UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q




x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended March 31, 2011




OR




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from  to




Commission file number 333-116595









LEASE EQUITY APPRECIATION FUND II, L.P.


(Exact name of registrant as specified in its charter)





Delaware
20-1056194(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)




110 South Poplar Street, Suite 101, Wilmington Delaware 19801


(Address of principal executive offices)




(800) 819-5556


(Registrant’s telephone number, including area code)




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




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    o  Yes    o  No




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o    (Do not check if a smaller reporting company)
Smaller Reporting Company
x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   o Yes    x No




There is no public market for the Registrant’s securities.







INDEX





LEASE EQUITY APPRECIATION FUND II, L.P.


INDEX TO ANNUAL REPORT


ON FORM 10-Q




PAGEPART I
FINANCIAL INFORMATIONITEM 1.
Financial StatementsConsolidated Balance Sheets – March 31, 2011 and December 31, 2010 (Unaudited)
3Consolidated Statements of Operations – Three Months Ended March 31, 2011 and 2010 (Unaudited)
4Consolidated Statement of Changes in Partners’ (Deficit) – Three Months Ended March 31, 2011 (Unaudited)
5Consolidated Statements of Cash Flows – Three Months Ended March 31, 2011 and 2010 (Unaudited)
6Notes to Consolidated Financial Statements – March 31, 2011 (Unaudited)
7ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
23ITEM 4.
Controls and Procedures
24PART II
OTHER INFORMATIONITEM 6.
Exhibits
25SIGNATURES
27


2
 INDEX




LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES


Consolidated Balance Sheets


(In thousands)


(Unaudited)




March 31,


December 31,2011


2010ASSETSCash

$
129


$
239Restricted cash


15,024



15,870Accounts receivable


55



65Investment in leases and loans, net


72,154



86,922Deferred financing costs, net


2,016



2,230Other assets


263



272Total assets

$
89,641


$
105,598LIABILITIES AND PARTNERS’ (DEFICIT) CAPITALLiabilities:Debt

$
68,979


$
82,637Note payable - related party


7,984



7,988Accounts payable and accrued expenses


464



317Other liabilities


531



535Derivative liabilities, at fair value


1,699



2,318Due to affiliate


17,036



17,230Total liabilities


96,693



111,025Commitments and contingenciesPartners’ (Deficit):General partner


(564
)


(546
)Limited partners


(4,584
)


(2,818
)Accumulated other comprehensive loss


(1,904
)


(2,063
)Total partners’ (deficit)


(7,052
)


(5,427
)Total liabilities and partners’ (deficit)

$
89,641


$
105,598








3
 INDEX





LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES


Consolidated Statements of Operations


(In thousands, except unit and per unit data)


(Unaudited)





Three Months EndedMarch 31,2011


2010Revenues:Interest on equipment financings

$
1,608


$
3,014Rental income


222



517Losses on sales of equipment and lease dispositions, net


(312
)


(700
)Other


345



4841,863



3,315Expenses:Interest expense


759



2,714Loss on derivative activities


184



—Interest expense - related party


240



38Depreciation on operating leases


191



402Provision for credit losses


1,612



2,459General and administrative expenses


166



608Administrative expenses reimbursed to affiliate


201



490Management fees to affiliate


—



5623,353



7,273Net loss

$
(1,490
)

$
(3,958
)Net loss allocated to limited partners

$
(1,475
)

$
(3,918
)Weighted average number of limited partner unitsoutstanding during the period


592,809



592,809Net loss per weighted average limited partner unit

$
(2.49
)

$
(6.61
)




The accompanying notes are an integral part of these consolidated financial statements.




4
 INDEX




LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES


Consolidated Statement of Changesin Partners’ Deficit


(In thousands, except unit data)


(Unaudited)





AccumulatedGeneral







Other


TotalPartner


Limited Partners

Comprehensive


Partners’

ComprehensiveAmount


Units


Amount

(Loss) Income


Deficit

(Loss) IncomeBalance, January 1, 2011

$
(546
)


592,809


$
(2,818
)

$
(2,063
)

$
(5,427
)Cash distributions


(3
)


—



(291
)


—



(294
)Net loss


(15
)


—



(1,475
)


—



(1,490
)

$
(1,490
)Unrealized loss on hedging derivitives


—



—



—



254



254



254Amortization of gain on financial derivative


—



—



—



(95
)


(95
)


(95
)Balance, March 31, 2011

$
(564
)


592,809


$
(4,584
)

$
(1,904
)

$
(7,052
)

$
(1,331
)




The accompanying notes are an integral part of these consolidated financial statements.




