEM 9B: OTHER INFORMATION - -------- -----------------
None.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership, as an entity, does not have any directors or officers. The Individual General Partner of the Partnership is Joseph M. Jayson. The directors and executive officers of Realmark Properties, Inc., the Partnership's Corporate General Partner, as of December 31, 2006, are listed below. Each director is subject to election on an annual basis.
Joseph M. Jayson and Judith P. Jayson are married to each other.
The Directors and Executive Officers of the Corporate General Partner and their principal occupations and affiliations during the last five years or more are as follows:
Joseph M. Jayson, age 68, is Chairman, Director and sole stockholder of J. M. Jayson and Company, Inc. and certain of its affiliated companies: U.S. Apartments LLC, Westmoreland Capital Corporation, Oilmark Corporation and U.S. Energy Development Corporation. In addition, Mr. Jayson is Chairman of Realmark Corporation, Chairman, President and Treasurer of Realmark Properties, Inc., wholly-owned subsidiaries of J. M. Jayson and Company, Inc. and co-general partner of Realmark Property Investors Limited Partnership, Realmark Property Investors Limited Partnership-II, Realmark Property Investors Limited Partnership-III, Realmark Property Investors Limited Partnership-IV, Realmark Property Investors Limited Partnership-V, Realmark Property Investors Limited Partnership-VI A, and Realmark Property Investors Limited Partnership-VI B. Mr. Jayson has been in the real estate business for the last 44 years and is a Certified Property Manager as designated by the Institute of Real Estate Management ("I.R.E.M."). Mr. Jayson received a B.S. Degree in Education in 1961 from Indiana University, a Masters Degree from the University of Buffalo in 1963, and has served on the educational faculty of the Institute of Real Estate Management. Mr. Jayson has for the last 44 years been engaged in various aspects of real estate brokerage and investment. He brokered residential properties from 1962 to 1964, commercial investment properties from 1964 to 1967, and in 1967 left commercial real estate to form his own investment firm. Since that time, Mr. Jayson and J. M. Jayson & Company, Inc. have formed or participated in various ways with forming over 30 real estate related limited partnerships. For the past 25 years, Mr. Jayson and an affiliate have also engaged in developmental drilling for gas and oil.
Judith P. Jayson, age 66, is currently Vice President and a Director of Realmark Properties, Inc. She is also a Director of the property management affiliate, Realmark Corporation. Mrs. Jayson has been involved in property management for the last 35 years and has extensive experience in the hiring and training of property management personnel and in directing, developing and implementing property management systems and programs. Mrs. Jayson, prior to joining the firm in 1973, taught business in the Buffalo, New York High School System. Mrs. Jayson graduated from St. Mary of the Woods College in Terre Haute, Indiana, with a degree in Business Administration.
Audit Committee - ---------------
The Partnership has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the audit committee are Joseph M. Jayson and Duane Neyman, CPA.
Audit Committee Financial Expert - --------------------------------
The Directors and Executive Officers of the Corporate General Partner have determined that Duane Neyman, CPA is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Mr. Neyman is not independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act due to limited circumstances, namely that the Partnership is small in size and there is limited personnel. Mr. Neyman is not independent as a result of being an employee of an affiliate of the Corporate General Partner.
Code of Ethics - --------------
The Partnership has adopted a code of ethics for the partners, principal financial officer, and employees of the Corporate General Partner or its affiliates who render services on behalf of the Partnership. The Partnership will provide to any person without charge, upon request, a copy of the code of ethics, which is available from:
Realmark Property Investors Limited Partnership - II Attention: Investor Relations 2350 North Forest Road Getzville, New York 14068
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION - -------- ----------------------
No direct remuneration was paid or payable by the Partnership to directors and officers (since it has no directors or officers), nor was any direct remuneration paid or payable by the Partnership to directors or officers of Realmark Properties, Inc., the Corporate General Partner and sponsor, for the year ended December 31, 2006. The Corporate General Partner and its affiliate, Realmark Corporation, are entitled to fees and to certain expense reimbursements with respect to Partnership operations, as set forth in Item 13 hereof and in the notes to the consolidated financial statements.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
No person is known to the Partnership to own of record or beneficially, more than 5% of the units of limited partnership interests of the Partnership, except for affiliates of the general partners that own 912 units of limited partnership interest amounting to approximately 9.1% of the Partnership interest at December 31, 2006. The general partners and the executive officers of the Corporate General Partner, as of December 31, 2006, owned 8 units of limited partnership interest. The general partners and affiliates will receive their proportionate share, as limited partners, of any distributable proceeds from the sale of the properties.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
The properties of the Partnership and its subsidiary are managed by Realmark Corporation, an affiliate of the Partnership's Corporate General Partner, for a fee of generally 5% of annual net rental income of the properties. Realmark Corporation and the Corporate General Partner are also reimbursed for disbursements made on behalf of the Partnership. Those transactions are further described, and quantified, in the note to the consolidated financial statements entitled "Related Party Transactions".
