10-K 1 land210k.htm                                  UNITED STATES


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


X

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 2005

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: 0-19220


Inland Land Appreciation Fund II, L.P.

 (Exact name of registrant as specified in its charter)


Delaware

36-3664407

(State of Incorporation)

(I.R.S. Employer Identification No.)


2901 Butterfield Road, Oak Brook, IL  60523

(Address of principal executive offices)(Zip Code)


630-218-8000

 (Registrant’s telephone number, including area code)

___________________________________________


Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Name of each exchange on which registered:

None

None


Securities registered pursuant to Section 12(g) of the Act:

Limited Partnership Units

(Title of each class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  o      No X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes  o      No  X

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 the filing requirements for at least the past 90 days.

Yes X   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ X ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (See definition of "accelerated filer" in Rule 12b-2 of the Exchange Act).

Large accelerated filer  o         Accelerated filer  o          Non-accelerated filer X


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No  X




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INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)


TABLE OF CONTENTS


 

Part I

Page

   

Item  1.

Business

3

   

Item  1(a).

Risk factors

4

   

Item  1(b).

Unresolved Staff Comments

5

   

Item  2.

Properties

5

   

Item  3.

Legal Proceedings

8

   

Item  4.

Submission of Matters to a Vote of Security Holders

8

   
 

Part II

 
   

Item  5.

Market for Partnership's Limited Partnership Units and Related Security Holder Matters

8

   

Item  6.

Selected Financial Data

9

   

Item  7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

10

   

Item 7(a).

Quantitative and Qualitative Disclosures about Market Risk

16

   

Item  8.

Financial Statements and Supplementary Data

17

   

Item  9.

Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure

37

   

Item 9 (a).

Controls and Procedures

37

 

Part III

 
   

Item 10.

Directors and Executive Officers of the Registrant

38

   

Item 11.

Executive Compensation

42

   

Item 12.

Security Ownership of Certain Beneficial Owners and Management

43

   

Item 13.

Certain Relationships and Related Transactions

43

   

Item 14.

Principal Accountant Fees and Services

44

   
 

Part IV

 
   

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

45

   

 

SIGNATURES

46



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PART I


Item 1. Business


Inland Land Appreciation Fund II, L.P.  was formed on June 28, 1989, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, we commenced an offering of 30,000 (subject to an increase to 60,000) limited partnership units or units at $1,000 per unit, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991, we terminated our offering of units, after we sold 50,476.17 units, at $1,000 per unit, resulting in $50,476,170 in gross offering proceeds, not including our general partner's capital contribution of $500. All of the holders of our units were admitted to our partnership. Inland Real Estate Investment Corporation is our general partner. Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held. As of December 31, 2005, we have repurchased a total of 408.65 units for $383,822 from various limited partners through the unit repurchase program. Under this program, limited partners could, under certain circumstances, have their units repurchased for an amount equal to their original capital as reduced by distributions from net sale proceeds.


We purchased on an all-cash basis, 27 parcels of undeveloped land and two buildings and are engaged in the rezoning and resale of the parcels. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). All of the investments were made in the Chicago metropolitan area. The anticipated holding period of the land was approximately two to seven years from the completion of the land portfolio acquisitions. As a result of the lengthy rezoning and entitlement processes and the no growth mentality of the municipalities where the land is located, our holding period has exceeded our original estimates. As of December 31, 2005, we have had multiple sales transactions, through which we have disposed of approximately 3,254 acres of the approximately 4,530 acres originally owned. We continue to market the remaining acres for sale.


We are engaged in the business of real estate investment which management considers being a single operating segment. A presentation of information about operating segments would not be material to an understanding of our business taken as a whole.


We plan to enhance the value of our land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments.  Parcel 20 has been granted rezoning which will permit additional land to be used for development.  We are in zoning and planning discussions for Parcels 3 and 27. We have completed our final planning on Parcels 4 and 18 and marketing has begun on these parcels.


In addition to the sales of the remaining acres of Parcels 2 and 10 in 2005, we also sold 34.4 acres of Parcel 3, and 33.3 acres of Parcel 18. In June 2005, we paid distributions totaling $6,500,000, which included $6,000,000 paid to the limited partners and $500,000 paid to the general partner. In December 2005, we paid an additional distribution totaling $3,900,000, which included $3,500,000 paid to the limited partners and $400,000 paid to the general partner.  In addition to these sales which occurred in 2005, we anticipate additional sales of over 600 acres of Parcels 3, 4, 18, 20 and 27 during 2006 and 2007.  Undistributed net sales proceeds will be used to cover our operations, including property upgrades. We will evaluate our cash needs throughout the year to determine future distributions.


We had no employees during 2005.


Our general partner and its affiliates provide services to us. Our general partner and its affiliates are reimbursed for salaries and expenses of employees of the general partner and its affiliates relating to the administration of the partnership. An affiliate of the general partner performs marketing and advertising services for us and is reimbursed for direct costs. An affiliate of the general partner performs property upgrades, rezoning, annexation and other activities to prepare our parcels for sale and is reimbursed for salaries and direct costs.




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Access to Our Information


We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.


We make available, free of charge through our general partner’s website, and by responding to requests addressed to our director of investor relations, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practical after such material is electronically filed or furnished to the SEC. Our general partner’s website address is www.inland-investments.com. The information contained on this website, or other websites linked to our website, is not part of this document.


Limited partners wishing to communicate with our general partner can do so by writing to the attention of the general partner care of our partnership at 2901 Butterfield Road, Oak Brook, IL 60523.


Item 1(a). Risk Factors


Pre-Development Stage Land


The net proceeds of the offering were invested in pre-development stage land.  An investment in such land involves a number of potential risks, which include the following:


Dependence on Governmental Zoning and Fiscal Policies.  We will conduct rezoning and pre-development activities with respect to our land investments.  Rezoning may only be effected by appropriate city, county and/or other local authorities.  There can be no assurance that our efforts to cause these authorities to change the zoning classification(s) which apply to a given parcel of land owned by the partnership will be successful. Sometimes citizens oppose our efforts. Moreover, these authorities may require us to spend funds to facilitate future development of the land as a condition of rezoning.  There can be no assurance that we will have sufficient funds to accomplish the required changes.


Restricted or Limited Access to Utilities and Roadways.  The value of our land will be affected by ease of access to utilities and transportation.  If public utility providers are not located in sufficient proximity to a parcel owned by the partnership, the cost of arranging for such utility access may be prohibitive to the partnership or a potential purchaser of the parcel, thereby reducing the value of the parcel. Delays and/or postponements in the construction of roads in areas by our parcels likely would adversely affect the value of our parcels.


Environmental Risks.  Federal and state environmental laws can impose substantial liability on owners of real estate without regard to fault, even when other parties are or were responsible for the environmental impairment.  Environmental liabilities could cause us to incur significant expenses, including (but not limited to) the obligation to remedy or clean up hazardous substances (such as pesticides commonly used on farmland) or other pollutants, regardless of fault.  Such liabilities could require us to dispose of a property at a loss, which could be substantial.


In addition, the value of our land is affected by the drainage pattern of such land and the surrounding area, the susceptibility of such land to flooding and the possibility that such land might be classified as "wetlands" by a government agency, thereby inhibiting or precluding development of the parcel.




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Nature of Farm Leases and Limited Current Income.  With the exception of limited amounts of cash which may be generated from leasing the land as farmland or for other revenue-producing activities, pre-development land does not generate current income.  Nevertheless, we incur ongoing expenses in connection with the ownership of such land (for example, real estate taxes).  At the same time, our farm rental revenue is subject to a farm tenant's ability to pay the contracted rent, which depends on fluctuations in commodity prices, bad weather, competition from other producers, changes in government farm policy (including price supports), pests and crop diseases.


Lack of Geographic Diversification.  All of our land investments are located in the Chicago metropolitan area.  The success of the partnership will, therefore, depend to a great extent upon the rate and amount of economic growth in the Chicago metropolitan area.


Partnership-Related Risks


Risk of Installment Sale.  We may sell some land parcels on an installment basis (which means that the sale price will be received in installments during the term of the agreement).  In the event we find it necessary or desirable to provide such financing upon the resale of our parcels, a liquidation of the partnership may be delayed beyond the time of disposition of the parcels until any such loans are repaid or otherwise liquidated.  In the event of a default on an installment sale, we may be forced to reacquire a property.


No Market for Units.  Our units are subject to certain restrictions on transferability.  As a result of these restrictions, no public trading market is likely to develop for these securities, nor is one intended to develop.  Purchasers of units may not, therefore, be able to liquidate their investment, and units may not be readily acceptable as collateral for a loan.


Conflicts of Interest.   We may be subject to various conflicts of interest arising out of our relationship with our general partners and its affiliates.   If the general partner or its affiliates breach their fiduciary obligations to us, or do not resolve these conflicts of interest to our benefit, we could suffer consequences which we might not otherwise be subject to if such conflicts of interest did not exist.


Federal Income Tax Aspects


Potential Receipt of UBTI.  The incurrence of debt in connection with our pre-development and/or sales activities could cause the gain on the sale of parcels to constitute unrelated business taxable income ("UBTI") and affect limited partners that are tax-exempt entities.