5
 INDEX





LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES


Consolidated Statements of Cash Flows


(In thousands)


(Unaudited)




Three Months Ended March 31,2011


2010Cash flows from operating activities:Net loss

$
(1,490
)

$
(3,958
)Adjustments to reconcile net loss to net cash provided by (used in) operatingactivities:Losses on sales of equipment and lease dispositions, net


312



700Depreciation on operating leases


191



402Provision for credit losses


1,612



2,459Amortization of deferred financing costs


214



576Amortization of gain on financial derivative


(95
)


(95
)Unrealized gains on derivative hedging activities


(365
)


—Changes in operating assets and liabilities:Accounts receivable


10



7Other assets


9



334Accounts payable and accrued expenses and other liabilities


143



(173
)Due to affiliate


(194
)


(5,032
)Net cash provided by (used in) operating activities


347



(4,780
)Cash flows from investing activities:Purchases of leases and loans


—



(7,690
)Proceeds from leases and loans


12,691



19,084Security deposits returned


(38
)


(46
)Net cash provided by investing activities


12,653



11,348Cash flows from financing activities:Borrowings of debt


—



6,735Repayment of debt


(13,658
)


(20,833
)Borrowings - note payable - related party


—



8,000Repayments - note payable - related party


(4
)


—Decrease in restricted cash


846



213Increase in deferred financing costs


—



(280
)Cash distributions to partners


(294
)


(368
)Net cash used in financing activities


(13,110
)


(6,533
)(Decrease) increase in cash


(110
)


35Cash, beginning of period


239



10Cash, end of period

$
129


$
45




The accompanying notes are an integral part of these consolidated financial statements.




6
 INDEX




LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES


Notes To ConsolidatedFinancial Statements


March 31, 2011


(Unaudited)




NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS




Lease Equity Appreciation Fund II, L.P. (the “Fund”) is a Delaware limited partnership formed on March 30, 2004 by its General Partner, LEAF Financial Corporation (the “General Partner”). The General Partner manages the Fund. The General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 13, 2006, the Fund raised $60.0 million by selling 600,000 of its limited partner units. It commenced operations in April 2005.




The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and secured loans during the maturity period, the Fund is expected to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2014. The Fund expects to enter its maturity period beginning in October 2011. Contractually, the Fund will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.




The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.




As of March 31, 2011, in addition to its 1% general partnership interest, the General Partner also had invested $0.9 million for a 1.6% limited partnership interest in the Fund.




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis of Presentation




The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiaries, LEAF Fund II, LLC and LEAF II Receivables Funding, LLC.  All intercompany accounts and transactions have been eliminated in consolidation.




The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of March 31, 2011, and the results of its operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results of the Fund’s operations for the 2011 fiscal year. The Fund has evaluated subsequent events through the date the financial statements were issued. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on April 14, 2011




Reclassification




A reclassification has been made to the 2010 consolidated financial statements to conform to the 2011 presentation.  In the statement of operations, renewal income of approximately $62,000 for the three months ended March 31, 2010, that was previously included in “Interest on equipment financings” has been reclassified to “Other”.




Use of Estimates




Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.




7
 INDEX




Investments in Leases and Loans




The Fund’s investments in leases and loans consist of direct financing leases, operating leases and loans.




Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value over the cost of the related equipment.




Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.




Operating Leases.Leases not meeting the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis. Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the three months ended March 31, 2011 and 2010.




Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.




Allowance for credit losses.The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount.  Generally, the account is then charged-off and referred to our internal recovery group consisting of a team of collectors. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Income is not recognized on leases and loans when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes less than 90 days delinquent. Fees from delinquent payments are recognized when received and are included in other income.




Derivative Instruments




The Fund recognizes all derivatives at fair value as either assets or liabilities in the Consolidated Balance Sheets. The accounting for subsequent changes in the fair value of these derivatives depended on whether the derivative had been designated and qualified for hedge accounting treatment pursuant to US GAAP.




Prior to October 1, 2010, the Fund entered into derivative contracts, including interest rate swaps, substantially all of which were accounted for as cash flow hedges.  Under hedge accounting, the effective portion of the overall gain or loss on a derivative designated as a cash flow hedge was reported in accumulated other comprehensive income on the Consolidated Balance Sheets and then was then reclassified into earnings as an adjustment to interest expense over the term of the related borrowing.




8
 INDEX




Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting and periodic settlements of contracts, are recognized immediately in loss on derivatives. While the Fund will continue to use derivative financial instruments to reduce exposure to changing interest rates, this accounting change may create volatility in Fund’s results of operations, as the fair value of Fund’s derivative financial instruments change





For the forecasted transactions that are probable of occurring, the derivative gain or loss remaining in accumulated other comprehensive income as of  March 31, 2011 is being reclassified into earnings as an adjustment to interest expense over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive income will be recognized in earnings immediately.




Recent Accounting Standards




Accounting Standards Issued But Not Yet Effective




The Financial Accounting Standards Board (“FASB”) has issued the following guidance that is not yet effective for the Fund as of March 31, 2011:




Troubled Debt Restructurings -In 2010, the FASB issued guidance that required the disclosure of more detailed information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses.  In January 2011, the FASB deferred the effective date of these disclosures.  In April 2011, the FASB issued additional guidance related to determining whether a creditor has granted a concession, including factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in the April issuance also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings.  For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.This guidance is not expected to have a material impact on the Fund’s consolidated financial statements, results of operations or cash flows.




NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION




Supplemental disclosure of cash flow information is as follows (in thousands):


Three Months Ended March 31,2011


2010Cash paid for:Interest

$
472


$
679




NOTE 4 – INVESTMENT IN LEASES AND LOANS




The Fund’s investment in leases and loans, net, consists of the following (in thousands):





March 31,


December 31,2011


2010Direct financing leases (a)

$
52,401


$
63,493Loans (b)


23,482



26,775Operating leases


1,581



1,97477,464



92,242Allowance for credit losses


(5,310
)


(5,320
)$
72,154


$
86,922




(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 84 months.