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES - -------- --------------------------------------
Audit Engagement: Rotenberg & Co., L.L.P. was engaged as the Partnership's independent auditor for the year 2006. Toski, Schaefer, & Co., P.C. was engaged as the Partnership's independent auditor for the year 2005. All fees incurred for the years ended December 31, 2006 and 2005 were approved by the Audit Committee.
Audit Fees: Audit fees for the quarterly reports on Form 10-Q by Rotenberg & Co., LLP for the year ended December 31, 2006 amounted to $9,000. Audit fees for the audit of the Partnership's annual financial statements included in the Partnership's annual report on Form 10-K and those financial statements included in the Partnership's quarterly reports on Form 10-Q by Toski, Schaefer & Co., P.C. for the year ended December 31, 2005 totaled $32,000.
Audit-Related Fees: None.
Tax Fees: The Partnership engaged Toski, Schaefer & Co., P.C. to provide tax filing and compliance services during the year ended December 31, 2005. The fees paid to Toski, Schaefer & Co., P.C. for these services amounted to $2,885 for the year ended December 31, 2005.
All Other Fees: None.
The Audit Committee has set a policy that all fees incurred by the Partnership for services performed by its independent auditors must be pre-approved by the Audit Committee. All fees related to 2006 were pre-approved by the Audit Committee.
The Audit Committee oversees the Partnership's financial reporting process. Management has the primary responsibility for the financial statements and the financial reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.
The Audit Committee has the sole authority to retain and terminate the Partnership's independent auditors and approves all fees paid to the independent auditors. During 2006 and 2005, the Audit Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Partnership's accounting principles and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards. In addition, the Audit Committee has discussed with the independent auditors the auditors' independence from management and the Partnership, including the matters in the written disclosures required by the Independence Standards Board, and considered the scope and type of non-audit services provided by the auditor when reviewing the compatibility of those non-audit services with the auditors' independence.
The Audit Committee discussed with the Partnership's independent auditors the overall scope and plans for their audit. The Audit Committee meets with the independent auditors to discuss the results of their examinations, their evaluations of the Partnership's internal controls, and the overall quality of the Partnership's financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the General Partners (and the General Partners have approved) that the audited financial statements be included in the annual report on Form 10-K for the year ended December 31, 2006.
PART IV -------
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K - -------- ------------------------------------------------------------------
(a) Consolidated Financial Statements Page --------------------------------- ----
Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Partners' Equity for the years ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULE ----------------------------
(i) Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K -------------------
Current report on Form 8-K filed by the Partnership during and subsequent to the year end December 31, 2006 to which this report is filed:
Form 8-K report filed on August 14, 2006 Form 8-K report filed on December 6, 2006
(c) Exhibits --------
2. Plan of acquisition, reorganization, arrangement, liquidation, or succession
(a) Stipulation of Settlement Agreement dated August 29, 2001 is incorporated herein by reference.
(b) Order and Final Judgment Approving Settlement and Awarding Fees and Expenses dated November 29, 2001 is incorporated herein by reference.
4. Instruments defining the rights of security holders, including indentures
(a) First Amended and Restated Agreement and Certificate of Limited Partnership filed with the Registration Statement of the Registrant Form S-11, filed September 30, 1982 and subsequently amended, is incorporated herein by reference.
10. Material contracts
(a) Property Management Agreement with Realmark Corporation included with the Registration Statement of the Registrant as filed and amended to date is incorporated herein by reference.
