UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d)

of the Securities and Exchange Act of 1934

 

For the fiscal year ended:   **December 31, 2001**
 

Commission File Number:      **33-4682
 

CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 
**California 	(State or other jurisdiction of incorporation or organization)
** 

77-0111643	(I.R.S. Employer Identification No.)

 
**1130 Iron Point Road, Suite 170, Folsom, California 95630

(Address of principal executive offices)		Zip Code

 

Registrant's telephone number, including area code:

(916) 353-0500

 

Securities registered pursuant to Section 12(b) of the Act: **NONE**
 

Securities registered pursuant to Section 12(g) of the Act:
**Limited Partnership Units**
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No

As of December 31, 2001 the aggregate Limited Partnership Units held by nonaffiliates of the registrant was 23,030. There is no market for the Units.

Documents Incorporated by Reference

Limited Partnership Agreement dated February 6, 1986, filed as Exhibit 3.3, and the Amendment to the Limited Partnership Agreement dated May 22, 1986 filed as Exhibit 3.4 to Registration Statement No. 33-4682 of Capital Builders Development Properties II, A California Limited Partnership, are hereby incorporated by reference into Part IV of this Form 10K.

Forward-Looking Statements

When used in this annual report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the sections entitled "Potential Factors Affecting Future Operating Results" and "Qualitative and Quantitative Disclosures About Market Risks" below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the case hereof. The Partnership undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 
**PART I

ITEM 1.	BUSINESS
(a)	General Development of Business

Capital Builders Development Properties II (the "Partnership") is a publicly held limited partnership organized under the provisions of the California Revised Limited Partnership Act pursuant to the Limited Partnership Agreement dated February 6, 1986, as amended (the "Agreement"). The Partnership commenced on May 22, 1986 and shall continue in full force and be effective until December 31, 2021 unless dissolved sooner by certain events as described in the Agreement. The Managing General Partner is Capital Builders, Inc., a California Corporation (CB). The Associate General Partners are the sole shareholder, President and Director of CB, and two founders of CB.

On October 6, 1986 the Partnership sold 2,407 Limited Partnership Units for a total of $1,203,500. From October 6, 1986, through May 21, 1988, the Partnership sold an additional 20,623 Units for a total of 23,030 Units. On May 21, 1988, the Partnership was closed to capital raising activity with a total of $11,515,000 proceeds raised from the offering. The General Partners have contributed capital in the amount of $1,000 to the Partnership for a 1% interest in the profits, losses, tax credits and distributions of the Partnership.
**(b)	Financial Information about Industry Segments**
The Partnership is in the business of real estate development and is not a significant factor in its industry. The Partnership's investment properties are located near major urban areas and, accordingly, compete not only with similar properties in their immediate areas but with hundreds of properties throughout the urban areas. Such competition is primarily on the basis of locations, rents, services and amenities. In addition, the Partnership competes with significant numbers of individuals and organizations (including similar partnerships, real estate investment trusts and financial institutions) with respect to the purchase and sale of land, primarily on the basis of the prices and terms of such transactions.
**(c)	Narrative Description of the Business**
The Partnership's business objective is to complete the development of its existing land with light industrial and office buildings for lease and eventual sale. The primary investment objective of the Partnership is to realize capital appreciation from the sale of the Properties developed by it some three to five years after such Properties have been placed in service. A secondary investment objective is to generate cash from the leasing of Partnership Properties pending their sale for distribution to the Limited Partners, although it is not presently anticipated that the amount of such cash available for distribution to the Limited Partners will be significant. Since the Partnership has not sold its investment properties, it has not achieved its investment goals as yet. Although investor returns cannot be accurately determined until the investment properties are sold, due to the additional time required to lease up the investment properties, the decline in real estate values during the recession of the early 90's, and although the real estate market has shown recovery from that recession, it is anticipated that ultimate returns will be less than initially projected. Funds obtained by the Partnership from the sale of Limited Partnership Units were used to acquire equity interest in one piece of land for development and a 40% equity interest in another for development in accordance with its investment objective.