(b)
The interest rates on loans generally range from 7% to 14%.




9
 INDEX




The components of direct financing leases and loans, net, are as follows (in thousands):


March 31,


December 31,2011


2010Leases


Loans


Leases


LoansTotal future minimum lease payments

$
56,007


$
27,197


$
68,308


$
31,010Unearned income


(5,701
)


(3,589
)


(7,139
)


(4,106
)Residuals, net of unearned residual income (a)


2,801



—



3,080



—Security deposits


(706
)


(126
)


(756
)


(129
)$
52,401


$
23,482


$
63,493


$
26,775




(a)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the equipment.




The Fund’s investment in operating leases, net, consists of the following (in thousands):


March 31,


December 31,2011


2010Equipment

$
5,625


$
6,714Accumulated depreciation


(4,072
)


(4,760
)Security deposits


28



20$
1,581


$
1,974




NOTE 5 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY




The disclosures in this footnote follow new guidance issued by the FASB that requires companies to provide more information about the credit quality of their financing receivables including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.




The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $5.3 million) as of March 31, 2011 (in thousands):




Investment inAge of receivable

leases and loans


%Current

$
68,746



88.7
%Delinquent:31 to 91 days past due


1,925



2.5
%Greater than 91 days (a)


6,793



8.8
%$
77,464



100.0
%




(a) Balances in this age category are collectivelly evaluated for impairment.




The Fund had $6.8 million and $6.4 million of leases and loans on nonaccrual status as of March 31, 2011 and December 31, 2010, respectively.  The credit quality of the Fund’s investment in leases and loans as of March 31, 2011 is as follows (in thousands):




Performing

$
70,671Nonperforming


6,793$
77,464




10
 INDEX


The following table summarizes the annual activity in the allowance for credit losses (in thousands):
 Three Months Ended March 31,2011


2010Allowance for credit losses, beginning of year

$
5,320


$
11,380Provision for credit losses


1,612



2,459Charge-offs


(1,902
)


(9,710
)Recoveries


280



71Allowance for credit losses, end of period (a)

$
5,310


$
4,200
 (a)
End of period balances were collectively evaluated for impairment.
 
 NOTE 6 – DEFERRED FINANCING COSTS
 
 As of March 31, 2011 and December 31, 2010, deferred financing costs include $2.0 million and $2.2 million, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated useful life of the related debt. Accumulated amortization as of March 31, 2011 and December 31, 2010 was $4.0 million and $3.8 million, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for the years ending March 31 is as follows (in thousands):
 2011

$
9102012


7162013


390$
2,016
 
 NOTE 7 – DEBT
 
 The Fund’s debt consists of the following (in thousands):
 March 31, 2011Interest rateInterest rate


per annumAmount


per annum per


adjusted for

December 31, 2010Type

Maturity Date

Outstanding


agreement


Swaps

Outstanding BalanceWestLB, AG (1)

Revolving

June 30, 2010

$
45,082


LIBOR +1.2%



5.7
%

$
53,1742007-01- TermSecuritization - Class









One monthA-3 (2)

Term

July 2012


9,368


LIBOR + 0.20%



5.6
%


14,9342007-01 TermSecuritization - ClassB (2)

Term

March 2015


14,529



6.7%



6.7
%


14,529$
68,979










$
82,637
 (1)
The Fund has no availability under this credit facility. Availability is subject to having eligible leases or loans (as defined in the respective agreement) to pledge as collateral, compliance with covenants and the borrowing base formula. This revolving line of credit is collateralized by specific lease receivables and related equipment, with a 1% credit reserve of the outstanding line of credit. Interest on borrowings prior to March 2009 are calculated at London Interbank Offered Rate (“LIBOR”) plus 1.20% per annum. Borrowings under this facility after March 2009 are a rate of LIBOR plus 2.50% per annum. This credit facility expired on June 30, 2010 and renewal discussions are ongoing. Unless renewal occurs, there are no additional borrowings available on this facility. We will continue to repay the principal and interest on any outstanding debt as payments are received on the underlying leases and loans pledged as collateral.  Recourse under this facility is limited to the amount of collateral pledged. As of March 31, 2011, $50.9 million of leases and loans and $4.3 million of restricted cash were pledged as collateral under this facility.
 
 11
 INDEX
 
 (2)
As of March 31, 2011, $25.9 million of leases and loans and $11.5 million of restricted cash were pledged as collateral under this securitization.
 
 The Fund is subject to certain financial covenants related to its debt facility with WestLB. These covenants are related to such things as minimum tangible net worth, maximum leverage ratios and portfolio. As of March 31, 2011, the Fund was in breach of several covenants under its debt facility with WestLB that matured on June 10, 2010.  Additionally, the Fund is not in compliance with a covenant based on the minimum net worth covenant of its affiliate responsible for servicing the Fund's portfolio.  On April 7, 2011 the Fund was notified by WestLB that it was in default of its loan agreement due to three ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, as well as the percentage of defaulted leases in the overall lease portfolio serviced by the Fund's General Partner.  As a result, the lender has advised the Fund that it has reserved, and continues to reserve, all of its rights and remedies provided for in the loan agreement.
 