Item 1(b). Unresolved Staff Comments

None


Item 2. Properties

We acquired fee ownership of the following real property investments:


 

Gross Acres

Remaining

Purchase/Sales

Parcel & Location

Purchased/Sold

Acres

Date

Parcel 1, McHenry County, Illinois

372.7590

-    

04/25/90

 

(372.7590

 

sold 02/23/04)

    

Parcel 2, Kendall County, Illinois

41.1180

-    

07/06/90

 

(3.473

 

sold 08/29/03)

 

(37.645

 

sold 02/17/05)

    

Parcel 3, Kendall County, Illinois

120.8170

86.427

11/06/90

 

(3.3900

 

sold 05/17/05)

 

(31.0000

 

sold 07/14/05)

    



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Gross Acres

Remaining

Purchase/Sales

Parcel & Location

Purchased/Sold

Acres

Date

    

Parcel 4, Kendall County, Illinois

299.0250

299.0250

06/28/91

    

Parcel 5, Kane County, Illinois

189.0468

-    

02/28/91

 

(189.0468

 

sold 05/16/01)

    

Parcel 6, Lake County, Illinois

57.3345

57.0765

04/16/91

 

(.2580

 

sold 10/01/94)

    

Parcel 7, McHenry County, Illinois

56.7094

-    

04/22/91

 

(12.6506

 

sold various  1997)

 

(15.7041

 

sold various 1998)

 

(19.6296

 

sold various 1999)

 

(8.7251

 

sold various 2000)

    

Parcel 8, Kane County, Illinois

325.3940

181.5240

06/14/91

 

(.8700

 

sold 04/03/96)

 

(63.000

 

sold 01/23/01)

 

(80.000

 

sold 05/11/04)

    

Parcel 9, Will County, Illinois

9.8670

-    

08/13/91

 

(9.8670

 

*09/16/02)

    

Parcel 10, Will County, Illinois

150.6600

-    

08/20/91

 

(150.6600

 

sold 01/10/05)

    

Parcel 11, Will County, Illinois

138.4470

-    

08/20/91

 

(138.4470

 

sold 05/03/93)

    

Parcel 12, Will County, Illinois

44.7320

-    

08/20/91

 

(44.7320

 

*09/16/02)

    

Parcel 13, Will County, Illinois

6.3420

-    

09/23/91

 

(6.3420

 

sold 05/03/93)

    

Parcel 14, Kendall County, Illinois

44.4030

-    

09/03/91

 

(15.3920

 

sold 04/16/01)

 

(14.2110

 

sold various 2002)

 

(13.6000

 

sold 04/11/03)

 

(1.2000

 

sold 02/19/04)

    

Parcel 15, Kendall County, Illinois

100.3640

-    

09/04/91

 

(5.0000

 

sold 09/01/93)

 

(11.0000

 

sold 12/01/94)

 

(84.3640

 

sold 08/14/98)

    

Parcel 16, McHenry County, Illinois

168.9050

-    

09/13/91

 

(168.9050

 

sold 08/03/01)

    



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Gross Acres

Remaining

Purchase/Sales

Parcel & Location

Purchased/Sold

Acres

Date

    

Parcel 17, Kendall County, Illinois

3.4620

-    

10/30/91

 

(2.1130

 

sold 03/06/01)

 

(1.3490

 

sold 08/23/02)

    

Parcel 18, McHenry County, Illinois

139.1697

96.6000

11/07/91

 

(9.2500

 

sold various 2004)

 

(33.3197

 

sold various 2005)

    

Parcel 19, Kane County, Illinois

436.2360

-    

12/13/91

 

(436.2360

 

sold 05/16/01)

    

Parcel 20, Kane & Kendall Counties, Illinois

400.1290

378.9910

01/31/92

 

(21.1380

 

sold 06/30/99)

    

Parcel 21, Kendall County, Illinois

15.0130

14.0130

05/26/92

 

(1.0000

 

sold 03/16/99)

    

Parcel 22, Kendall County, Illinois

391.9590

28.9960

10/30/92

 

(10.0000

 

sold 01/06/94)

 

(5.5380

 

sold 01/05/96)

 

(2.4000

 

sold 07/27/99)

 

(73.3950

 

sold various 2001)

 

(136.0000

 

sold 08/14/02)

 

(34.1400

 

sold 05/27/03)

 

(101.4900

 

sold various 2004)

    

Parcel 23, Kendall County, Illinois

133.4750

-    

10/30/92

 

(.2676

 

sold 03/16/93)

 

(11.5250

 

donated 07/16/93)

 

(44.0700

 

sold various 1995)

 

(8.2500

 

sold various 1996)

 

(2.6100

 

sold various 1997)

 

(10.6624

 

sold various 1998)

 

(5.8752

 

sold various 1999)

 

(49.0120

 

sold various 2000)

 

(.2028

 

sold various 2001)

 

(1.0000

 

sold various 2002)

    

Parcel 24, Kendall County, Illinois

4.3140

-    

01/21/93

 

(4.3140

 

sold 04/16/01)

    

Parcel 25, Kendall County, Illinois

656.6870

-    

01/28/93

 

(656.6870

 

sold 10/31/95)

    

Parcel 26, Kane County, Illinois

89.5110

-    

03/10/93

 

(2.1080

 

sold 12/03/99)

 

(34.2550

 

sold various 2000)

 

(7.8000

 

sold various 2001)

 

(29.1200

 

sold various 2002)

 

(11.3100

 

sold various 2003)

 

(4.9180

 

sold 01/28/04)



-7-




 

Gross Acres

Remaining

Purchase/Sales

Parcel & Location

Purchased/Sold

Acres

Date

    

Parcel 27, Kendall County, Illinois

83.5250

83.5250

03/11/93

    

Parcel 28, Kendall County, Illinois

50.0000

50.0000

*09/16/02


*  On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).


Our general partner anticipates that the land we acquired will produce sufficient income to pay property taxes, insurance and other miscellaneous expenses. Income will be derived through leases to farmers or from other activities compatible with undeveloped land. Although the general partner believes that leasing our land will generate sufficient revenues to pay these expenses, there can be no assurance that this will in fact occur. Our general partner has agreed to make a supplemental capital contribution to us if and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed the revenue earned by us from leasing our land during such year. Any supplemental capital contribution will be repaid only after limited partners have received, over the life of our partnership, a return of their original capital plus the 15% cumulative return. A majority of the parcels purchased by us consist of land which generates revenue from farming or other leasing activities. It is not expected that we will generate cash distributions to limited partners from farm leases or other leasing activities. Through December 31, 2005, our land has generated sufficient revenues from leasing to cover real estate taxes and insurance expense.




Item 3. Legal Proceedings


We are not subject to any material pending legal proceedings.


Item 4. Submission of Matters to a Vote of Security Holders


Consistent with our limited partnership agreement, there were no matters submitted to a vote of our security holders during 2005.


Part II


Item 5. Market for the our Limited Partnership Units and Related Security Holder Matters


As of March 15, 2006, there were 4,472 holders of our units. There is no public market for units nor is it anticipated that any public market for units will develop.


For the years ended December 31, 2005 and 2004, we paid the following distributions:


    

Distributions to:

 

2005

2004

    

General partners

$

900,000

4,111,902

Limited partners

 

9,500,000

17,088,098

    

Total

$

10,400,000

21,200,000




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Item 6. Selected Financial Data



INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

For the years ended December 31, 2005, 2004, 2003, 2002 and 2001


(not covered by Report of Independent Registered Public Accounting Firm)



  

2005

2004

2003

2002

2001

       
       

Total assets

$

40,369,857

37,219,501

39,274,559

41,787,000

46,018,596

       

Total income

$

20,171,792

25,705,324

5,713,191

12,208,392

20,993,953

       

Net income

$

14,722,791

18,657,525

2,504,880

6,333,833

13,666,351

       

Net income allocated to   the one general partner   unit

$

918,818

4,118,355

348,525

1,244,813

1,221,246

       

Net income allocated per   limited partnership unit

$

275.70

290.39

43.07

101.64

248.54

       

Distributions per limited   partnership unit from   sales

$

189.74

341.30

92.50

174.83

299.56

       

Weighted average limited   partnership units

 

50,068

50,068

50,068

50,068

50,073



The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this annual report.


The net income per unit and distributions per unit data is based upon the weighted average number of units outstanding.


All distributions from sales represent a return of original capital until such time as the limited partners have received distributions totaling their original capital.  As of March 2004, the limited partners had received distributions in excess of their original capital.





-9-


Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations


Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report on Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward looking statements. These factors include, among other things, the ability to obtain annexation and zoning approvals required to develop our properties; the approval of local governing bodies to develop our properties; successful lobbying of local "no growth" or limited development homeowner groups; adverse changes in real estate, financing and general economic or local conditions; eminent domain proceedings; changes in the environmental conditions or changes in the environmental positions of governmental bodies; and potential conflicts of interest between us and our affiliates, including our general partner.


Critical Accounting Policies


On December 12, 2001, the Securities and Exchange Commission issued Financial Reporting Release or FRR No. 60 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies."  A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgements in certain circumstances. We believe that our most critical accounting policies relate to how we value our investment properties and mortgage loans receivable and revenue recognition.  These judgements often result from the need to make estimates about the effect of matters that are inherently uncertain.  The purpose of the FRR is to provide investors with an understanding of how management forms these policies.  Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States of America or GAAP.  GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates.  The following disclosure discusses judgements known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.


Valuation of Investment Properties - On a quarterly basis, in accordance with Statement of Financial Accounting Standards No. 144, we conduct an impairment analysis to ensure that the carrying value of each property does not exceed its estimated fair value.  If this were to occur, we would be required to record an impairment loss equal to the excess of carrying value over fair value.


In determining the value of an investment property and whether the property is impaired, management considers several factors such as projected capital expenditures and sales prices. The aforementioned factors are considered by management in determining the value of any particular property.  The value of any particular property is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole.  Should the actual results differ from management's judgement, the valuation could be negatively or positively affected.


The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property. For the year ended December 31, 2005, we had recorded no such impairment.


Cost Allocation - We use the area method of cost allocation, which approximates the relative sales method of cost allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price.




-10-


Valuation of Mortgage Loans Receivable - On a quarterly basis, we conduct an analysis to ensure that the carrying value of each mortgage loan receivable is recoverable from the borrower. If we determine all or a portion of the receivable is not collectible, we would be required to record an allowance for doubtful accounts equal to the amount estimated to be uncollectible.


In determining the value of mortgage loans receivable, management considers projected sales proceeds available and expenses related to the property associated with the mortgage. Should the actual results differ from management's judgement, the valuation could be negatively or positively affected.


The valuation and possible subsequent allowance for doubtful accounts is a significant estimate that can and does change based on management's continuous process of analyzing each mortgage loan receivable. As of December 31, 2005, the partnership has evaluated the mortgage loans receivables and recorded an allowance for doubtful accounts of $85,992 on one of the mortgage loans receivable.


Revenue Recognition - We recognize income from the sale of land parcels in accordance with Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate”.



Liquidity and Capital Resources


On October 25, 1989, we commenced an offering of 30,000 (subject to increase to 60,000) limited partnership units or units pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. On October 24, 1991, we terminated our offering of units, with total sales of 50,476.17 units, at $1,000 per unit, resulting in $50,476,170 in gross offering proceeds, not including the general partner's capital contribution of $500. All of the holders of these units were admitted to the partnership. Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held.