14. Code of Ethics filed December 31, 2003, are incorporated herein by reference.
21. Subsidiary of the Partnership is filed herewith.
31. Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is filed herewith.
32. Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith.
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.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II
By: /s/ Joseph M. Jayson March 29, 2007 -------------------- -------------- JOSEPH M. JAYSON, Date Individual General Partner
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: REALMARK PROPERTIES, INC. Corporate General Partner
/s/ Joseph M. Jayson March 29, 2007 -------------------- -------------- JOSEPH M. JAYSON, Date President, Treasurer and Director
/s/ Judith P. Jayson March 29, 2007 -------------------- -------------- JUDITH P. JAYSON, Date Vice President and Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------
To the Partners Realmark Property Investors Limited Partnership - II Getzville, New York
We have audited the accompanying consolidated balance sheet of Realmark Property Investors Limited Partnership - II and Subsidiary ("the Company") as of December 31, 2006, and the related consolidated statements of operations, partners' equity, and cash flows for the year then ended. Our audit also included the 2006 financial statement schedule listed in the index at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Realmark Property Investors Limited Partnership - II and Subsidiary as of December 31, 2006, 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. Also, in our opinion, the 2006 financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in note 8 to the consolidated financial statements, the Company settled a class and derivative lawsuit in which it was involved. As a result of this settlement, the Company is currently in the process of winding up its operations and disposing of its investments. It is anticipated that this process will take place within the next twelve months.
/s/ Rotenberg & Co., LLP - ------------------------ Rotenberg & Co., LLP Rochester, New York March 29, 2007
INDEPENDENT AUDITOR'S REPORT ----------------------------
The Partners Realmark Property Investors Limited Partnership - II:
We have audited the accompanying consolidated balance sheets of Realmark Property Investors Limited Partnership - II and Subsidiary as of December 31, 2005, and the related consolidated statements of operations, partners' equity, and cash flows for each of the years ended December 31, 2005 and 2004. Our audits also included the financial statement schedule listed in the index at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the general partners. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule 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 audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Realmark Property Investors Limited Partnership - II and Subsidiary as of December 31, 2005, and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in note 8 to the consolidated financial statements, the Partnership settled a class and derivative lawsuit in which it was involved. As a result of this settlement, the Partnership is currently in the process of winding up its operations and disposing of its investments. It is anticipated that this process will take place within the next twelve months.
/s/ TOSKI, SCHAEFER & CO., P.C. ------------------------------- TOSKI, SCHAEFER & CO., P.C.
Williamsville, New York March 31, 2006
a
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004
(1) Formation and Operation of Partnership - --- --------------------------------------
Realmark Property Investors Limited Partnership - II (the Partnership) is a Delaware limited partnership formed on March 25, 1982, to invest in a diversified portfolio of income producing real estate investments.
In 1982 and 1983, the Partnership sold, through a public offering, 10,000 units of limited partnership interest. The general partners are Realmark Properties, Inc. (the Corporate General Partner) and Joseph M. Jayson (the Individual General Partner) who is the sole shareholder of J.M. Jayson & Company, Inc. Realmark Properties, Inc. is a wholly-owned subsidiary of J.M. Jayson & Company, Inc.
Under the partnership agreement, the general partners and their affiliates can receive compensation for services rendered, and reimbursement for expenses incurred on behalf of the Partnership (note 6).
(2) Summary of Significant Accounting Policies - --- ------------------------------------------
(a) Basis of Accounting and Consolidation -----------------------------------------
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of the Partnership and its subsidiary, Realmark/Foxhunt Limited Partnership which owned and operated the Foxhunt Apartments, a 250 unit apartment complex located in Dayton, Ohio, acquired in 1984 and sold in 2001. The Partnership owns Northwind Office Park.
In consolidation, all intercompany accounts and transactions have been eliminated.
(b) Estimates -------------
The preparation of financial statements in conformity with generally accepted accounting principles in requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
(c) Property and Equipment --------------------------
Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, from 5 to 25 years. Significant improvements are capitalized, while expenditures for maintenance and repairs and replacements are charged to expense as incurred. Upon disposal of depreciable property, the appropriate property accounts are reduced by the related costs and accumulated depreciation and gains and losses are reflected in the consolidated statements of operations.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements
(2) Summary of Significant Accounting Policies, Continued - --- -----------------------------------------------------
(c) Property and Equipment, Continued -------------------------------------
The Partnership reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In determining whether there is an impairment of long-lived assets, the Partnership compares the sum of the expected future net cash flows (undiscounted and without interest charges) to the carrying amount of the assets. At December 31, 2006, no impairment in value has been recognized.