 The lender noted that such remedies include the right to (i) commence legal action to collect the obligations we owe it, (ii) declare all amounts immediately due and payable; (iii) repossess the collateral we have pledged to it under the loan agreement; and (iv) increase the interest rate that the Fund pay’s.  If the lender repossessed and sold the Fund’s collateral, a sale of a portfolio could be at prices lower than its carrying value, which could result in losses and reduce the Fund’s income and distributions to its partners.
 
 Notwithstanding the foregoing, the Fund is not, nor has been, delinquent on any monthly payments of principle and interest owed to the lender.  Moreover, while the Lender has reserved its rights, it has not initiated exercise of any of the forgoing remedies.
 
 In addition, our general partner is engaged in discussions with investment bankers to refinance all of  the Funds debt, including the amounts owed to WestLB and the amounts owed pursuant to the 2007-1 term securitization.  If the general partner can refinance this debt, it intends to use the expected proceeds to repay WestLB, the remaining debt from the 2007-1 term securitization and the Resource Capital Corporation (“RCC”) loan that matures June 4, 2011.
 
 Note Payable related party:  In March 2010, the Fund borrowed $8.0 million from RCC. RCC is an affiliate of the Fund through common management with RAI. The note bears interest at 12% per annum.  Principal is payable monthly at one-sixtieth of one percent and interest is payable quarterly. Any unpaid principal was originally due and payable on March 4, 2011.  Prior to such maturity, the loan was amended so that the unpaid amounts are now due on June 4, 2011.  These funds were used as part of the Fund’s ongoing efforts to reduce debt owed to WestLB, to reduce the balanced owed to the General Partners and to purchase more leases and loans in an effort to improve the Fund’s operating results.
 
 Repayments:Estimated annual principal payments on the Fund’s aggregate borrowings (assuming that WestLB waives the aforementioned covenant breaches) over the next five years ended March 31, and thereafter, are as follows (in thousands):
 
 2011

$
41,5972012


20,8412013


9,2542014


3,3372015


1,934$
76,963
 
 NOTE 8 – DERIVATIVE INSTRUMENTS
 
 Since the Fund’s assets are structured on a fixed-rate basis, and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.
 
 12
 INDEX
 
 To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps.  As discussed previously, effective October 1, 2010, the Fund has elected not to use hedge accounting.  The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporate the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of March 31, 2011, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at March 31, 2011, it could be required to settle its obligations under the agreements at their termination value of $1.7 million.
 
 At March 31, 2011, the Fund has 23 interest rate swaps which terminate on various dates ranging from September 2011 to August 2015 which generally coincide with the maturity period of the portfolio of lease and loans.
 
 The following tables present the fair value of the Fund’s derivative financial instruments, as well as their classification on the consolidated balance sheet as of  March 31, 2011, and on the consolidated statement of operations for the three months ended March 31, 2011 and 2010 (in thousands):
 
 Notional Amount



Fair ValueMarch 31,



March 31,2011

Balance Sheet Location

2011Derivatives not designated as hedging instrumentsInterest rate swap contracts

$
51,841

Derivative liabilities at fair value

$
(1,699
)
 Amount of Gain Recognized in OCI on Derivatives



Location and Amount of Loss reclassified from Accumulated OCI into IncomeThree Months Ended March 31,



Three Months Ended March 31,2011


2010



2011


2010Derivatives not designated as hedging instrumentsInterest rate swap contracts

$
486


$
552

Interest expense

$
(644
)

$
(1,435
)
 
 In the fourth quarter of 2010, the Fund made an election to discontinue the use of hedge accounting for its derivative financial instruments resulting in an unrealized loss which is being amortized into earnings over the remaining term of the Fund’s debt. As of March 31, 2011, $2.7 million of the unrealized loss remains in accumulated other comprehensive loss and approximately $1.0 million is expected to be charged to earnings over the next 12 months.  The election to discontinue hedge accounting may create future volatility in the Fund’s reported income statement results it is not expected to have any impact on the Fund’s future cash flows.
 
 Simultaneously with the 2007 term securitization, the Fund terminated interest rate swap agreements, resulting in a gain of $2.3 million which is being amortized as a reduction of interest expense over the remaining term of the terminated swap agreements. For the three months ended March 31, 2011 and 2010, $95,000, was recognized into interest expense. As of March 31, 2011, the unamortized gain balance of $791,000 is included in accumulated other comprehensive loss.
 
 NOTE 9 – FAIR VALUE MEASUREMENT
 
 For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.
 
 13
 INDEX
 
 It is not practicable for the Fund to estimate the fair value of the Fund’s leases and loans. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.
 
 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
 •
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 •
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
 •
Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
 
 The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
 Liabilities measured at fair value on a recurring basis included the following (in thousands):
 
 Fair Value Measurements Using

LiabilitiesLevel 1


Level 2


Level 3


At Fair ValueInterest Rate Swaps at March 31, 2011

$
—


$
(1,699
)

$
—


$
(1,699
)Interest Rate Swaps at December 31, 2010

$
—


$
(2,318
)

$
—


$
(2,318
)
 
 NOTE 10 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
 
 The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):
 
 Three Months Ended March 31,2011


2010Acquisition fees

$
—


$
151Management fees


—



562Administrative expenses


201



490
 
 Acquisition Fees:The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.
 