On April 10, 1987, the Partnership entered into a joint venture called Capital Builders Roseville Venture ("JV") with Capital Builders Development Properties ("CBDP"), a California limited partnership. The Partnership and CBDP are affiliates as they have the same General Partner, but there are no direct transactions between the respective Partnerships. The Partnership contributed $900,000 resulting in a 40% interest in the profits, losses and cash distributions of the JV. CB, the Managing General Partner of the Partnership, had the same rights and obligations with respect to the JV's operations and management as it could exercise as Managing General Partner of the Partnership. The JV was dissolved as of May 1, 1997 when the Partnership purchased the remaining 60% interest in the JV.

The acquisition of the real estate is consistent with the Partnership objectives which are to acquire, develop, hold, maintain, lease, sell, or otherwise dispose of real property within the Western United States (including the states of California, Oregon, Washington, Arizona, Nevada, New Mexico, Utah, Colorado, Hawaii, and Alaska), including without limitation, the acquisition of undeveloped land for development and construction of research and development, light industrial, commercial/retail, or office buildings thereon, and the acquisition of partially completed commercial real property developments for completion of development.

Although the Associate General Partners, Officers, and Directors of the Managing General Partners are experienced in real property operation and management, they also may utilize independent advisors, agents, and workers, in addition to the Partnership employees, to assist them in the operation, leasing, maintenance and improvement of the Partnership's properties.

The Partnership has no full time employees but is managed by CB, the Managing General Partner.
**ITEM 2.	PROPERTIES
The Partnership owns 100% equity interest in two properties, Highlands 80 Commerce Center ("H80") and Capital Professional Center ("CPC"). H80 is a three phase development. Phase I is a 109,083 square foot office/industrial project consisting of five multi-tenant buildings. Phase II consists of approximately 45,777 square feet of two, one-story light industrial/office space buildings and Phase III will consist of one, 27,664 square foot, two-story office building. Phase III's building is scheduled to be completed and placed into service during the first quarter of 2002. There are currently no leases signed for this building's space.

CPC is a 40,465 square foot office project consisting of two multi-tenant buildings which are completely developed and have achieved a stabilized occupancy.

Additional information about the individual properties follows:
  **H80**CPC
Ownership Percentage: 
100%
100%
Acquisition Date: 
April 30, 1987
Apr 10, 1987 - 40% Ownership   
May 1, 1997 - 60% Ownership    
Location: 
North Highlands, California
Roseville, California     
Present Monthly   
 Effective Average   
 Base Rent Per Square Foot: 
$1.03
$1.77    
Square Footage Mix:   
 Office 
21,967
40,465
 Industrial 
132,893     
Leased Occupancy at December 31:    
2001
84%
100% 
2000
83%
100% 
1999
80%
100% 
1998
68%
91% 
1997
75%
100%    
Current Year Depreciation: 
$417,056
$97,824    
Method of Depreciation: 
Straight Line
Straight Line    
Depreciation Life: 
40 Years
 40 Years  
Bldg. Improvements
Bldg. Improvements 

Life of Lease 
Life of Lease  
Tenant Improvements
Tenant Improvements    
Total cost: 
$12,342,399
$4,742,539    
Encumbrances: 
$7,182,351
$4,144,755
Tenants occupying more than 10% of square footage and nature of business:
Netswork, Inc.
Coldwell Banker (Residential Real Estate Brokerage),
First American Title Ins. Co.,
Martin, Rivett & Olson, Inc.
 

H80 and CPC are subject to encumbrances which are more fully described under Note 4 of the Partnership's financial statements included under Item 8 which is incorporated herein by reference. 

Both properties are being leased to a wide variety of tenants in a diversity of industries. Leases are typically three to five years in term and provide for free rent periods, at inception, equal to approximately one month per three years of lease term. Some leases contain options to extend the term of the lease.

The Partnership's investment properties are located in major urban areas and, therefore, must compete with properties of greater and lesser quality. Such competition is based primarily on rent, location, services and amenities. The properties are suitable for their current and anticipated use.
**ITEM 3.	LEGAL PROCEEDINGS
NONE
**ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
**PART II

ITEM 5.	MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS
There is no public trading market for the Partnership's Limited Partnership Units and it is not anticipated that a public trading market will develop. Furthermore, the Partnership Agreement prohibits Limited Partners from transferring Limited Partnership Interests if such transfers would result in the dissolution of the Partnership for tax purposes under Section 708 of the Internal Revenue Code.