We used $41,314,301 of gross offering proceeds to purchase, on an all-cash basis, 27 parcels of undeveloped land and two buildings. These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties.  Three of the parcels were purchased during 1990, sixteen during 1991, four during 1992, and four during 1993. On September 16, 2002, we completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28). As of December 31, 2005, we have had multiple sales and exchange transactions through which we have disposed of the buildings and approximately 3,254 acres of the approximately 4,530 acres originally owned. As of December 31, 2005, cumulative distributions have totaled $70,765,834 to the limited partners and $8,388,195 to the general partner.  Of the $70,765,834 distributed to the limited partners, $70,044,834 was net sales proceeds, which represents a return of original capital, and $721,000 was from operations. As of December 31, 2005, we have used $33,809,650 of working capital for rezoning and other activities. Such amounts have been capitalized and are included in investment properties.


Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from leasing. As of December 31, 2005, we own, in whole or in part, 10 parcels, the majority of which are leased to local tenants and are generating sufficient cash flow from leases to cover property taxes and insurance. We continue to market the remaining acres for sale.


At December 31, 2005, we had cash and cash equivalents of $6,129,127 which is available to be used for our costs and liabilities, cash distributions to partners and other activities with respect to some or all of our land parcels.




-11-


In 2005 we received net sales proceeds of approximately $18,404,697 from the sales of Parcels 2, 3, 10, and 18. In June 2005, we paid distributions totaling $6,500,000, which included $6,000,000 paid to the limited partners and $500,000 paid to the general partner. In December 2005, we paid distributions totaling $3,900,000, which included $3,500,000 paid to the limited partners and $400,000 paid to the general partner.  In addition to these sales which occurred in 2005, we anticipate additional sales of Parcels 3, 4, 18, 20 and 27 during 2006 and 2007. See Subsequent Events for sales which have occurred in 2006.  Undistributed net sales proceeds will be used to cover our operations, including property upgrades. We will evaluate our cash needs throughout the year to determine future distributions.


We plan to enhance the value of our land through pre-development activities such as rezoning, annexation and land planning. We have already been successful in, or are in the process of, pre-development activity on several of our land investments.  Parcel 20 has been granted rezoning which will permit additional land to be useable for development.  A portion of parcels 3 and 27 have been approved for residential development and zoning and land planning on the commercial portions of these parcels continue. We have completed our final planning on Parcels 4 and 18 and marketing has begun on these parcels.



Transactions with Related Parties


Our general partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the general partner and its affiliates relating to our administration. Such costs of $63,327, $64,788 and $71,464 are included in professional services to affiliates and general and administrative expenses to affiliates for the years ended December 31, 2005, 2004 and 2003, respectively, of which $8,511 and $12,267 was unpaid as of December 31, 2005 and 2004, respectively.


An affiliate of our general partner performed marketing and advertising services for us and was reimbursed for direct costs.   Such costs of $35,818, $28,048 and $26,008 have been incurred and paid and are included in marketing expenses to affiliates for the years ended December 31, 2005, 2004 and 2003, respectively, all of which was paid at December 31, 2005 and 2004.


An affiliate of our general partner performed property upgrades, rezoning, annexation and other activities to prepare our land investments for sale and was reimbursed for salaries and direct costs. For the years ended December 31, 2005 and 2004, we incurred $236,691 and $256,488, respectively, of such costs. The affiliate did not recognize a profit on any project. Such costs are included in investment properties, of which $62,716 and $21,775 was unpaid as of December 31, 2005 and 2004, respectively.


Results of Operations


Income from the sale of investment properties of $18,404,697 and cost of investment properties sold of $6,133,357 recorded for the year ended December 31, 2005 is the result of the sale of the remaining 37.645 acres of Parcel 2, the sale of 34.4 acres of Parcel 3, the sale of the remaining 150.66 acres of Parcel 10 and the sale of 33.3 acres of Parcel 18.  Income from the sale of investment properties of $23,345,650 and cost of investment properties sold of $6,573,355 recorded for the year ended December 31, 2004 is the result of the sale of the remaining 372 acres of Parcel 1, the sale of 80 acres of Parcel 8, the sale of 1.2 acres of Parcel 14, the sale of 9.25 acres of Parcel 18, the sale of 101 acres of Parcel 22 and the sale of the 10 remaining lots of Parcel 26.  Income from the sale of investment properties of $3,792,214 and cost of investment properties sold of $2,258,971 for the year ended December 31, 2003 is the result of the sale of approximately 3 acres of Parcel 2, 14 acres of Parcel 14, 34 acres of Parcel 22 and the sale of additional lots of Parcel 26. The sales activity for the years ended December 31, 2005, 2004 and 2003, respectively, are the result of favorable zoning and a change in our marketing approach to target homebuilders, commercial users and land developers.



-12-



During 2001, we sold 189 acres of Parcel 5 and 436 acres of Parcel 19 for $17,500,000 and recorded deferred gain of $10,203,634.  We received a deferred down payment note in the amount of $1,500,000, due December 31, 2001.  The note had an interest rate of 6%, however the note provided for the interest to be waived if the principal was paid in full by December 1, 2001.  We received payment of the deferred down payment note on December 1, 2001 and recognized $875,923 of deferred gain.  We also received an installment note in the amount of $16,000,000 at the time of closing.  The installment note matures July 1, 2011 and has an interest rate of 6%. During 2005, we received principal payments totaling $972,964 and recognized deferred gain of $569,637. As of December 31, 2005, the balance of the mortgage loan receivable was $11,705,015. The remaining deferred gain will be recognized as payments are received.


As of December 31, 2005, we owned 10 parcels of land consisting of approximately 1,276 acres. Of the approximately 1,276 acres owned, 500 acres are tillable, leased to local farmers and generate sufficient cash flow to cover property taxes, insurance and other miscellaneous expenses. Rental income was $79,969, $127,291 and $190,115 for the years ended December 31, 2005, 2004 and 2003, respectively. Rental income continues to decrease due to a decrease in the tillable acres as a result of sales.


Professional services to affiliates were $35,051, $40,156 and $38,388 for the years ended December 31, 2005, 2004 and 2003, respectively. Professional services to affiliates decreased in 2005 due to a decrease in legal services as a result of less sales activity.


General and administrative expenses to non-affiliates were $50,172, $53,113 and $29,206 for the years ended December 31, 2005, 2004 and 2003, respectively. The increase in 2004 was due to an increase in the printing, postage and investor service expenses.


Tax expenses were $121,561, $144,677 and $56,451 for the years ended December 31, 2005, 2004 and 2003, respectively.  The increase in tax expenses in 2005 and 2004 is due to state taxes paid and accrued as a result of the land sales.


Marketing expenses to non-affiliates were $49,949, $75,440 and $79,038 for the years ended December 31, 2005, 2004 and 2003, respectively. In 2003 and continuing into 2004, we changed our marketing approach to target homebuilders, industrial users and land developers through direct mailings, newspaper and trade publication advertising and an enhanced website. In 2005, marketing expenses decreased as we took advantage of our established marketing plans.


Land operating expenses to non-affiliates were $66,892, $50,465 and $81,971 for the years ended December 31, 2005, 2004 and 2003 respectively. These costs primarily include real estate tax expense, ground maintenance and insurance expense on the parcels owned and decrease as acres are sold.  


We determined that the maximum value of Parcel 15 could be realized if the parcel was developed and sold as individual lots. However, if we had followed that plan, there is a possibility that the limited partners may have been subject to unrelated business taxable income. Therefore, we sold the parcel to a third party developer whereby 100% of the sales price was represented by a note receivable from the buyer. This transaction was deemed an installment sale.  After the sale, the developer, through a limited liability company or LLC, secured third party financing to cover the deferred down payment owed to us as well as provide proceeds to begin the development of the project. This sale was structured so that the deferred down payment received at the time of the sale was sufficient to provide a distribution to our limited partners that equated to the parcel capital allocated to the parcel plus approximately a 6% return per annum on the capital invested in the parcel (parcel capital) through the date of the distribution.




-13-


The velocity of the developer's individual lot sales was slower than was originally projected and consequently, the developer's carrying costs were higher.  As a result of the slower lot sales, the net sale proceeds available to us are lower than anticipated. As of December 31, 2005, 2004 and 2003, we have recorded an allowance for doubtful accounts of $85,992, $1,208,378 and $1,208,378, respectively, relating to the mortgage receivable and $336,712 relating to the accrued interest relating to the sale of Parcel 15 and have written off the related deferred gain of $747,454.  During 2005, we received principal payments of $1,122,386 for a portion of the mortgage which was previously written off.  We recorded a provision for the reversal of loan losses and bad debt expense in the amount of $1,122,386.


The General Partner guaranteed the third party development loans owed by the LLC. In reviewing the development’s financial situation, our General Partner determined that it would be in its best interest to have an affiliate acquire the interest in the LLC. The General Partner and its affiliates concluded that they could better control the continuing costs to complete the development and would therefore have the best opportunity to limit their exposure under the guarantee agreements and possibly recover a portion of the amount owed to the Partnership. An affiliate of our General Partner acquired the interests in the LLC and paid off the debt under its guarantee of the LLC loans. The affiliate of the General Partner will complete the development and sale of this project.



Our Partnership Agreement


Our partnership agreement defines the allocation of profits and losses, and available cash. If and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed our revenues, our general partner will make a supplemental capital contribution of such amount to us to ensure that we have sufficient funds to make such payments.


Profits and losses from operations (other than capital transactions) will be allocated 99% to the limited partners and 1% to the general partner. The net gain from sales of our properties is first allocated among the partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the general partner in an amount equal to the proceeds distributed to the general partner from such sale and the balance of any net gain is allocated to the limited partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the general partner from such sale, we will allocate income or gain to the general partner in an amount equal to the excess of the cash distributed to the general partner with respect to such sale as quickly as permitted by law.  Any net loss from a sale will be allocated to the limited partners.


Distributions of net sale proceeds will be allocated between the general partner and the limited partners based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.


As a general rule, net sale proceeds will be distributed 90% to the limited partners and 10% to the general partner until the limited partners have received from net sale proceeds  (i) a return of their original capital plus (ii) a noncompounded cumulative preferred return of 15% of their invested capital. However, with respect to each parcel of land, the general partner's 10% share will be subordinated until the limited partners receive a return of the original capital attributed to such parcel ("parcel capital") plus a 6% per annum noncompounded cumulative preferred return thereon.




-14-


After the amounts described in items  (i) and  (ii) above and any previously subordinated distributions to the general partner have been paid, and the amount of any supplemental capital contributions have been repaid to the general partner, subsequent distributions shall be paid 75% to the limited partners and 25% to the general partner without considering parcel capital. If, after all net sale proceeds have been distributed, the general partner has received more than 25% of all net sale proceeds (exclusive of distributions made to the limited partners to return their original capital), the general partner shall contribute to us for distribution to the limited partners an amount equal to such excess.