The Partnership and its ventures' policy is to consider a property to be held for sale or disposition when the Partnership or venture has committed to a plan to sell or dispose of such property and active marketing activity has commenced or is expected to commence in the near term or the Partnership or venture has concluded that it may dispose of the property by no longer funding operating deficits or debt service requirements of the property thus allowing the lender to realize upon its security. Any properties identified as "held for sale of disposition" are no longer depreciated. All the properties were held for sale in 2006, 2005, and 2004.
(d) Cash and Equivalents ------------------------
Cash and equivalents include money market accounts and any highly liquid debt instruments purchased with a maturity period of three months or less.
(e) Deferred Mortgage Costs ---------------------------
Costs incurred in obtaining mortgage financing are deferred and amortized using the straight-line method over the life of the respective mortgages. In February 2004, the mortgage for the Northwind property was paid off. As of December 31, 2006 and 2005, there are no deferred mortgage costs.
(f) Unconsolidated Joint Ventures ---------------------------------
The Partnership's investment in Research Triangle Industrial Park West Associates Joint Venture and Research Triangle Land Joint Venture are unconsolidated joint ventures, which are accounted for on the equity method. These joint ventures are not consolidated in the Partnership's financial statements because the Partnership is not the majority owner.
(g) Rental Income -----------------
Rental income is recognized as earned according to the terms of the leases. Leases for residential properties are generally for periods
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued - --- -----------------------------------------------------
(g) Rental Income, Continued ----------------------------
of one year or less, payable monthly. Commercial leases are generally for periods of one to five years. Delinquent residential property rent is not recorded.
(h) Per Unit Data -----------------
Per limited partnership unit is based on the weighted average number of limited partnership units outstanding for the year.
(i) Fair Value of Financial Instruments ---------------------------------------
The fair value of the Partnership's financial instruments approximated their carrying values at December 31, 2006.
(j) Income Allocation and Distributable Cash Flow -------------------------------------------------
The partnership agreement provides that income not arising from sale and refinancing activities and all partnership losses are to be allocated 97% to the limited partners and 3% to the general partners. Partnership income arising from sale or refinancing activities is allocated in the same proportion as distributions of distributable cash from sale proceeds. In the event there is no distributable cash from sale proceeds, taxable income will be allocated 87% to the limited partners and 13% to the general partners. The above is subject to tax laws that were applicable at the time of the formation of the Partnership and may be adjusted due to subsequent changes in the Internal Revenue Code.
The partnership agreement also provides for the distribution to the partners of net cash flow from operations. In connection with the pending sale of the Partnership's properties (note 8), it is anticipated that there will be no future distributions of net cash flow from operations. Sale or refinancing proceeds are distributed to the extent available, 100% to the limited partners until there has been a return of the limited partner's capital contribution plus an amount sufficient to provide a 7%, not compounded, return on their adjusted capital contributions for all years following the termination of the offering of the units. It is anticipated that there will not be sufficient cash flow from the sale of the Partnership's remaining properties to provide this return to the limited partners. There were no distributions to partners made in 2006, 2005, or 2004.
(k) Income Taxes ----------------
No income taxes are included in the consolidated financial statements since the taxable income or loss of the Partnership is reportable
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued - --- -----------------------------------------------------
(k) Income Taxes, Continued ---------------------------
by the partners on their income tax returns. At December 31, 2006, net assets for financial reporting purposes were $580,988 less than the tax bases of the net assets.
(l) Segment Information -----------------------
The Partnership's operating segments all involve the ownership and operation of income-producing real property and are aggregated into one reporting segment.
(m) Recent Pronouncements -------------------------
The Partnership does not believe that the following recent pronouncements have a material effect on its financial position, results of operations or cash flows:
o Statement of Financial Accounting Standard ("SFAS") No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statement No. 133 and 140" ("SFAS 155"). o Statement of Financial Accounting Standard ("SFAS") No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS 156 o FIN 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109 o Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" o Statement of Financial Accounting Standard ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158") o SEC Staff Accounting Bulletin No. 108 ("SAB 108") - guidance on Quantifying Financial Statement Misstatements o Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115".