As of December 31, 2001, there were 1,546 holders and 23,030 Limited Partnership Units outstanding.
**ITEM 6.	SELECTED FINANCIAL DATA
The following constitutes a summary of selected financial data for the following periods (000's omitted except net loss per Limited Partnership Unit):
 **2001**2000**1999**1998**1997
Revenues
$2,678
$2,414
$2,145
$1,985
$1,728
Net Loss
($74)
($102)
($247)
($323)
($217)
Net Loss per Limited Partnership Unit
($3.19)
($4.37)
($10.63)
($13.90)
($9.33)
Total Assets
$14,983
$13,626
$12,808
$12,799
$13,077
Notes and Loans Payable
$11,327
$10,251
$9,313
$9,094
$8,950
(See ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA)
** 

ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

Liquidity and Capital Resources

The Partnership commenced operations on May 22, 1986 upon the sale of the minimum number of Limited Partnership Units. The Partnership's initial source of cash was from the sale of Limited Partnership Units. Through the offering of Units, the Partnership raised $11,515,000 (represented by 23,030 Limited Partnership Units). Cash generated from the sale of Limited Partnership Units was used to acquire land and for the development of a mixed use commercial project and a 40% interest in a commercial office project. In May 1997, the remaining 60% interest in the project was acquired.

The Partnership's primary current sources of cash are from cash balances, property rental income and construction financing for Phase II and Phase III improvements. As of December 31, 2001, the Partnership had $399,514 in cash and $1,680,016 in available construction loan draws for Highlands 80 Phase II and Phase III. It is the Partnership's investment goal to utilize existing capital resources for continued leasing operations (tenant improvements and leasing commissions) and further development of Highlands 80 Phase III. Both of the Partnership's projects have achieved occupancy and rental rates sufficient to meet its expected current and future debt service obligations.

The Partnership's scheduled principal and interest payments during 2002, 2003, 2004, 2005 and 2006 are $7,315,624, $1,169,460, $387,996, $387,996 and $3,900,355, respectively. The scheduled interest payments assume fixed rates of interest of 8.95% and 7.97% for fixed rate debt and a variable interest rate of 5.4% (effective as of December 31, 2001) for a variable rate debt.

During the year ended December 31, 2001, the Partnership expended $2,227,743 on improvements for both its properties. These improvements consisted of the construction of Highlands 80 Phase III (a 27,663 sq. foot office building), lobby and common area upgrades at Capital Professional Center, and tenant improvements for both of the Partnership's properties. The Partnership funded these improvements with $833,000 of cash reserves, $1,225,804 from construction loan proceeds, and $168,939 from cash from operations. The Partnership's remaining cash provided from operations ($175,341) was utilized to pay scheduled principal payments on its permanent loans and loan fees incurred to extend loans.

The Partnership will continue to incur improvement costs as the Phase III building is completed and as Highlands 80 is leased up. The total projected building and tenant improvement costs expected to be incurred during 2002 are estimated to be $1,680,000. These costs will be funded with construction loan draws.

Management anticipates cash provided from operations to continue to improve in future quarters with the additional lease-up of the Highlands 80 Phase III. The Partnership's properties' occupancy rates as of December 31, 2001 are 84% for Highlands 80 and 100% for Capital Professional Center.

During the year ended December 31, 2001, the Partnership paid $131,105 in management fees to its Managing General Partner. Management fees are classified on the Statements of Operations as an Operating Expense. The General Partner is currently charging 5% of collected revenue.

The Partnership's ability to maintain or improve cash flow is dependent upon its ability to maintain and improve the occupancy of its investment properties. Management believes the Partnership's financial resources should be adequate to meet 2002's obligations and no adverse change in liquidity is foreseen. The Partnership's properties' current market values are in excess of its total liabilities.

The Partnership's Highlands 80 Phase I mini-permanent and Phase II construction loans will become due during the fourth quarter of 2002. The properties secured by these loans currently have sufficient value and cash flow to either refinance on a short term or long-term basis. Management is currently evaluating strategies regarding the possible refinance or sale of these properties. Although no refinancing agreement has been executed, Partnership Management is currently discussing refinance options with their current lender and Partnership Management is confident that the debt will be refinanced as the property's cash flows and occupancy rates support such refinancing. Partnership Management has historically been successful in refinancing loan obligations if required. 
**Critical Accounting Policies and Estimates**
The Partnership's discussion and analysis of its financial condition and results of operations are based upon the Partnership's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires Partnership Management to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Partnership Management evaluates its estimates, including those related to long lived assets, accounts receivable, deferred revenue, and contingencies and litigation. Additionally, on an on-going basis Partnership Management also evaluates the debt obligations of the Partnership and evaluates the Partnership's ability to satisfy these obligations. Partnership Management bases its estimates on current information, historical experience and or various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 

The Partnership believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its financial statements:

Valuation of Investment Property (Long-Lived Assets):

Investment property is evaluated for impairment on a continual basis based on the property's occupancy levels, annual cash flows, and projected cash flows based on the rental market and other factors including prospective new tenants. 