Any distributions from net sales proceeds at a time when invested capital is greater than zero shall be deemed applied first to reduction of such invested capital before application to payment of any deficiency in the 15% cumulative preferred return.




Subsequent Events


Since January 1, 2006, we have sold 15 additional lots of parcel 18 for approximately $910,000 and recorded a gain of approximately $70,000.



Off-Balance Sheet Arrangements, Contractual Obligations, Liabilities and Contracts and Commitments


None




-15-


Selected Quarterly Financial Data (unaudited)


The following represents the results of operations for each quarter during the years ended December 31, 2005, 2004 and 2003.


  

12/31/05

09/30/05

06/30/05

03/31/05

Total income

$

1,485,846

5,783,322

2,062,900

10,839,724

Net income

 

561,284

4,970,323

802,595

8,388,589

Net income allocated to the limited partners

 

158,516

4,964,997

300,351

8,380,109

Net operating income per limited partnership   unit, basic and diluted

 

3.16

99.17

6.00

167.37

      
  

12/31/04

09/30/04

06/30/04

03/31/04

Total income

$

2,663,652

450,949

2,168,230

20,422,493

Net income

 

1,790,731

372,079

921,678

15,573,037

Net income allocated to the limited partners

 

1,788,915

370,015

920,723

11,459,517

Net operating income per limited partnership   unit, basic and diluted

 

35.73

7.39

18.39

228.88

      
  

12/31/03

09/30/03

06/30/03

03/31/03

Total income

$

1,168,417 

581,344 

3,294,354 

669,076 

Net income (loss)

 

928,394 

(170,720)

1,562,441 

184,765 

Net income (loss) allocated to the limited   partners

 

585,882 

(173,244)

1,560,096 

183,621 

Net operating income (loss) per limited   partnership unit, basic and diluted

 

11.70 

(3.46)

31.16 

3.67 

      


Inflation


Inflation in future periods may cause capital appreciation of our investments in land. Rental income levels  (from leases to new tenants or renewals of existing tenants) will rise and fall in accordance with normal agricultural market conditions and may or may not be affected by inflation. To date, our operations  have not been significantly affected by inflation.



Item 7(a). Quantitative and Qualitative Disclosures About Market Risk


Not Applicable.




-16-



Item 8.  Financial Statements and Supplementary Data




INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)


Index



 

Page

  

Report of Independent Registered Public Accounting Firm

18

  

Report of Independent Registered Public Accounting Firm

19

  

Financial Statements:

 
  

  Balance Sheets, December 31, 2005 and 2004

20

  

  Statements of Operations, for the years ended December 31, 2005, 2004 and 2003

22

  

  Statements of Partners' Capital, for the years ended December 31, 2005, 2004 and 2003

23

  

  Statements of Cash Flows, for the years ended December 31, 2005, 2004 and 2003

24

  

  Notes to Financial Statements

25




Schedules not filed:


All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.





















-17-


Report of Independent Registered Public Accounting Firm



To the Partners of

Inland Land Appreciation Fund II, L.P.


We have audited the accompanying balance sheets of Inland Land Appreciation Fund II, L.P. (a limited partnership) (“the Partnership”) as of December 31, 2005 and 2004, and the related statements of operations, partners’ capital, and cash flows for the years then ended.  The financial statements are the responsibility of the Partnership’s management.  Our responsibility is to express an opinion on these financial statements based on our audits  


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Partnership is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inland Land Appreciation Fund II, L.P. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.



Grant Thornton LLP


Chicago, Illinois

March 23, 2006






-18-








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Partners of

Inland Land Appreciation Fund II, L.P.


We have audited the accompanying statements of operations, partners' capital, and cash flows of Inland Land Appreciation Fund II, L.P. (a limited partnership) (the "Partnership") for the year ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.


In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of Inland Land Appreciation Fund II, L.P. for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



Deloitte & Touche LLP



March 26, 2004

Chicago, Illinois





-19-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Balance Sheets

December 31, 2005 and 2004




Assets



  

2005

2004

Current assets:

   

  Cash and cash equivalents (Note 1)

$

6,129,127

4,338,694

  Accounts and accrued interest receivable (net of allowance for  
    doubtful accounts of $336,712 at December 31, 2005 and
    2004)  (Note 6)

 

268,897

78,414

  Other current assets

 

278,182

302,507

    

Total current assets

 

6,676,206

4,719,615

    

Mortgage loans receivable (net of allowance for doubtful   accounts of $85,992 and $1,208,378 at December 31, 2005 and 2004, respectively) (Note 6)

 

11,705,015

12,677,979

Investment properties (including acquisition fees paid to   Affiliates of $585,834 and $690,325 at December 31, 2005
  and 2004, respectively) (Notes 1, 3 and 4):

   

  Land and improvements

 

21,988,636

19,821,907

    

Total assets

$

40,369,857

37,219,501






















See accompanying notes to financial statements.



-20-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Balance Sheets
(continued)

December 31, 2005 and 2004




Liabilities and Partners' Capital



  

2005

2004

    

Current liabilities:

   

  Accounts payable

$

2,377,965 

1,696,084 

  Accrued real estate taxes

 

29,126 

34,567 

  Due to Affiliates (Note 3)

 

71,227 

34,042 

  Unearned income

 

- 

1,316,422 

    

Total current liabilities

 

2,478,318 

3,081,115 

    

Deferred gain on sale of investment properties (Note 6)

 

6,841,470 

7,411,108 

    

Total liabilities

 

9,319,788 

10,492,223 

    

Partners' capital:

   

  General Partner:

   

    Capital contribution

 

500 

500 

    Cumulative net income

 

8,788,007 

7,869,189 

    Cumulative cash distributions

 

(8,388,195)

(7,488,195)

    

 

 

400,312 

381,494 

  Limited Partners:

   

    Units of $1,000. Authorized 60,000 Units, 50,068 Units outstanding
    at December 31, 2005 and 2004, (net of offering costs of $7,532,439,
    of which $2,535,445 was paid to Affiliates)

 

42,559,909 

42,559,909 

    Cumulative net income

 

58,855,682 

45,051,709 

    Cumulative cash distributions

 

(70,765,834)

(61,265,834)

    

 

 

30,649,757 

26,345,784 

    

Total Partners' capital

 

31,050,069 

26,727,278 

    

Total liabilities and Partners' capital

$

40,369,857 

37,219,501 








See accompanying notes to financial statements.



-21-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Statements of Operations

For the years ended December 31, 2005, 2004 and 2003



  

2005

2004

2003

Income:

    

  Sale of investment properties (Notes 1 and 3)

$

18,404,697 

23,345,650 

3,792,214 

  Recognition of deferred gain on sale of investment     properties (Note 6)

 

569,638 

1,239,953 

703,150 

  Rental income (Note 5)

 

79,969 

127,291 

190,115 

  Interest income

 

1,055,516 

979,905 

1,015,887 

  Other income

 

61,972 

12,525 

11,825 

     

 

 

20,171,792 

25,705,324 

5,713,191 

     

Expenses:

    

  Cost of investment properties sold

 

6,133,357 

6,573,355 

2,258,971 

  Professional services to Affiliates

 

35,051 

40,156 

38,388 

  Professional services to non-affiliates

 

50,311 

57,913 

43,843 

  General and administrative expenses to Affiliates

 

28,276 

24,632 

33,076 

  General and administrative expenses to non-affiliates

 

50,172 

53,113 

29,206 

  Tax expense

 

121,561 

144,677 

56,451 

  Marketing expenses to Affiliates

 

35,818 

28,048 

26,008 

  Marketing expenses to non-affiliates

 

49,949 

75,440 

79,038 

  Land operating expenses to non-affiliates

 

66,892 

50,465 

81,971 

  Recovery of bad debt expense

 

(1,122,386)

- 

- 

  Impairment loss on land

 

- 

- 

561,359 

     

 

 

5,449,001 

7,047,799 

3,208,311 

     

Net income

$

14,722,791 

18,657,525 

2,504,880 

     

Net income allocated to (Note 2):

    

  General Partner

$

918,818 

4,118,355 

348,525 

  Limited Partners

 

13,803,973 

14,539,170 

2,156,355 

     

Net income

$

14,722,791 

18,657,525 

2,504,880 

     

Net income allocated to the one General Partner Unit

$

918,818 

4,118,355 

348,525 

     

Net income per Unit allocated to Limited Partners per   weighted average Limited Partnership Units (50,068   for the years ended December 31, 2005, 2004 and   2003)

$

275.70 

290.39 

43.07 






See accompanying notes to financial statements.



-22-


 INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Statements of Partners' Capital

For the years ended December 31, 2005, 2004 and 2003




  

General

Limited

 
  

Partner

Partners

Total

     

Balance January 1, 2003

$

366,742 

31,369,760 

31,736,502 

     

Distributions to Partners ($92.50 per weighted average   Limited Partnership Units of 50,068) (Note 2)

 

(340,226)

(4,631,403)

(4,971,629)

Net income (Note 2)

 

348,525 

2,156,355 

2,504,880 

     

Balance December 31, 2003

 

375,041 

28,894,712 

29,269,753 

     

Distributions to Partners ($341.30 per weighted average   Limited Partnership Units of 50,068) (Note 2)

 

(4,111,902)

(17,088,098)

(21,200,000)

Net income (Note 2)

 

4,118,355 

14,539,170 

18,657,525 

     

Balance December 31, 2004

 

381,494 

26,345,784 

26,727,278 

     

Distributions to Partners ($189.74 per weighted average   Limited Partnership Units of 50,068) (Note 2)

 

(900,000)

(9,500,000)

(10,400,000)

Net income (Note 2)

 

918,818 

13,803,973 

14,722,791 

     

Balance December 31, 2005

$

400,312 

30,649,757 

31,050,069 




















See accompanying notes to financial statements.



