Educational Housing Services, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2015 and 2014

Transcription

1 Educational Housing Services, Inc. and Subsidiaries Consolidated Financial Statements

2 Index Page(s) Independent Auditor s Report Consolidated Financial Statements Statements of Financial Position... 3 Statements of Activities... 4 Statements of Cash Flows... 5 Notes to Financial Statements

3 Independent Auditor s Report The Board of Directors Educational Housing Services, Inc. and Subsidiaries We have audited the accompanying consolidated financial statements of Educational Housing Services, Inc. and Subsidiaries (the Organization ), which comprise the consolidated statements of financial position as of, and the related consolidated statements of activities and cash flows for the years then ended. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We did not audit certain components of EHS Towers LLC, a wholly owned subsidiary. These components comprise total assets of $792,133 and $1,316,760 as of, and total revenues of $8,234,507 and $7,802,154 for the years then ended, respectively. Those components were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EHS Towers LLC, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Organization s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP, PricewaterhouseCoopers Center, 300 Madison Avenue, New York, NY T: (646) , F: (813) ,

4 Opinion In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Educational Housing Services, Inc. and Subsidiaries as of, and changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. New York, New York June 17,

5 Consolidated Statements of Financial Position Assets Current assets Cash and cash equivalents $ 13,475,268 $ 9,528,775 Cash and cash equivalents restricted funds CUNY project (Note 10) 198, ,603 Cash and cash equivalents restricted funds OAG settlement(note 10) 987,266 3,504,793 Accounts receivable, net (Note 2) 1,220,072 1,000,090 Other current assets 341, ,621 Cash, cash equivalents, and investments held by bond trustees, current portion (Note 6) 2,995,094 2,957,219 Total current assets 19,217,692 18,090,101 Security deposits and other assets 3,982,654 3,800,510 Cash, cash equivalents, and investments held by bond trustees, net of current portion (Note 6) 7,212,870 6,157,670 Property and equipment, net (Note 3) 50,448,140 51,722,234 Total assets $ 80,861,356 $ 79,770,515 Liabilities and Net Assets Current liabilities Current portion of notes payable (Note 4) $ 588,160 $ 573,397 Accounts payable and accrued expenses 1,014,860 1,633,809 Accrued interest tax-exempt bonds 1,435,094 1,472,219 Other liabilities, current portion 77, ,659 Tax-exempt bonds payable, current portion (Note 6) 1,758,508 1,683,508 Deferred liability OAG settlement, current portion (Note 7) 979,247 3,415,984 Deferred license fee income, current portion 7,413,689 5,929,527 Deferred revenue renewal option to licensee, current portion (Note 8) 66, ,292 Deferred rent expense, current portion 791,243 1,066,744 Total current liabilities 14,124,348 16,083,139 Long-term liabilities Notes payable, net of current portion (Note 4) 145, ,605 Deferred license fee income, net of current portion 1,525,730 1,838,616 Deferred revenue renewal option to licensee, net of current portion (Note 8) - 66,375 Deferred rent expense, net of current portion 4,272,050 4,947,710 Other liabilities, net of current portion 25,000 66,667 Deferred compensation payable 13,283 - Tax-exempt bonds payable, net of current portion (Note 6) 53,802,518 55,452,248 Total liabilities 73,908,374 79,188,360 Net assets unrestricted 6,952, ,155 Total liabilities and net assets $ 80,861,356 $ 79,770,515 The accompanying notes are an integral part of these consolidated financial statements. 3