 14
 INDEX
 
 Management Fees:The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2 % for full payout leases, or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.0% of their capital contributions, as adjusted by distributions deemed to be a return of capital.  Beginning December 1, 2009, the General Partner waived asset management fees.  Effective January1, 2011, The General Partner has waived all future management fees.
 
 Administrative Expenses:The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate which don’t exceed the General Partner’s cost of those fees or services.
 
 Due to Affiliate:Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.
 
 Note Payable to related party:  See Note 7 for a further discussion.
 
 NOTE 11 – COMMITMENTS AND CONTINGENCIES
 
 In connection with a sale of leases and loans to a third-party in July of 2008, the Fund contractually agreed to repurchase delinquent leases up to a maximum of $2.3 million calculated as 7.5% of total proceeds received from the sale (“Repurchase Commitment”).  As of March 31, 2011, the Fund has no remaining Repurchase Commitment.
 
 The Fund is party to various legal proceeding arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
 15
 INDEX
 
 ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in other documents filed with Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
 The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) Our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
 As used herein, the terms “we,” “us,” or “our” refer to Lease Equity Appreciation Fund II, L.P. and Subsidiary.
 
 Business
 
 We are a Delaware limited partnership formed on March 30, 2004 by our General Partner, LEAF Financial Corporation (our “General Partner”), which manages us. Our General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise, to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of October 13, 2006, we raised $60.0 million by selling 600,000 of our limited partner units. We commenced operations in April 2005.
 
 We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and secured loans during the maturity period, to the extent that there is excess cash, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2014. We will enter our liquidation period beginning in October 2011. We will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
 
 We seek to acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third-parties. We also seek to acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:
 
 •
500 or fewer employees;
 
 •
$1 billion or less in total assets; or
 
 •
$100 million or less in total annual sales.
 
 Our principal objective is to generate regular cash distributions to our limited partners.
 
 16
 INDEX
 
 Fund Summary
 
 When we commenced operations in 2005, the United States economy was experiencing strong growth, an abundance of liquidity in the debt markets and historically low credit losses.  It is widely believed that the United States economy over the past few years, has suffered through the worst economic recession in over 75 years.  The recession has been severe and its consequences broadly felt.  Many well-known major financial institutions failed and others had to be bailed out.   Unemployment soared to generational highs and has remained at such levels.  Bank lending was severely reduced and became more expensive.   In recent years, banks became much more reluctant to lend, and when they did it became more expensive to borrow.  If existing loans came up for renewal and were extended, they were written for reduced amounts and at higher interest rates. Also, lenders insisted on ever-tighter covenants around delinquencies and write-offs that made it more difficult to remain in compliance. As our primary debt facilities matured and we had to extend, renew or refinance them, our costs increased.  Most significantly, we had to reduce our debt on the leases previously financed.  The money to pay down the debt had to come from lease payments and those amounts were no longer available to re-invest in new leases.  The lenders’ higher fees and costs also had to be paid from funds that were then unavailable to re-invest in new leases.    All of this happened while losses increased.  The small businesses that represent our typical leasing customer have suffered through the recession.  The increase in write-offs also created an additional burden on the cash available to re-invest.
 
 Our losses, while greater than projected, were still modest considering the magnitude of the economic storm.  In fact, the General Partner changed its underwriting standards early in 2008, and the portfolio of leases written since then have performed as well as originally modeled.  We proactively negotiated with lenders to prevent them from foreclosing on any collateral, or requiring a distressed sale of leases that would have badly impaired capital.  Additionally, our General Partner has deferred payment of fees and reimbursement of expenses totaling approximately $17.0 million from inception through December 31, 2010, in order to preserve cash for us.  Additionally, the General Partner will not earn additional management fees for future services.  When we enter our maturity phase in October 2011, we will be prohibited under the partnership agreement from acquiring new leases.
 
 To date, limited partners have received total distributions ranging from approximately 25% to 37% of their original amount invested, depending upon when the investment was made.   Management is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support 8% distributions, and beginning in August 2010, distributions were lowered to 2.0%.
 
 General Economic Overview
 
 The overall U.S. economic outlook remains unsettled.  In particular the small to medium sized business community has not fared as well as the larger businesses with respect to the economic recovery.  This is significant as our portfolio is composed primarily of equipment leases and loans to the small to medium size business community, and as stated the small to medium size business community is trailing behind other business segments in the economic recovery.  In fact, as reported by the U.S. Chamber of Commerce in its Small business Outlook Survey – April 2011, “The small business climate has deteriorated.  Small business owners almost universally agree – by a 73% to 17% margin – that the climate of the last two years has hindered their growth.”
  This decline in business performance and expectations is also seen in several other widely followed indicators of economic performance.
  ●
The U.S. housing market, historically a significant contributor to economic growth and wealth, continues to be depressed.  On April 26, 2011 the S&P/Case-Shiller Home Price Report for February  2011 was released and reported that single family home prices fell for an eighth consecutive month.  The report went on to state “Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm we are still in a slow recovery.”
 
 ●
The National Association of Credit Managers reported that the manufacturing and Services Index Levels for March 2011 declined. “There were sharp declines in sales, new credit applications, dollar collections and the amount of credit extended. . .”
 