-23-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Statements of Cash Flows

For the years ended December 31, 2005, 2004 and 2003


  

2005

2004

2003

Cash flows from operating activities:

    

  Net income

$

14,722,791 

18,657,525 

2,504,880 

  Adjustments to reconcile net income to net cash       provided by operating activities:

    

    Gain on sale of investment properties

 

(12,271,340)

(16,772,295)

(1,533,243)

    Recognition of deferred gain on sale of investment       properties

 

(569,638)

(1,239,953)

(703,150)

    Recovery of bad debt expense

 

(1,122,386)

- 

- 

    Impairment loss on land

 

- 

- 

561,359 

    Changes in assets and liabilities:

    

      Restricted cash

 

- 

182,879 

(2,763)

      Accounts and accrued interest receivable

 

(190,483)

24,848 

845,838 

      Other current assets

 

24,325 

(257)

(7,029)

      Accounts payable

 

681,881 

1,647,095 

(145,122)

      Accrued real estate taxes

 

(5,441)

(21,746)

(99,636)

      Due to Affiliates

 

37,185 

(11,225)

15,898 

      Unearned income

 

(13,321)

(181,975)

886,318 

     

Net cash provided by operating activities

 

1,293,573 

2,284,896 

2,323,350 

     

Cash flows from investing activities:

    

  Principal payments collected on mortgage loans     receivable

 

2,095,350 

2,117,893 

1,204,128 

  Additions to investment properties

 

(8,300,086)

(5,375,640)

(1,249,231)

  Proceeds from sale of investment properties

 

18,404,697 

23,345,650 

3,792,214 

  Deposits

 

(1,303,101)

- 

- 

     

Net cash provided by investing activities

 

10,896,860 

20,087,903 

3,747,111 

     

Cash flows from financing activities:

    

  Distributions

 

(10,400,000)

(21,200,000)

(4,971,629)

     

Net cash used in financing activities

 

(10,400,000)

(21,200,000)

(4,971,629)

     

Net increase in cash and cash equivalents

 

1,790,433 

1,172,799 

1,098,832 

Cash and cash equivalents at beginning of year

 

4,338,694 

3,165,895 

2,067,063 

     

Cash and cash equivalents at end of year

$

6,129,127 

4,338,694 

3,165,895 

     

Supplemental schedule of non-cash investing activities:

    

  Reduction of investment properties

$

6,133,357 

6,573,355 

2,258,971 

  Gain on sale of investment properties

 

12,271,340 

16,772,295 

1,533,243 

     

  Proceeds from sale of investment properties

$

18,404,697 

23,345,650 

3,792,214 


See accompanying notes to financial statements.



-24-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements

For the years ended December 31, 2005, 2004 and 2003



(1) Organization and Basis of Accounting


The Registrant, Inland Land Appreciation Fund II, L.P. (the "Partnership"), is a limited partnership formed on June 28, 1989, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale. On October 25, 1989, the Partnership commenced an Offering of 30,000 (subject to increase to 60,000) Limited Partnership Units pursuant to a Registration under the Securities Act of 1933.  The Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") provides for Inland Real Estate Investment Corporation to be the General Partner. On October 24, 1991, the Partnership terminated its Offering of Units, with total sales of 50,476.17 Units, at $1,000 per Unit, resulting in $50,476,170 in gross offering proceeds, not including the General Partner's capital contribution of $500. All of the holders of these Units have been admitted to the Partnership. As of December 31, 2005, the Partnership had repurchased a total of 408.65 Units for $383,822 from various Limited Partners through the Unit Repurchase Program. Under this program, Limited Partners could, under certain circumstances, have their Units repurchased for an amount equal to their Invested Capital.


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications were made to the 2004 financial statements to conform with the 2005 presentation.


Offering costs have been offset against the Limited Partners' capital accounts.


The Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents and are carried at cost, which approximates market.


The Partnership recognizes income from the sale of land parcels in accordance with Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate".


For vacant land parcels and parcels with insignificant buildings and improvements, the Partnership uses the area method of allocation, which approximates the relative sales method of allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales. The total cost of the parcel is divided by the total number of acres to arrive at a per acre price. For parcels with significant buildings and improvements (Parcel 24, described in Note 4), the Partnership records the buildings and improvements at a cost based upon the appraised value at the date of acquisition. Buildings and improvements are depreciated using the straight-line method of depreciation over a useful life of thirty years.  Repair and maintenance expenses are charged to operations as incurred.  





-25-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)



The Partnership is required to pay a withholding tax to the Internal Revenue Service with respect to a Partner's allocable share of the Partnership's taxable net income, if the Partner is a foreign person. The Partnership will first pay the withholding tax from the distributions to any foreign partner, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to the foreign partner. Withholding tax payments are made every April, June, September and December.


No provision for Federal income taxes has been made, as the liability for such taxes is that of the Partners rather than the Partnership.


The Partnership records are maintained on the accrual basis of accounting in accordance with GAAP. The Federal income tax return has been prepared from such records after making appropriate adjustments, if any, to reflect the Partnership's accounts as adjusted for Federal income tax reporting purposes. Such adjustments are not recorded in the records of the Partnership.  The net effect of these items is summarized as follows:


  

2005

2004

  

GAAP

Tax Basis

GAAP

Tax Basis

  

Basis

(unaudited)

Basis

(unaudited)

      

Total assets

$

40,369,857

46,632,298

37,219,501

44,459,719

      

Partners' capital:

     

  General Partner

 

400,312

219,416

381,494

200,597

  Limited Partners

 

30,649,757

38,363,095

26,345,784

34,059,123

      

Net income:

     

  General Partner

 

918,818

909,504

4,118,355

4,118,575

  Limited Partners

 

13,803,973

12,865,209

14,539,170

13,618,583

      

Net income per Limited Partnership Unit

 

275.70

256.95

290.39

272.00


The net income per Unit is based upon the weighted average number of Units of 50,068 during 2005 and 2004.


New Accounting Pronouncements


In December 2004, the FASB issued SFAS No. 153: Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured on the fair value of assets exchanged. It eliminates the exceptions for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Partnership does not believe that the adoption of SFAS No. 153 will have a material impact on its financial statements.





-26-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)



Emerging Issues Task Force ("EITF") Issue No. 04-5: Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity when the Limited Partners Have Certain Rights, was ratified by the FASB in June 2005. At issue is what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with U.S. generally accepted accounting principles. The assessment of limited partners' rights and their impact on the presumption of control of the limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (a) there is a change to the terms or in the exercisability of the rights of the limited partners, (b) the sole general partner increases or decreases its ownership of limited partnership interests, or (c) there is an increase or decrease in the number of outstanding limited partnership interests. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. This Issue is effective no later than for fiscal years beginning after December 15, 2005 and as of June 29, 2005 for new or modified arrangements. The Partnership does not expect that this EITF Issue will have a material effect on its financial statements.


In June 2005, the FASB issued EITF Issue No. 04-10: Determining Whether to Aggregate Operating Segments that do not meet the Quantitative Thresholds.  The EITF provides clarification regarding SFAS No. 131: Disclosure about Segments of an Enterprise and Related Information.  The consensus states that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles provided in SFAS No. 131, the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria listed in SFAS No. 131.  This should be applied for fiscal years ending after September 15, 2005.  The corresponding information for earlier periods, including interim periods, should be restated unless it is impractical to do so.  Early application of the consensus is permitted.  The adoption of this consensus did not have a significant impact on the Partnership’s segment disclosure.


In March 2005, the FASB issued FIN No. 47: Accounting for Conditional Asset Retirement Obligations.  This interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143: Accounting for Asset Retirement Obligation, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity.  Thus, the timing and (or) method of settlement may be conditional on a future event.  This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.  This interpretation is effective no later than the end of fiscal years ending after December 15, 2005.  The adoption of this interpretation did not have a significant impact on the Partnership’s financial statements.




-27-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)





(2) Partnership Agreement


The Partnership Agreement defines the allocation of profits and losses, and available cash. If and to the extent that real estate taxes and insurance payable with respect to the Partnership's land during a given year exceed revenues of the Partnership, the General Partner will make a Supplemental Capital Contribution of such amount to the Partnership to ensure that it has sufficient funds to make such payments.


Profits and losses from operations  (other than capital transactions) will be allocated 99% to the Limited Partners and 1% to the General Partner. The net gain from sales of Partnership properties is first allocated among the Partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the General Partner in an amount equal to the proceeds distributed to the General Partner from such sale and the balance of any net gain is allocated to the Limited Partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the General Partner from such sale, the Partnership will allocate income or gain to the General Partner in an amount equal to the excess of the cash distributed to the General Partner with respect to such sale as quickly as permitted by law.  Any net loss from a sale will be allocated to the Limited Partners.


Distributions of Net Sale Proceeds will be allocated between the General Partner and the Limited Partners based upon both an aggregate overall return to the Limited Partners and a separate return with respect to each parcel of land purchased by the Partnership.


As a general rule, Net Sale Proceeds will be distributed 90% to the Limited Partners and 10% to the General Partner until the Limited Partners have received from Net Sale Proceeds  (i) a return of their Original Capital plus (ii) a noncompounded Cumulative Preferred Return of 15% of their Invested Capital. However, with respect to each parcel of land, the General Partner's 10% share will be subordinated until the Limited Partners receive a return of the Original Capital attributed to such parcel ("Parcel Capital") plus a 6% per annum noncompounded Cumulative Preferred Return thereon.


After the amounts described in items  (i) and  (ii) above and any previously subordinated distributions to the General Partner have been paid, and the amount of any Supplemental Capital Contributions have been repaid to the General Partner, subsequent distributions shall be paid 75% to the Limited Partners and 25% to the General Partner without considering Parcel Capital. If, after all Net Sale Proceeds have been distributed, the General Partner has received more than 25% of all Net Sale Proceeds (exclusive of distributions made to the Limited Partners to return their Original Capital), the General Partner shall contribute to the Partnership for distribution to the Limited Partners an amount equal to such excess.


Any distributions from Net Sales Proceeds at a time when Invested Capital is greater than zero shall be deemed applied first to reduction of such Invested Capital before application to payment of any deficiency in the 15% Cumulative Preferred Return.




-28-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)



 (3) Transactions with Affiliates


The General Partner and its Affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its Affiliates relating to the administration of the Partnership. Such costs are included in professional services to Affiliates and general and administrative expenses to Affiliates, of which $8,511 and $12,267 was unpaid as of December 31, 2005 and 2004, respectively.


An Affiliate of the General Partner performed marketing and advertising services for the Partnership and was reimbursed (as set forth under term of the Partnership Agreement) for direct costs. Such costs of $35,818, $28,048 and $26,008 have been incurred and are included in marketing expenses to Affiliates for the years ended December 31, 2005, 2004 and 2003, respectively, all of which was paid as of December 31, 2005 and 2004.