6 Consolidated Statements of Activities Years Ended Revenues Program license fees (Note 9) $ 68,018,287 $ 66,665,954 Application fees 533, ,230 Recovery of OAG settlement, net (Note 7) 1,974,689 - Other income 843, ,122 Total revenue 71,370,092 67,906,306 Expenses Program services 57,620,681 56,367,891 Administration 7,378,584 6,685,668 Total expenses 64,999,265 63,053,559 Changes in Net Assets Excess of revenues over expenses - unrestricted 6,370,827 4,852,747 Net assets (deficit) - unrestricted (Note 11) Beginning of year 582,155 (4,270,592) End of year $ 6,952,982 $ 582,155 The accompanying notes are an integral part of these consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years Ended Cash flows from operating activities Change in net assets $ 6,370,827 $ 4,852,747 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation expense 2,966,203 2,832,362 Amortization of bond issue costs 108, ,778 Amortization of bond premium CUNY bonds (198,508) (198,508) Amortization and change in discount on note payable 25,387 31,768 Deferred rent expense (951,161) (671,850) Recovery of OAG settlement, net (1,974,689) - Changes in operating assets and liabilities Decrease (increase) in CUNY restricted funds 324,186 (454,616) Decrease in restricted funds OAG settlement 2,517, ,575 Decrease in other receivables - OAG settlement - 204,703 (Increase) decrease in accounts receivable (219,982) 640,525 Decrease (increase) in other current assets 235,046 (19,211) Increase in security deposits and other assets (182,144) (44,089) Decrease (increase) in accounts payable and accrued expenses (618,949) 451,640 Decrease in deferred liability - OAG settlement (462,048) (411,810) Decrease in accrued interest tax-exempt bonds (37,125) (35,250) Decrease in other liabilities (113,151) (71,783) Increase in deferred compensation payable 13,283 - Increase in deferred license fee income 1,171, ,511 Decrease in deferred revenue renewal option to licensee (159,295) (159,288) Net cash provided by operating activities 8,815,461 7,622,204 Cash flows from investing activities Purchases of property and equipment (1,692,109) (1,606,589) Net cash used in investing activities (1,692,109) (1,606,589) Cash flows from financing activities Principal payments on notes payable (598,784) (658,273) Principal payments on tax-exempt bonds (1,485,000) (1,410,000) Increase in cash, cash equivalents, and investments held by bond trustees (1,093,075) (1,232,385) Net cash used in financing activities (3,176,859) (3,300,658) Net increase in cash and cash equivalents 3,946,493 2,714,957 Cash and cash equivalents Beginning of year 9,528,775 6,813,818 End of year $ 13,475,268 $ 9,528,775 Supplemental disclosure Cash paid for interest $ 2,907,313 $ 3,049,323 The accompanying notes are an integral part of these consolidated financial statements. 5

8 1. Nature of Organization The accompanying consolidated financial statements include the accounts of Educational Housing Services, Inc. (EHSI) and its wholly owned subsidiaries, EHS-I Inc., EHS-II Inc., EHS-III Inc., EHS Clark Street Residence LLC, EHS VI, LLC, EHS VII, LLC and EHS Towers LLC. Collectively, these are referred to as the Organization. Intercompany transactions and balances have been eliminated in consolidation. EHSI is a New York not-for-profit organization incorporated in 1987 under Section 501(c)(3) of the Internal Revenue Code (IRC). EHS-I Inc., EHS-II Inc., and EHS-III Inc. were all incorporated in New York in 2003 and began operations in August Each of EHS-I Inc., EHS-II Inc., and EHS-III Inc. has been recognized by the Internal Revenue Service (IRS) as Section 501(c)(2) organizations. EHS Clark Street Residence LLC, EHS VI, LLC, EHS VII, LLC and EHS Towers LLC are tax-exempt Delaware limited liability companies formed in 2005, 2006, 2007 and 2008, respectively, with EHSI as the sole member of each. As determined by the IRS, EHSI is exempt from federal income taxes under Section 501(c)(3) of the IRC and a similar provision of the New York State income tax laws. For tax reporting purposes, EHSI files consolidated federal and state informational tax returns, which include the results of operations of EHS Clark Street Residence LLC, EHS VI, LLC, EHS VII, LLC and EHS Towers LLC. EHS-I Inc., EHS-II Inc., and EHS-III Inc. separately file federal and state informational tax returns. The Organization s principal operating activities are the marketing, development, and management of residence halls for college and university students. The Organization provides a full range of related services to those colleges and universities, including financing, designing, and developing new facilities, as well as renovating older facilities. To date, the Organization s main emphasis has been the redevelopment and repositioning of existing facilities within New York City into dormitory residence halls. Typically, the Organization enters into long-term leases with the landlords of these existing properties for either the entire building or a substantial portion thereof. In connection with these long-term leases, ranging from 4 to 15 years with extension options for years, the Organization renovates and furnishes the buildings according to the specific requirements of the intended student residents. A typical unit includes a bed, a desk, a wardrobe, a bureau and private bathroom, as well as telephone and internet service, air conditioning, and cable television. The building usually includes a student lounge, laundry facility, access to a health and wellness facility, vending areas and 24 hour security. In 1998, EHSI received legislative approval as an issuer of tax-exempt bonds through the Dormitory Authority of the State of New York (DASNY). This approval has been extended through 2018, which allows EHSI to offer tax-exempt bonds, on a project-by-project basis, for those projects approved by DASNY. This financing is available for both renovations and new construction. In 2005, EHSI exercised its legislative approval, issuing $63,050,000 of Dormitory Authority Series 2005 Insured Revenue Bonds for a Student Housing Project for residency by The City University of New York (CUNY) students in New York, New York (Note 6). Construction of the project began in April 2005 and was completed in July This facility houses approximately six hundred (600) CUNY students and faculty and had initial move-ins in August