Debt Obligations:

Partnership management also believes that the evaluation of the Partnership's debt obligations and the Partnership's ability to satisfy these obligations is critical in the preparation of its financial statements. 

Partnership Management evaluates the debt obligations of the Partnership continually and determines the Partnership's ability to satisfy debt obligations through either refinancing, repayment, or various other strategic methods including potential sale of the property. 
**Results of Operations

2001 vs 2000

During the year ended December 31, 2001 as compared to December 31, 2000, the Partnership's total revenues increased by $263,942 (10.9%), while its expenses increased by $236,562 (9.4%), resulting in a change in net loss to $74,284 from $101,664.

The increase in revenue is primarily due to an increase in occupancy for Highlands 80 during the year and rent increases at Capital Professional Center. Highlands 80 maintained an average occupancy of 90% during 2001, but during the fourth quarter lost a 9,900 square foot tenant, bringing its year-end occupancy down to 84%.

Expenses increased for the year ended December 31, 2001, as compared to December 31, 2000, primarily due to the net effect of:

a)	$79,722 (18.2%) increase in operating expenses due to an increase in property management salaries related to an increase in occupancy at Highlands 80, supervision costs for the refurbishing of Capital Professional Center's lobbies, and general wage increases ($47,850); an increase in property management fees due to increases in Highlands 80 occupancy and in rental rates at both H80 and CPC ($15,470); an increase in general liability insurance costs ($8,732); and an increase in utility costs ($7,670);

b) $106,296 (33.9%) increase in non-capitalized repairs and maintenance due to the refurbishment of Capital Professional Center's lobbies and building exteriors, plus minor repairs for suite turnovers at various H80 and CPC suites;

c) $40,891 (4.8%) decrease in interest due to large interest rate drops on Highlands 80's variable interest rate loans;

d) $20,597 (11.4%) increase in general and administrative due to an increase in administrative costs associated with additional reporting requirements by the SEC and IRS, an increase in audit fees, and administrative costs associated with the development of Phase III; and

e) $69,279 (12%) increase in depreciation due to additional amortized costs for Highlands 80 tenant improvements.
**2000 vs 1999

During the year ended December 31, 2000 as compared to December 31, 1999, the Partnership's total revenues increased by $268,276 (12.5%), while its expenses also increased by $122,690 (5.1%), resulting in a decrease in net loss of $145,586 (58.9%).

The increase in revenue is primarily due to an increase in occupancy for Highlands 80 ($185,914) and rent increases at Capital Professional Center ($78,083).

Expenses increased for the year ended December 31, 2000, as compared to December 31, 1999, due to the net effect of:

a) $15,461 (3.7%) increase in operating expenses due to general inflation for utility costs.

b) $14,680 (4.9%) increase in repairs and maintenance due to suite turnover costs incurred for lease renewals at Highlands 80;

c) $11,790 (8.1%) increase in property taxes primarily due to the additional buildout of Highlands 80 tenant improvements;

d) $44,978 (5.6%) increase in interest due to loan costs associated with Highlands 80 and Phase II tenant improvement loan draws; 

e) $4,037 (2.3%) increase in general and administrative due to general cost/wage inflation; and

f) $31,744 (5.8%) increase in amortization and depreciation due to an increase in amortized loan fees related to the Highlands 80 Phase II loan extensions.
**ITEM 7a. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**
The Partnership does not have a material market risk due to financial instruments held by the Partnership. The Partnership's only variable rate instrument consists of two construction loans in the amounts of $1,863,759 and 776,225 at December 31, 2001 and $1,414,180 and -0- at December 31, 2000.
**ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 

 

 
  
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INDEPENDENT AUDITORS' REPORT
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FINANCIAL STATEMENTS  
BALANCE SHEETS******************************************