An Affiliate of the General Partner performed property upgrades, rezoning, annexation and other activities to prepare the Partnership's land investments for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs.  For the years ended December 31, 2005 and 2004, the Partnership incurred $236,691 and $256,488, respectively, of such costs.  The Affiliate did not recognize a profit on any project. Such costs are included in investment properties, of which $62,716 and $21,775 was unpaid as of December 31, 2005 and 2004, respectively.




-29-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)

(4) Investment Properties

 

Gross Acres

Purchase/

Initial Costs

Costs Capitalized

Costs of

Total Remaining Costs of

Current Year Gain

Parcel

Illinois

Purchased

Sales

 

Original

Acquisition

Total

Subsequent to

Property

Parcels at

on Sale

#

County

(Sold)

Date

 

Costs

Costs

Costs

Acquisition

Sold

12/31/05

Recognized

1

McHenry

372.759

 04/25/90

$

2,114,295

114,070

2,228,365

630,703

2,859,068

-    

-    

  

(372.759)

02/23/04

        
            

2

Kendall

 41.118

07/06/90

 

549,639

43,889

593,528

75,199

668,727

-    

1,587,700

  

(3.47)

08/29/03

        
  

(37.645)

02/17/05

        
            

3

Kendall

120.817

11/06/90

 

1,606,794

101,863

1,708,657

2,344,554

567,827

3,485,384

4,593,679

  

(3.390)

05/17/05

        
  

(31.000)

07/14/05

        
            

4

Kendall

299.025

06/28/91

 

1,442,059

77,804

1,519,863

464,714

-     

1,984,577

-     

            

5

Kane

189.0468

02/28/91

 

1,954,629

94,569

2,049,198

349,845

2,399,043

-     

-    

  

(189.0468)

05/16/01

        
            

6

Lake

57.3345

04/16/91

 

904,337

71,199

975,536

1,227,996

4,457

2,199,075

-     

 

 

(.258)

10/01/94

        
            

7

McHenry

56.7094

04/22/91

 

680,513

44,444

724,957

3,210,451

3,935,408

-     

-     

 

 

(12.6506)

Var 1997

        
 

 

(15.7041)

Var 1998

        
 

 

(19.6296)

Var 1999

        
  

(8.7251)

Var 2000

        
 

 

          

8

Kane

325.394

06/14/91

 

3,496,700

262,275

3,758,975

48,650

1,909,034

1,898,591

-    

 

 

(.870)

04/03/96

        
  

(63.000)

01/23/01

        
  

(80.000)

05/11/04

        
            

9 (c)

Will

9.867

08/13/91

 

-     

-     

-     

-     

-     

-     

-     

  

(9.867)

09/16/02

        
            



-30-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)

(4) Investment Properties (continued)


 

Gross Acres

Purchase/

Initial Costs

Costs Capitalized

Costs of

Total Remaining Costs of

Current Year Gain

Parcel

Illinois

Purchased

Sales

 

Original

Acquisition

Total

Subsequent to

Property

Parcels at

on Sale

#

County

(Sold)

Date

 

Costs

Costs

Costs

Acquisition

Sold

12/31/05

Recognized

            

10

Will

150.66

08/20/91

$

1,866,716

89,333

1,956,049

23,897

1,979,946

-    

5,886,788

  

(150.66)

01/10/05

        
            

11

Will

138.447

 08/20/91

 

289,914

20,376

310,290

2,700

312,990

-     

-     

 

 

(138.447)

05/03/93

        
            

12 (c)

Will

44.732

08/20/91

 

-     

-     

-     

-     

-     

-     

-     

  

(44.732)

09/16/02

        
            

13

Will

6.342

09/23/91

 

139,524

172

139,696

-     

139,696

-     

-     

  

(6.342)

05/03/93

        
            

14

Kendall

 44.403

09/03/91

 

888,060

68,210

956,270

1,259,583

2,215,853

-     

-    

  

(15.392)

04/16/01

        
  

(14.2110)

Var 2002

        
  

(13.6000)

04/11/03

        
  

(1.2000)

02/19/04

        
            

15

Kendall

100.364

 09/04/91

 

1,050,000

52,694

1,102,694

117,829

1,220,523

-     

-     

 

 

(5.000)

09/01/93

        
 

 

(11.000)

12/01/94

        
 

 

(84.364)

08/14/98

        
            

16

McHenry

168.905

09/13/91

 

1,402,058

69,731

1,471,789

97,766

1,569,555

-     

-     

  

(168.905)

08/03/01

        
            

17

Kendall

3.462

10/30/91

 

435,000

22,326

457,326

113,135

570,461

-     

-     

  

(2.113)

03/06/01

        
  

(1.349)

08/23/02

        
            

18

McHenry

139.1697

11/07/91

 

1,160,301

58,190

1,218,491

6,578,494

3,716,827

4,080,158

203,173

  

(9.2500)

Var 2004

        
  

(33.3197)

Var 2005

        



-31-





INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)

(4) Investment Properties (continued)


 

Gross Acres

Purchase/

Initial Costs

Costs Capitalized

Costs of

Total Remaining Costs of

Current Year Gain

Parcel

Illinois

Purchased

Sales

 

Original

Acquisition

Total

Subsequent to

Property

Parcels at

on Sale

#

County

(Sold)

Date

 

Costs

Costs

Costs

Acquisition

Sold

12/31/05

Recognized

            

19

Kane

436.236

12/13/91

$

4,362,360

321,250

4,683,610

187,211

4,870,821

-     

-     

  

(436.236)

05/16/01

        
            

20

Kane &

          
 

Kendall

400.129

01/31/92

 

1,692,623

101,318

1,793,941

3,218,693

1,250,469

3,762,165

-     

 

 

(21.138)

06/30/99

        
            

21

Kendall

15.013

05/26/92

 

250,000

23,844

273,844

35,798

18,798

290,844

-     

 

 

(1.000)

03/16/99

        
            

22

Kendall

391.959

10/30/92

 

3,870,000

283,186

4,153,186

1,767,592

5,556,530

364,248

-     

 

 

(10.000)

01/06/94

        
 

 

(5.538)

01/05/96

        
 

 

(2.400)

07/27/99

        
  

(73.395)

Var 2001

        
  

(136.000)

08/14/02

        
  

(34.1400)

05/27/03

        
  

(101.4900)

01/09/04

        
            

23

Kendall

133.2074

10/30/92

 

3,231,942

251,373

3,483,315

4,665,998

8,149,313

-     

-     

 

 

(11.525)

07/16/93

        
 

 

(44.070)

Var 1995

        
 

 

(8.250)

Var 1996

        
 

 

(2.610)

Var 1997

        
 

 

(10.6624)

Var 1998

        
 

 

(5.8752)

Var 1999

        
  

(49.0120)

Var 2000

        
  

(.2028)

Var 2001

        
  

(1.0000)

Var 2002

        
            

23A(a)

Kendall

.2676

10/30/92

 

170,072

12,641

182,713

-     

182,713

-     

-     

 

 

(.2676)

03/16/93

        




-32-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)

(4) Investment Properties (continued)



 

Gross Acres

Purchase/

Initial Costs

Costs Capitalized

Costs of

Total Remaining Costs of

Current Year Gain

Parcel

Illinois

Purchased

Sales

 

Original

Acquisition

Total

Subsequent to

Property

Parcels at

on Sale

#

County

(Sold)

Date

 

Costs

Costs

Costs

Acquisition

Sold

12/31/05

Recognized

            

24

Kendall

3.908

01/21/93

$

645,000

56,316

701,316

30,436

731,752

-     

-     

  

(3.908)

04/16/01

        
            

24A(b)

Kendall

.406

01/21/93

 

155,000

13,533

168,533

-     

168,533

-     

-     

  

(.406)

04/16/01

        
            

25

Kendall

656.687

01/28/93

 

1,625,000

82,536

1,707,536

22,673

1,730,209

-     

-     

 

 

(656.687)

10/31/95

        
            

26 (d)

Kane

89.511

03/10/93

 

1,181,555

89,312

1,270,867

5,135,895

6,406,762

-     

-    

 

 

(2.108)

Var 1999

        
  

(34.255)

Var 2000

        
  

(7.800)

Var 2001

        
  

(29.1200)

Var 2002

        
  

(11.3100)

Var 2003

        
  

(4.9180)

01/28/04

        
            

27

Kendall

83.525

03/11/93

 

984,474

54,846

1,039,320

2,052,730

-     

3,092,050

-     

            

28 (c)

Kendall

50.0000

09/16/02

 

661,460

22,976

684,436

147,108

-     

831,544

-     

            
    

$

38,810,025

2,504,276

41,314,301

33,809,650

53,135,315

21,988,636

12,271,340




-33-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)


(4) Investment Properties (continued)


(a)

Included in the purchase of Parcel 23 was a newly constructed 2,500 square foot house. The house was sold in March 1993.


(b)

Included in the purchase of Parcel 24 was a 2,400 square foot office building. The building was sold in 2001.


(c)

On September 16, 2002, the Partnership completed a tax-deferred exchange of Parcels 9 and 12 for 50 acres in Kendall County (Parcel 28).


(d)

Reconciliation of investment properties owned:


  

2005

2004

    

Balance at January 1,

$

19,821,907 

21,019,622 

Additions during year

 

8,300,086 

5,375,640 

Sales during year

 

(6,133,357) 

(6,573,355)

    

Balance at December 31,

$

21,988,636 

19,821,907 


(e)

The aggregate cost of investment properties owned at December 31, 2005 for Federal income tax purposes was approximately $20,600,000 (unaudited).



(5) Rental Income


The Partnership has determined that all leases relating to the farm parcels are operating leases. Accordingly, rental income is reported when earned.


As of December 31, 2005, the Partnership had leases of generally one year in duration, for approximately 500 acres of the approximately 1,276 acres owned.



-34-


INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)



(6) Mortgage Loans Receivable


Mortgage loans receivable are the result of sales of Parcels, in whole or in part.  The Partnership has recorded a deferred gain on these sales.  The deferred gain will be recognized over the life of the related mortgage loan receivable as principal payments are received. The fair market value of the mortgage loans receivable was approximately $12,400,000 and $13,750,000, at December 31, 2005 and 2004, respectively.