 ●
The Institute of Supply Management reports that its non-manufacturing index declined in March 2011 as compared to February 2011. Similarly the Institute of Supply Management’s manufacturing index declined in March 2011 as compared to February 2011. Significantly both indices reported declines in new orders.
 
 17
 INDEX
 
 ●
The MLFI-25 Monthly Leasing and Finance Index published by the Equipment Lease and Finance Association reported increases in both delinquencies and charge-offs in March 2011 as compared to February 2011.
 
 These various national economic trends have an impact on the businesses that have financings with us, and while the economy remains in an unsettled state, periodic swings in our portfolio performance may be expected.
 
 Finance Receivables and Asset Quality
 
 Information about our portfolio of leases and loans is as follows (dollars in thousands):
 
 March 31,


December 31,2011


2010Investment in leases and loans, net

$
72,154


$
86,922Number of contracts


12,800



13,600Number of individual end users (a)


11,200



12,000Average original equipment cost

$
24.9


$
24.8Average initial lease term (in months)


63



62Average remaining lease term (in months)


22



22States accounting for more than 10% of lease and loan portfolio:California


13
%


13
%Types of equipment accounting for more than 10% of lease andloan portfolio:Industrial Equipment


28
%


28
%Medical Equipment


18
%


18
%Water Purification


11
%


10
%Office Equipment


10
%


10
%Types of businesses accounting for more than 10% of lease andloan portfolio:Services


45
%


45
%Retail Trade


13
%


13
%Manufacturing


12
%


12
%
 
 (a)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment.
 
 We utilize debt facilities in addition to our equity to fund the acquisitions of lease portfolios. As of March 31, 2011 and December 31, 2010, our outstanding bank debt was $69.0 million and $82.6 million, respectively.
 
 18
 INDEX
 
 Portfolio Performance
 
 The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
 As of and for theThree Months Ended March 31,Change2011


2010


$



%Investment in leases and loans before allowance for credit losses

$
77,464


$
148,306


$
(70,842
)


(48
)%Less: allowance for credit losses


5,310



4,200



1,110



26
%Investment in leases and loans, net

$
72,154


$
144,106


$
(71,952
)


(50
)%Weighted average investment in direct financing leases and loans

$
83,333


$
157,346


$
(74,013
)


(47
)%Non-performing assets

$
6,794


$
6,156


$
638



10
%Charge-offs, net of recoveries

$
1,622


$
9,639


$
(8,017
)


(83
)%As a percentage of finance receivables:Allowance for credit losses


6.85
%


2.83
%Non-performing assets


8.77
%


4.15
%As a percentage of weighted average finance receivables:Charge-offs, net of recoveries


1.95
%


6.13
%
 
 Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge-off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.
 
 We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the US has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the US economy recovers.  Our non-performing assets as a percentage of finance receivables, has increased from 4.15% at March 31, 2010 to 8.77% at March 31, 2011, primarily due to the decrease in the portfolio of leases and loans.  Our net charge-offs decreased in the three months ended March 31, 2011 as compared to March 31, 2010, also due the decline in our portfolio of leases and loans as well as the recent economic recession as discussed above.
  19
 INDEX
 
 Critical Accounting Policies
 
 The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2010 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.” There have been no material changes to these policies through March 31, 2011.
 
 Results of Operations
 
 Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
 
 The following summarizes our results of operations for the three months ended March 31, 2011 and three months ended March 31, 2010 (dollars in thousands):
 
 Increase (Decrease)2011


2010


$



%Revenues:Interest on equipment financings

$
1,608


$
3,014



(1,406
)


(47
)%Rental income


222



517



(295
)


(57
)%Losses on sales of equipment and lease dispositions, net


(312
)


(700
)


388



(55
)%Other


345



484



(139
)


(29
)%1,863



3,315



(1,452
)


(44
)%Expenses:Interest expense


759



2,714



(1,955
)


(72
)%Loss on derivative activities


184



—



184



—
%Interest expense - related party


240



38



202



—Depreciation on operating leases


191



402



(211
)


(52
)%Provision for credit losses


1,612



2,459



(847
)


(34
)%General and administrative expenses


166



608



(442
)


(73
)%Administrative expenses reimbursed to affiliate


201



490



(289
)


(59
)%Management fees to affiliate


—



562



(562
)3,353



7,273



(3,920
)


(54
)%Net loss

$
(1,490
)

$
(3,958
)


2,468Net loss allocated to limited partners

$
(1,475
)

$
(3,918
)


2,443
 
 As discussed in more specific detail below, the overall reductions in both revenues and expenses were caused by the significant decrease in the size of the leases and loans portfolio as well as the significant reduction in debt in during the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.
 
 The decrease in total revenues was primarily attributable to the following:
 
 •
a decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $83.3 million for the three months ended March 31, 2011 as compared to $157.3 million for the three months ended March 31, 2010, a decrease of $74.0 million (47%).
 
 20
 INDEX
 
 •
a decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2011 period compared to the 2010 period.
 
 The decrease in total revenue was offset by the following:
 
 •
a decrease in losses on sales of equipment. Gain or losses on sale of equipment vary significantly from period to period.
 
 The decrease in total expenses was primarily attributable to the following:
 
 •
a decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for three months ended March 31, 2011 were $76.5 million as compared to $143.2 million for the three months ended March 31, 2010.
 