(n) Reclassifications ---------------------
Reclassifications have been made to certain 2005 balances in order for them to conform to the 2006 presentation.
(3) Investments in Real Estate - --- --------------------------
On January 1, 2002, the Partnership adopted SFAS No. 144, "Accounting for
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
(3) Investments in Real Estate, Continued - --- -------------------------------------
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes the accounting and reporting standards for the impairment or disposal of long-lived assets by requiring those assets to be measured at the lower of depreciated cost or fair value less selling costs, whether reported on continuing operations or in discontinued operations. The adoption of this standard did not have a material effect on the Partnership's consolidated financial position or results of operations for the year ended December 31, 2002.
Effective January 1, 2001, the Partnership entered into a plan to dispose of the property of Northwind Office Park. The carrying value of the assets of Northwind Office Park was $2,331,876 at December 31, 2006, and the property generated net income of $32,595 for the year then ended.
Depreciation expense, not recorded during the disposal periods on Northwind Office Park amounted to $219,000, $219,000 and $187,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
All of the properties were classified as property held for sale prior to the adoption of SFAS No. 144 and continue to be actively marketed for sale. Accordingly their results of operations have been recorded in continuing operations.
(4) Investments in Unconsolidated Joint Ventures - --- --------------------------------------------
The Partnership has a 50% interest in a joint venture with Realmark Property Investors Limited Partnership-VIA (RPILP-VIA), an entity affiliated through common general partners. The venture owns and operates the Research Triangle Industrial Park West, an office/warehouse facility located in Research Triangle Park, North Carolina. The joint venture agreement provides that any income, loss, gain, cash flow, or sale proceeds be allocated 50% to the Partnership and 50% to RPILP-VIA.
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
(4) Investments in Unconsolidated Joint Ventures, Continued - --- -------------------------------------------------------
Summary financial information of the Venture follows:
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements
(4) Investments in Unconsolidated Joint Ventures, Continued - --- -------------------------------------------------------
A reconciliation of the Partnership's investment in Research Triangle Industrial Park Joint Venture is as follows:
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Investments in Unconsolidated Joint Ventures, Continued - --- -------------------------------------------------------
In 1992, the Partnership entered into an agreement with the Adaron Group to form the Research Triangle Land Joint Venture. The primary purpose of this joint venture is to develop the undeveloped land on the site of Research Triangle Industrial Park West. This land was placed into the Land Joint Venture by Research Triangle Industrial Park West. The ownership of the joint venture is 50% attributable to Adaron Group and 50% to the Partnership. The value allocated to the land in this joint venture upon acquisition was $412,500. In 2001, a portion of the land was sold for a gain of $180,199. The Partnership's remaining investment in the land amounted to $108,997 and $111,770 at December 31, 2005 and 2004, respectively. In July 2006, the land was sold for a purchase price of $1,371,704. The Partnership received a distribution in the amount of $711,314 related to the sale of the land. There are two purchase money notes totaling $143,312. The Partnership's basis in the investment in the land has been adjusted to approximately 67% of the remaining partner's equity, which amounted to $97,625 at December 31, 2006.
(5) Mortgage Loan Payable - --- ---------------------
Northwind Office Park made the final payment on a mortgage loan bearing interest at 9% and payable in monthly principal and interest installments of $4,779 in February 2004.
(6) Related Party Transactions - --- --------------------------
The Corporate General Partner and its affiliates earn fees, principally for property and partnership management and are reimbursed for services rendered to the Partnership, as provided for in the partnership agreement. A summary of those items follows:
In addition to the above, other property specific expenses such as payroll, benefits, etc. are charged to property operations on the Partnership's consolidated statements of operations. On January 1, 2005, the interest rate on related party transactions was changed from
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
(6) Related Party Transactions, Continued - --- -------------------------------------
11% to 8%. Receivables from affiliates are payable on demand and bear interest at 8% in 2006 and 2005 and 11% in 2004.