      

Accrued

 
    

Principal

Principal

Interest

Deferred

    

Balance

Balance

Receivable

Gain

Parcel

Maturity

Interest Rate

 

12/31/05

12/31/04

12/31/05

12/31/05

        

5 & 19

07/01/11

6.00%

$

11,705,015

12,677,979

163,203

6,841,470

        

15

07/31/05

9.00%

 

85,992

1,208,378

336,712

-    

        
    

11,791,007

13,886,357

499,915

6,841,470

        

Less allowance for doubtful accounts

 

85,992

1,208,378

336,712

-    

        
   

$

11,705,015

12,677,979

163,203

6,841,470



On May 16, 2001, the Partnership sold 189 acres of Parcel 5 and 436 acres of Parcel 19 for $17,500,000 and recorded deferred gain of $10,203,634.  The Partnership received a deferred down payment note in the amount of $1,500,000, due December 31, 2001.  The note had an interest rate of 6%, however the note provided for the interest to be waived if the principal was paid in full by December 1, 2001.  The Partnership received payment of the deferred down payment note on December 1, 2001 and recognized $875,923 of deferred gain.  The Partnership also received an installment note in the amount of $16,000,000 at the time of closing.  The installment note matures July 1, 2011 and has an interest rate of 6%.  The remaining deferred gain will be recognized as payments are received.


The General Partner determined that the maximum value of Parcel 15 could be realized if the parcel was developed and sold as individual lots. However, if we had followed that plan, there is a possibility that it could have increased income taxes. Therefore, the Partnership sold the parcel to a third party developer whereby 100% of the sales price was represented by a note receivable from the buyer. This transaction was deemed an installment sale. After the sale, the developer, through a limited liability company or LLC, secured third party financing to cover the deferred down payment owed to us as well as provide proceeds to begin the development of the project. This sale was structured so that the deferred down payment received at the time of the sale was sufficient to provide a distribution to our Limited Partners that equated to the parcel capital allocated to the parcel plus approximately a 6% return per annum on the capital invested in the parcel (parcel capital) through the date of the distribution.



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INLAND LAND APPRECIATION FUND II, L.P.
(a limited partnership)

Notes to Financial Statements
(continued)



The velocity of the developer's individual home sales was slower than was originally projected and consequently, the developer's carrying costs were higher.  As a result of the slower lot sales, the net sale proceeds available to the Partnership were lower than anticipated. As of December 31, 2005, 2004 and 2003, the Partnership has recorded an allowance for doubtful accounts of $85,992, $1,208,378 and $1,208,378, respectively, relating to the mortgage receivable and $336,712, relating to the accrued interest relating to the sale of Parcel 15 and has written off the related deferred gain of $747,454.  During 2005, the Partnership received principal payments of $1,122,386 for a portion of the mortgage which was previously written off.  The Partnership recorded a provision for the reversal of loan losses and bad debt expense in the amount of $1,122,386.


The General Partner guaranteed the third party development loans owed by the limited liability company. In reviewing the development’s financial situation, our General Partner determined that it would be in its best interest to have an affiliate acquire the interest in the LLC. The General Partner and its affiliates concluded that they could better control the continuing costs to complete the development and would therefore have the best opportunity to limit their exposure under the guarantee agreements and possibly recover a portion of the amount owed to the Partnership. An affiliate of our General Partner acquired the interests in the LLC and paid off the debt under its guarantee of the LLC loans. The affiliate of the General Partner will complete the development and sale of this project.



 (7) Subsequent Events


Since January 1, 2006, we have sold 15 additional lots of parcel 18 for approximately $910,000 and recorded a gain of approximately $70,000.




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Item 9.  Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure


There were no disagreements on accounting or financial disclosure matters during 2005.



Item 9(a)  Controls and Procedures


The general partner conducted, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report.  Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information that is required to be disclosed in the periodic reports that we must file with the Securities and Exchange Commission.


There were no significant changes in our internal controls over financial reporting during the fourth quarter of 2005 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


Item 9 (b).  Other Information


Not applicable.





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PART III



Item 10.  Directors and Executive Officers of the Registrant


Our general partner, Inland Real Estate Investment Corporation, was organized in 1984 for the purpose of acting as general partner of limited partnerships formed to acquire, own and operate real properties. The general partner is a wholly-owned subsidiary of The Inland Group, Inc.     The general partner has responsibility for all aspects of our operations.


During 2005, the board of directors of our general partner formalized the audit committee. The Audit Committee is not independent of our general partner and consists of Catherine L. Lynch, committee chair and financial expert, Brenda G. Gujral, Roberta S. Matlin and Gary Pechter. The audit committee is responsible for engaging our independent registered public accounting firm, reviewing the plans and results of the audit engagement with our independent registered public accounting firm and consulting with the independent registered public accounting firm regarding the adequacy of our internal accounting controls.


During 2005, our general partner adopted a Code of Ethics that applies to all of its employees.



Officers and Directors


The officers, directors, and key employees of IREIC and its affiliates that are likely to provide services to the Partnership are as follows.  Ages are listed as of January 1, 2006.



Functional Title


Daniel L. Goodwin

Director

Robert H. Baum

Director, General Counsel of IREIC

Robert D. Parks

Chairman

Brenda G. Gujral

Director, President and principal executive officer of the Partnership

Catherine L. Lynch

Treasurer

Roberta S. Matlin

Director, Senior Vice President-Investments

Guadalupe Griffin

Vice President-Asset Management

Kelly Tucek

Vice President-Partnership Accounting and principal financial officer of the Partnership

Gary E. Pechter

Senior Vice President, The Inland Group,  Counsel to the Partnership



 



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DANIEL L. GOODWIN (age 62) has been with Inland since 1968 and is a founding and controlling stockholder of, and the chairman of the board and chief executive officer of, The Inland Group. Mr. Goodwin also serves as a director or officer of entities wholly owned or controlled by The Inland Group. In addition, Mr. Goodwin is the chairman of the board of Inland Real Estate Corporation, chairman of the board and chief executive officer of Inland Mortgage Investment Corporation and chairman of the board and chief executive officer of Inland Bancorp Holding Company, a bank holding company. Mr. Goodwin also serves on the management committee of Inland Real Estate Corporation.


Mr. Goodwin is a member of the National Association of Realtors, the Illinois Association of Realtors and the Northern Illinois Commercial Association of Realtors.  He is also the author of a nationally recognized real estate reference book for the management of residential properties.  Mr. Goodwin serves on the Board of the Illinois State Affordable Housing Trust Fund. He has served as an advisor for the Office of Housing Coordination Services of the State of Illinois, and as a member of the Seniors Housing Committee of the National Multi-Housing Council. He has served as Chairman of the DuPage County Affordable Housing Task Force and presently serves as chairman of New Directions Affordable Housing Corporation.


Mr. Goodwin obtained his bachelor's and master's degrees from Illinois state universities. Following graduation, he taught for five years in the Chicago public schools system. More recently, Mr. Goodwin has served as a member of the board of governors of Illinois State Colleges and Universities.  He is vice chairman of the board of trustees of Benedictine University, vice chairman of the board of trustees of Springfield College and chairman of the board of Northeastern Illinois University.


ROBERT H. BAUM (age 62) has been with Inland since 1968 and is one of the founding stockholders. Mr. Baum is vice chairman and executive vice president and general counsel of The Inland Group. In his capacity as general counsel, Mr. Baum is responsible for the supervision of the legal activities of The Inland Group and its affiliates. This responsibility includes the supervision of The Inland Law Department and serving as liaison with outside counsel. Mr. Baum has served as a member of the North American Securities Administrators Association Real Estate Advisory Committee and as a member of the Securities Advisory Committee to the Secretary of State of Illinois. He is a member of the American Corporation Counsel Association and has also been a guest lecturer for the Illinois State Bar Association. Mr. Baum has been admitted to practice before the Supreme Court of the United States, as well as the bars of several federal courts of appeals and federal district courts and the State of Illinois. He is also a licensed real estate broker. He has served as a director of American National Bank of DuPage and currently serves as a director of Inland Bancorp Holding Company and of Westbank. Mr. Baum also is a member of the Governing Council of Wellness House, a charitable organization that exists to improve the quality of life for people whose lives have been affected by cancer and its treatment by providing psychosocial and educational support for cancer patients, their families and friends.


ROBERT D. PARKS  (age 62) has been with Inland since 1968 and is one of the founding stockholders. He also is chairman of Inland Real Estate Investment Corporation, director of Inland Securities Corporation and a director of Inland Investment Advisors, Inc.  Mr. Parks is president, chief executive officer, and a director of Inland Real Estate Corporation and serves on its management committee.  He is also chairman and an affiliated director of Inland Western Retail Real Estate Trust, Inc. He is chairman and an affiliated director of Inland American Real Estate Trust, Inc. Mr. Parks is responsible for the ongoing administration of existing investment programs, corporate budgeting and administration for Inland Real Estate Investment Corporation. He oversees and coordinates the marketing of all investments and investor relations.


Prior to joining Inland, Mr. Parks was a school teacher in Chicago's public schools. He received his B.A. Degree from Northeastern Illinois University and his M.A. Degree from the University of Chicago. He is a registered Direct Participation Program Limited Principal with the National Association of Securities Dealers, Inc. He is also a member of the Real Estate Investment Association, the Financial Planning



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Association, the Foundation for Financial Planning, as well as a member of the National Association of Real Estate Investment Trusts.



BRENDA G. GUJRAL (age 63) is president, chief operating officer and a director of Inland Real Estate Investment Corporation (IREIC). She is also president, chief operating officer and a director of Inland Securities Corporation (ISC), a member firm of the National Association of Securities Dealers (NASD). Mrs. Gujral is also a director of Inland Investment Advisors, Inc., an investment advisor. She is also Chief Executive Officer and an affiliated director of Inland Western Retail Real Estate Trust, Inc., chairman of the board of Inland Real Estate Exchange Corporation and President and chief operating officer and an affiliated director of Inland American Retail Real Estate Trust, Inc.


Mrs. Gujral has overall responsibility for the operations of IREIC, including the distribution of checks to over 70,000 investors, review of periodic communications to those investors, the filing of quarterly and annual reports for Inland’s publicly registered investment programs with the Securities and Exchange Commission, compliance with other SEC and NASD securities regulations both for IREIC and ISC, review of asset management activities, and marketing and communications with the independent broker/dealer firms selling Inland’s current and prior programs.  Mrs. Gujral works with internal and outside legal counsel in structuring and registering the prospectuses for IREIC’s investment programs and in connection with the preparation of its offering documents and registering the related securities with the Securities and Exchange Commission and state securities commissions.