9 2. Summary of Significant Accounting Policies The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Other significant accounting policies are described below. Basis of Presentation Net assets and revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the Organization and the changes therein are classified and reported as unrestricted net assets, as the net assets are not subject to donor-imposed stipulations. Revenues are reported as increases in unrestricted assets unless they are limited by donorimposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Cash and Cash Equivalents Cash and cash equivalents are recorded at fair value and include depository accounts, checking accounts, and liquid investments. The Organization considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Accounts Receivable Receivables due from licensees are recorded at net realizable value, net of allowance for doubtful accounts. The allowance is estimated from a historical performance and projection of trends. No interest is charged on past due balances and balances greater than 90 days past due are reviewed by management for collectability. The allowance for doubtful accounts was $185,524 and $230,269 at, respectively. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred; capital improvements and betterments are capitalized. Depreciation is provided for consolidated financial statement purposes under the straight-line method over the estimated useful lives of fixed assets as follows: Years Student residence Furniture and fixtures 5-7 Computers and office equipment 3-5 Appliances 3-5 Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the related lease. The Organization reviews long-lived assets to determine whether there has been any permanent impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, the Organization would recognize an impairment loss. No impairment losses were required to be recognized for the years ended. 7

10 Deferred License Fees In connection with the licensing of rooms to individual students, the Organization collects the full semester s license fees in advance of the move-in date. When contracting with schools and universities, in most cases, the Organization collects the first and last month s license fees in advance of the move-in date. These advance payments are initially classified as deferred license fee income and are subsequently recognized as income when earned based on the underlying license agreement. Deferred license fee income also includes other payments for miscellaneous charges collected in advance. Deferred Rent Expense The Organization s operating leases contain annual escalations in base rent, as well as escalations for certain operating expenses and real estate taxes. In accordance with U.S. GAAP, rent expense is recognized on a straight-line basis, including future fixed escalations of rent, over the life of the lease, rather than in accordance with lease payments. Deferred rent expense represents the adjustment to future rents as a result of using the straight-line method. Revenue Recognition Revenues from student housing activities are recognized when earned in Program license fees in the consolidated statement of activities according to the license agreements. Application fee revenues are nonrefundable and recognized when received. Advertising Advertising costs are expensed as incurred. Advertising costs charged in operations for the years ended were $131,631 and $85,136, respectively. Functional Expense Allocation The costs of providing the various programs and other activities have been reported on a functional basis. Accordingly, certain costs have been allocated on either an activity costing or on a direct basis among the program and administration services. Bond Issue Costs Costs incurred in connection with the tax exempt bonds of $3,263,351 were capitalized and are being amortized over 30 years, the term of the bonds. Amortization expense totaled $108,778 for both 2015 and Accumulated amortization costs amounted to $1,164,832 and $1,056,054 at, respectively. See Note 6. Income Taxes The Organization is tax-exempt under the relevant sections of the Internal Revenue Code as noted in Note 1. Therefore, no provision for income taxes has been included in the Organization s consolidated financial statements. U.S. GAAP requires management to evaluate tax positions taken by the Organization and recognize a tax liability (or asset) if the organization has taken an uncertain position that more likely than not be sustained upon examination by the relevant tax authorities. Management has analyzed the tax positions taken by the Organization, and has concluded that, as of December 31, 2015, there are no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements. Management believes that its tax-exempt status would be sustained upon examination. The Organization files informational tax returns in the United States Federal and New York State jurisdictions. The Organization is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before