Memorandum of Understanding ---------------------------
The Partnership has a 50% interest in the unconsolidated joint venture in Realmark Research, LLC (known as Research Triangle Industrial Park West). Realmark Research, LLC (Research) advanced a portion of its sales proceeds in the amount of $1,066,719 to an affiliate under a Memorandum of Understanding Agreement dated December 8, 2006. Under the terms of this agreement, the affiliate agrees to repay this loan plus interest at a rate of 8% per annum, upon the sale of a remaining property, which is currently being marketed for sale.
Property Disposition Fee ------------------------
According to the terms of the partnership agreement, the general partners are also allowed to collect a property disposition fee upon sale of acquired properties. This fee is not to exceed the lesser of 50% of amounts customarily charged in arm's-length transactions by others rendering similar services for comparable properties or 3% of the sales price. The property disposition fee is subordinate to payments to the limited partners of a cumulative annual return (not compounded) equal to 7% of their average adjusted capital balances and to repayment to the limited partners of an amount equal to their original capital contributions. Since these conditions described above have not been met, no disposition fees have been paid or accrued on properties sold in prior years.
(7) Leases - --- ------
In connection with the operation of Northwind, a commercial property, the Partnership has entered into numerous operating leases with terms from 1 to 5 years. Future rentals to be received on non-cancelable operating leases with terms of more than one year are as follows:
2007 $ 523,142 2008 337,202 2009 40,036 2010 15,111 =========
(8) Settlement of Lawsuit - --- ---------------------
As previously reported, the Partnership, as a nominal defendant, the general partners of the Partnership and of affiliated public Partnerships (the "Realmark Partnerships") and the officers and directors of the Corporate General Partner, as defendants, had been involved in a class action litigation at the state court level
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Settlement of Lawsuit, Continued - --- --------------------------------
regarding the payment of fees and other management issues.
On August 29, 2001, the parties entered into a Stipulation of Settlement (the "Settlement"). On October 4, 2001, the Court issued an "Order Preliminary Approving Settlement' (the "Hearing Order") and on November 29, 2001, the Court issued an "Order and Final Judgment Approving Settlement and Awarding Fees and Expenses" and dismissing the complaints with prejudice. The Settlement provided, among other things, that all of the Realmark Partnerships' properties be disposed of. The general partners will continue to have primary authority to dispose of Partnerships' properties. If either (i) the general partners have not sold or contracted to sell 50% of the Partnerships' properties (by value) by April 2, 2002 or (ii) the general partners have not sold or contracted to sell 100% of the Partnerships' properties by September 29, 2002, then the primary authority to dispose of the Partnerships' properties will pass to a sales agent designated by plaintiffs' counsel and approved by the Court. On October 4, 2002, the Court appointed a sales agent to work with the general partners to continue to sell the Partnerships' remaining properties.
The settlement also provided for the payment by the Partnerships of fees to the plaintiffs' attorneys. These payments, which are not calculable at this time but may be significant, are payable out of the proceeds from the sale of all of the properties owned by all of the Realmark Partnerships, following the sale of the last of these properties in each partnership. Plaintiffs' counsel will receive 15% of the amount by which the sales proceeds distributable to limited partners in each partnership exceeds the value of the limited partnership units in each partnership (based on the weighted average of the units' trading prices on the secondary market as reported by Partnership Spectrum for the period May through June 2001). In no event may the increase on which the fees are calculated exceed 100% of the market value of the units as calculated above.
(RESTUBBED TABLE)
*In accordance with Statement of Financial Accounting Standards No. 144, no depreciation was recorded during the disposal period January 1, 2001 through December 31, 2006.
Schedule III, Cont. -------------------
REALMARK PROPERTY INVESTORS LIMITED PARTNERSHIP - II AND SUBSIDIARY Real Estate and Accumulated Depreciation December 31, 2006, 2005 and 2004
(1) Cost for Federal income tax purposes is $4,853,406.
(2) A reconciliation of the carrying amount of land and buildings as of December 31, 2006, 2005 and 2004 follows:
(3) A reconciliation of accumulated depreciation for buildings and improvements for the years ended December 31, 2006, 2005 and 2004 follows:
(4) Balance applies entirely to buildings and improvements.
(5) The Research Triangle Joint Venture and Research Triangle Land Joint Venture properties were sold during the 2006 year.