Mrs. Gujral has been with the Inland organization for more than 20 years, becoming an officer in 1982. Prior to joining Inland, she worked for the Land Use Planning Commission establishing an office in Portland, Oregon, to implement land use legislation for that state.


She is a graduate of California State University.  She holds Series 7, 22, 39 and 63 licenses withthe NASD.  Mrs. Gujral is a member of the National Association of Real Estate Investment Trusts (NAREIT) and the National Association for Female Executives.



CATHERINE L. LYNCH (age 47) joined Inland in 1989 and is the treasurer of Inland Real Estate Investment Corporation. Ms. Lynch is responsible for managing the corporate accounting department. Prior to joining Inland, Ms. Lynch worked in the field of public accounting for KPMG LLP since 1980. She received her B.S. Degree in Accounting from Illinois State University. Ms. Lynch is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. She is registered with the National Association of Securities Dealers as a Financial Operations Principal.



ROBERTA S. MATLIN (age 61) joined Inland Real Estate Investment Corporation (IREIC) in 1984 as director of investor administration and currently serves as senior vice president of IREIC, directing the day-to-day internal operations.  Ms. Matlin is a director of IREIC and president of Inland Investment Advisors, Inc., and Intervest Southern Real Estate Corporation, and a director and vice president of Inland Securities Corporation. She is the president of Inland American Advisory Services, Inc. Since 2003, she has been vice president of administration of Inland Western Retail Real Estate Trust, Inc., and since 2004, vice president of administration of Inland American Real Estate Trust, Inc.  She was vice president of administration of Inland Real Corporation from 1995 until 2000 and of Inland Retail Real Estate Trust, Inc from 1998 until 2004. From June 2001 until April 2004, she was a trustee and executive vice president of Inland Mutual Fund Trust. Prior to joining Inland, she worked for the Chicago Region of the Social Security Administration of the Untied States Department of Health and Human Services.  Ms. Matlin is a graduate of the University of Illinois. She holds Series 7, 22, 24, 39, 63 and 65 licenses with the National Association of Securities Dealers.



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GUADALUPE GRIFFIN (age 41) joined Inland in 1994. Ms. Griffin serves as vice president of Inland Real Estate Investment Corporation and assistant vice president of Inland Midwest Investment Corporation. Ms. Griffin is responsible for the asset management and day-to-day operations of the public and private partnerships which include the development of operating and disposition strategies for the partnerships and investor communications. Prior to joining Inland, Ms. Griffin was employed by the University of Illinois at Chicago Center for Urban Educational Research and Development as Assistant to the Director of the Nation of Tomorrow Program; a privately funded multi-million dollar program, which provided educational and empowerment services to youths and their families in four inner-city schools. Ms. Griffin holds an Illinois Real Estate Sales License.



KELLY TUCEK (age 43) joined Inland in 1989 and is a vice president of Inland Real Estate Investment Corporation and beginning in 2006, vice president, controller of Inland Western Retail Real Estate Advisory Services, Inc.  As of August 1996, Ms. Tucek is responsible for the investment accounting department which includes all public partnership accounting functions along with quarterly and annual SEC filings. Prior to joining Inland, Ms. Tucek was on the audit staff of Coopers and Lybrand since 1984. She received her B.A. Degree in Accounting and Computer Science from North Central College.



GARY E. PECHTER (age 54) joined Inland in 1985 and is a Senior Vice President and Assistant General Counsel of The Inland Real Estate Group, Inc., and a member of the Audit Committee for all public partnerships sponsored by IREIC. In his capacity as their counsel, Mr. Pechter has been admitted to practice law in the State of Illinois and the federal district court.  He is also a licensed real estate broker. Mr. Pechter received his undergraduate degree from the University of Illinois and his law degree from John Marshall Law School.



Section 16(a) Beneficial Ownership Reporting Compliance


Section 16(a) of the Exchange Act requires directors, executive officers and beneficial owners of more than ten percent of our partnership units to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission and to provide us with copies of such reports. Based solely on a review of the copies provided to us and written representations from such reporting persons, we believe that all applicable Section 16(a) filing requirements have been met for such reporting persons.






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Item 11. Executive Compensation


Our general partner is entitled to receive a share of cash distributions of net sale proceeds based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.


Our partnership agreement defines the allocation of profits and losses, and available cash. If and to the extent that real estate taxes and insurance payable with respect to our land during a given year exceed our revenues, our general partner will make a supplemental capital contribution of such amount to us to ensure that we have sufficient funds to make such payments.


Profits and losses from operations (other than capital transactions) will be allocated 99% to the limited partners and 1% to the general partner. The net gain from sales of our properties is first allocated among the partners in proportion to the negative balances, if any, in their respective capital accounts. Thereafter, except as provided below, net gain is allocated to the general partner in an amount equal to the proceeds distributed to the general partner from such sale and the balance of any net gain is allocated to the limited partners. If the amount of net gain realized from a sale is less than the amount of cash distributed to the general partner from such sale, we will allocate income or gain to the general partner in an amount equal to the excess of the cash distributed to the general partner with respect to such sale as quickly as permitted by law.  Any net loss from a sale will be allocated to the limited partners.


Distributions of net sale proceeds will be allocated between the general partner and the limited partners based upon both an aggregate overall return to the limited partners and a separate return with respect to each parcel of land purchased by us.


As a general rule, net sale proceeds will be distributed 90% to the limited partners and 10% to the general partner until the limited partners have received from net sale proceeds (i) a return of their original capital plus (ii) a noncompounded cumulative preferred return of 15% of their invested capital. However, with respect to each parcel of land, the general partner's 10% share will be subordinated until the limited partners receive a return of the original capital attributed to such parcel ("parcel capital") plus a 6% per annum noncompounded cumulative preferred return thereon.


After the amounts described in items  (i) and  (ii) above and any previously subordinated distributions to the general partner have been paid, and the amount of any supplemental capital contributions have been repaid to the general partner, subsequent distributions shall be paid 75% to the limited partners and 25% to the general partner without considering parcel capital. If, after all net sale proceeds have been distributed, the general partner has received more than 25% of all net sale proceeds (exclusive of distributions made to the limited partners to return their original capital), the general partner shall contribute to us for distribution to the limited partners an amount equal to such excess.


Any distributions from net sales proceeds at a time when invested capital is greater than zero shall be deemed applied first to reduction of such invested capital before application to payment of any deficiency in the 15% cumulative preferred return.


We are permitted to engage in various transactions involving affiliates of our general, as described below.


Our general partner and its affiliates may be reimbursed for its expenses or out-of-pocket costs relating to our administration. For the year ended December 31, 2005, such costs, included in general and administrative expenses to affiliates and professional services to affiliates, were $63,327, of which $8,511 was unpaid as of December 31, 2005.




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An affiliate of our general partner performed marketing and advertising services for us and was reimbursed  (as set forth under terms of the partnership agreement) for direct costs. For the year ended December 31, 2005, such costs were $35,818, all of which was paid at December 31, 2005.


An affiliate of our general partner performed property upgrades, rezoning, annexation and other activities to prepare our land investments for sale and was reimbursed (as set forth under terms of the partnership agreement) for salaries and direct costs. The affiliate did not recognize a profit on any project. For the year ended December 31, 2005, we incurred $236,691 of such costs, of which $62,716 was unpaid as of December 31, 2005, and which are included in investment properties.





Item 12. Security Ownership of Certain Beneficial Owners and Management


(a)

No person or group is known by us to own beneficially more than 5% of the outstanding units of our partnership.


(b)

The officers and directors of our general partner own as a group the following units of our partnership:


 

Amount and Nature

 
 

of Beneficial

Percent

Title of Class

Ownership

of Class

   

Limited partnership units

234 Units directly

Less than 1/2%


No officer or director of our general partner possesses a right to acquire beneficial ownership of units of our partnership.


All of the outstanding shares of our general partner are owned by an affiliate or its officers and directors as set forth above in Item 10.


(c)

There exists no arrangement, known us, the operation of which may, at a subsequent date, result in a change in our control.



Item 13. Certain Relationships and Related Transactions


There were no significant transactions or business relationships with the general partner, affiliates or their management other than those described in Items 10 and 11 above. Reference is made to Note 3 of the Notes to Financial Statements (Item 8 of this annual report) for information regarding related party transactions.




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Item 14:  Principal Accountant Fees and Services


Fees.  Aggregate fees for professional services rendered by our independent registered public account firm were as follows:


  

Years ended December 31,

  

2005

2004

    

Audit fees for professional services rendered for the audit of our   annual financial statements and quarterly reviews of our   financial statements.

$

35,801

42,000

Tax fees for professional services rendered for tax return   preparation and review of our K-1s.

 

5,200

9,490

    

Total fees

$

41,001

51,490







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PART IV


Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K


(a)

The financial statements listed in the index at page 17 of this annual report are filed as part of this annual report.


(b)

Exhibits. The following exhibits are incorporated herein by reference:


3 Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership, included as Exhibits A and B of the Prospectus dated October 25, 1989, as amended, are incorporated herein by reference thereto.


31.1 Rule 13a-14(a)/15d-14(a) Certification by principal executive officer

31.2 Rule 13a-14(a)/15d-14(a) Certification by principal financial officer


32.1 Section 1350 Certification by principal executive officer

32.2 Section 1350 Certification by principal financial officer


(c)

Financial Statement Schedules:


All schedules have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.


(d)

Reports on Form 8-K.


None.




No annual report or proxy material for the year 2005 has been sent to our limited partners. An annual report will be sent to the limited partners subsequent to this filing and we will furnish copies of such report to the Commission when it is sent to the limited partners.






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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.


 

INLAND LAND APPRECIATION FUND II, L.P.

 

Inland Real Estate Investment Corporation

 

General Partner

  

/s/

Brenda G. Gujral

  

By:

Brenda G. Gujral

 

President and Director

Date:

March 23, 2005


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:


By:

Inland Real Estate Investment Corporation

 

General Partner

  

/s/

Brenda G. Gujral

  

By:

Brenda G. Gujral

 

President and Director

Date:

March 23, 2005

  

/s/

Guadalupe Griffin

  

By:

Guadalupe Griffin

 

Vice President

Date:

March 23, 2005

  

/s/

Kelly Tucek

  

By:

Kelly Tucek

 

Vice President

Date:

March 23, 2005

  

/s/

Robert D. Parks

  

By:

Robert D. Parks

 

Chairman

Date:

March 23, 2005

  

/s/

Daniel L. Goodwin

  

By:

Daniel L. Goodwin

 

Director

Date:

March 23, 2005

  




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