 •
a decrease in depreciation on operating leases directly related to a decrease in our investment in operating leases.
 
 •
a significant decrease in provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. This decrease is consistent with the decline in the portfolio of equipment financed assets.
 
 •
a decrease in management fees as beginning December 1, 2009, the General Partner waived asset management fees. The General Partner has waived all future management fees.
 
 •
a decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our portfolio, partially offset by increased legal costs associated with collection efforts.
 
 The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended March 31, 2011 and 2010 was $2.49 and $6.61, respectively, based on a weighted average number of limited partner units outstanding of 592,809 for both periods.
 
 Liquidity and Capital Resources
 
 General
 
 Our major source of liquidity is obtained by the collection of lease and loan payments after payments of debt principal and interest on debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners.
 
 The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
 
 2011


2010Net cash provided by (used in) operating activities


347



(4,780
)Net cash provided by investing activities


12,653



11,348Net cash used in financing activities


(13,110
)


(6,533
)(Decrease) increase in cash


(110
)


35
 
 During the three months ended March 31, 2011, cash decreased by $110,000 which was primarily due to net proceeds from leases and loans of $14.8 million, partially offset by a net debt repayment of $13.7 million and distributions to our partners of $294,000. As a result of increased delinquencies, the amount of borrowing availability under our leases and loans was reduced, resulting in the net debt repayment.
 
 For the period August 2009 through February 2010, we suspended monthly distributions to our partners in order to increase liquidity to enable us to renew our WestLB debt agreement. We resumed the payment of monthly distributions to our partners in March of 2010 at a rate of 2% per annum.
 
 Partners’ distributions paid for the three months ended March 31, 2011 and 2010 were $294,000 and $368,000, respectively.  Prior to August 1, 2009, distributions to limited partners were paid at a rate of 8% per annum of invested capital. Cumulative partner distributions paid from our inception to March 31, 2011 were approximately $18.0 million. Ongoing distributions are dependent on us having sufficient cash and liquidity to make such distributions.
 
 21
 Beginning December 1, 2009, the General Partner waived asset management fees.  Approximately $336,000 of management fees were waived for the three months ended March 31, 2011.  The General Partner has waived all future management fees.
 
 Future cash distributions are dependent on our performance and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. If the current economic recovery falters, we could continue to see a scarcity of available debt on terms beneficial to the partnership and higher than expected and loan defaults resulting in poorer fund performance than projected.
 
 Borrowings
 
 Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities are as follows as of March 31, 2011 (in thousands):
 
 Type

Amount Outstanding


Amount of Collateral (1)WestLB (2)
Revolving

$
45,082


$
55,122Series 2007-Term Securitization (3)
Term


23,897



36,922$
68,979


$
92,044
 
 
 (1)
Recourse under these facilities is limited to the amount of collateral pledged.
 
 (2)
We have no availability under this credit facility.  Availability is subject to having eligible leases or loans to pledge as collateral, compliance with covenants and the borrowing base formula.  The WestLB revolving line of credit is collateralized by specific lease receivables and related equipment, with a 1% credit reserve of the outstanding line of credit. Interest on the borrowings prior to March 2009 are calculated at LIBOR plus 1.20% per annum. Borrowings under this facility after March 2009 are at a rate of LIBOR plus 2.50% per annum. To mitigate fluctuations in interest rates, we entered into interest rate swap agreements, which terminate on various dates ranging from July 2013 to August 2015. As of March 31, 2011, the interest rate swap agreements fixed the interest rate on this facility at 5.7%. Interest and principal are due as payments are received under the financings. This credit facility expired on June 30, 2010 and renewal discussions are ongoing. Unless renewal occurs, there are no additional borrowings available on this facility. We will continue to repay the principal and interest on any outstanding debt as payments are received on the underlying leases and loans pledged as collateral.
 
 (3)
The original amount borrowed at June 2007 was $276.8 million. A term note securitization is a one-time funding that pays down over time without any ability for us to draw down additional amounts. See Note 7 for a further discussion.
 
 In addition to the borrowings discussed above, in March 2010 we borrowed $8.0 million from Resource Capital Corporation (“RCC”), a related entity of ours through common management with RAI. The note bears interest at 12% per annum. Principal is payable monthly at one-sixtieth of one percent and interest is payable quarterly. Any unpaid principal was originally due and payable on March 4, 2011.  Prior to such maturity, the loan was amended so that the unpaid amounts are now due on June 4, 2011. These funds were used as part of our ongoing efforts to reduce debt owed to WestLB, to reduce the balance owed to our general partner and to purchase more leases and loans in an effort to improve our operating results.
 
 We are subject to certain financial covenants related to our debt facility with WestLB. These covenants are related to such things as minimum tangible net worth, maximum leverage ratios and portfolio delinquency.  As of March 31, 2011, we were in breach of several covenants under our debt facility with WestLB that matured on June 10, 2010. Additionally, we are not in compliance with a covenant based on the minimum net worth covenant of our affiliate responsible for servicing our portfolio.  On April 7, 2011 we were notified by WestLB that we were in default of our loan agreement due to three ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in our portfolio, as well as the percentage of defaulted leases in the overall lease portfolio serviced by our General Partner.  As a result the lender has advised us that it has reserved, and continues to reserve, all of its rights and remedies provided for in the loan agreement.
 
 The lender noted that such remedies include the right to (i) commence legal action to collect the obligations we owe it, (ii) declare all amounts immediately due and payable; (iii) repossess the collateral we have pledged to it under the loan agreement; and (iv) increase the interest rate we pay.  If the lender repossessed and sold our collateral, a sale of a portfolio could be at prices lower than its carrying value, which could result in losses and reduce our income and distributions to our partners.
 
 Notwithstanding the foregoing, we are not, nor have we been, delinquent on any monthly payments of principle and interest owed to the lender.  Moreover, while the Lender has reserved its rights, it has not initiated exercise of any of the forgoing remedies.
 
 22
 INDEX
 
 In addition, our general partner is engaged in discussions with investment bankers to refinance all of its debt, including the amounts owed to WestLB and the amounts owed pursuant to the 2007-1 term securitization.  If it can refinance this debt, it intends to use the expected proceeds to repay WestLB, the remaining debt from the 2007-1 term securitization and the RCC loan that matures June 4, 2011.
 
 As a result, we do not expect WestLB to take any adverse steps to collect its loan balance.
 
 Liquidity Summary
 
 Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent we must repay our lender, even though our customer has not paid us. Higher-than-expected lease and loan defaults will reduce our liquidity.
 
 Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s management’s prior experience with similar lease assets. At March 31, 2011, our credit evaluation indicated a need for an allowance for credit losses of $5.3 million. As our lease portfolio ages, and if the recovery in the United States economy falters for a substantial period of time, we anticipate the need to increase our allowance for credit losses.
 
 The tightening of credit markets has and may continue to adversely affect our liquidity, particularly our ability to obtain or renew debt financing needed to execute our investment strategies. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If our banks do not renew a revolving facility upon maturity, the debt facility would convert to a term facility and we would not be able to borrow additional amounts under the line of credit. A term debt facility is a loan that is contractually repaid over a period of time. If we are unable to obtain new debt or renew existing facilities that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.
 
 To date, our general partner has been successful in obtaining new debt financing and either extending or refinancing our credit facilities prior to their maturities; however, there can be no assurance that we will be able to continue to do so, as such activities are dependent on many factors beyond our control, including general economic and credit conditions. We continue to seek additional sources of financing, including expanded bank financing that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.
 
 Legal Proceedings
 
 We are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
 ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies
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 ITEM 4 – CONTROLS AND PROCEDURES
 
 Disclosure Controls
 
 We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
 Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.
 
 Changes in Internal Control over Financial Reporting
 
 There has been no change in our internal control over financial reporting that occurred during the three months ended  March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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 PART II. OTHER INFORMATION
 
 ITEM 6 – EXHIBITS
 Exhibit No.

Description3.1

Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (1)3.2

Amended Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P.(2)3.3

Amended and Restated Agreement of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (4)4.1

Forms of letters sent to limited partners confirming their investment (1)10.1

Origination & Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund II, L.P. and LEAF Funding, Inc. dated April 15, 2005 (3)10.2

Secured Loan Agreement dated as of June 1, 2005 with LEAF Fund II, LLC as Borrower, LEAF Funding, Inc. as Originator, Lease Equity Appreciation Fund II, L.P. as Seller, LEAF Financial Corporation as Servicer, U.S. Bank National Association, as Collateral Agent and Securities Intermediary and WestLB AG, New York Branch as Lender (3)10.3

First Amendment to WestLB AG, New York Branch, Secured Loan Agreement (5)10.4

Second Amendment to WestLB AG, New York Branch, Secured Loan Agreement (6)10.5

Third Amendment to WestLB AG, New York Branch, Secured Loan Agreement (7)10.6

Fifth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (8)10.7

Sixth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (9)10.8

Indenture among LEAF II Receivables Funding, LLC as issuer, and U.S. Bank National Association as trustee and custodian (9)10.9

Seventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)10.10

Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)10.11

Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)10.12

Tenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)10.13

Eleventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)10.14

Twelfth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)10.15

Thirteenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)10.16

Fourteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (12)31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
Filed previously on June 17, 2004 as an exhibit to our Registration Statement and by this reference incorporated herein.
 (2)
Filed previously on September 7, 2004 in Pre-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
 (3)
Filed previously as an exhibit to our Form 10-Q for the quarter ended June 30, 2005 and by this reference incorporated herein.
 (4)
Filed previously on December 27, 2005 as Appendix A Post-Effective Amendment No. 1 to our Registration Statement and by this reference incorporated herein.
 
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  (5)
Filed previously as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and by this reference incorporated herein.
 (6)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and by this reference incorporated herein.
 (7)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.
 (8)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.
 (9)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
 (10)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.
 (11)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and by this reference incorporated herein.
 (12)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.
 
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  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.
 
 LEASE EQUITY APPRECIATION FUND II, L.P.Delaware Limited PartnershipBy:
LEAF Financial Corporation,  the General PartnerMay 16, 2011
By:
/s/ CRIT S. DEMENTCRIT S. DEMENTChairman and Chief Executive OfficerMay 16, 2011
By:
/s/ ROBERT K. MOSKOVITZROBERT K. MOSKOVITZChief Financial Officer
 
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