11 Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include estimated useful lives of property and equipment and allowance for doubtful accounts. Fair Value Measurement The Organization follows the provisions of the fair value measurements standard. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Valuations based on quoted prices in active markets for identical assets or liabilities that the Organization has the ability to access. Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Fair Value of Financial Instruments The carrying amounts of the Organization s financial instruments (including cash equivalents and liquid investments) approximate fair value due to the short-term nature of these instruments. The investments held by the bond trustee include, $2.5 million invested in a money market fund backed by U.S. Treasury instruments and $5.4 million invested in U.S. Treasury notes/bills. These investments are categorized as Level 2 investments in the fair value hierarchy. New Authoritative Pronouncements In May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs - Contracts with Customers (Subtopic ). This standard implements a single framework for recognition of all revenue earned from customers. This framework ensures that entities appropriately reflect the consideration to which they expect to be entitled in exchange for goods and services by allocating transaction price to identified performance obligations and recognizing revenue as performance obligations are satisfied. Qualitative and quantitative disclosures are required to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For nonpublic entities, the standard is effective for fiscal years beginning after December 15, The Organization is evaluating the impact this will have on the consolidated financial statements beginning in fiscal year In April 2015, the FASB issued ASU No (Subtopic ) Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. This standard requires all costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The standard is effective for fiscal years beginning after December 15, 2016 with early adoption permissible. The Organization elected to early adopt this standard and the updated presentation is reflected in the consolidated balance sheets as of December 31, 2015 with 9

12 retrospective application for In January 2016, the FASB issued ASU , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Certain financial institutions and companies with large equity investment portfolios that are not currently being measured at fair value through the income statement are most affected by the new standard. The new standard also allows entities that are not public business entities and do not carry financial instruments at fair value in the statement of financial position to no longer be required to disclose the fair value and significant assumptions used to estimate the fair value of such financial instruments. The standard is effective for fiscal years beginning after December 15, 2017 for public business entities. All other entities and not for profit entities have an additional year, or may early adopt coincident with the public business entity effective date. Early adoption of no longer requiring the fair value disclosure of financial instruments is allowable as of the issuance date of the standard. The Organization, not being a public business entity, elected to early adopt this provision of the standard in the December 31, 2015 consolidated financial statements. In February 2016, the FASB issued ASU No , Leases (Topic 842). The new standard is effective for the Organization for fiscal years beginning after December 15, 2019, and interim periods the following year. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. While the Organization is evaluating the impact of the new standard on its consolidated financial statements, it is anticipated that upon adoption, a substantial number of the leases which are currently classified as operating leases will be classified as capital leases. Accordingly, the Organization will recognize ROU assets and lease liabilities in the balance sheet and the resultant impact to the net assets of the Organization consequent to this recognition is expected to be immaterial. Additionally, the new standard requires the lessor to classify leases as either sales-type, capital or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a capital lease. If the lessor does not convey risks and rewards or control, an operating lease results. Upon adoption of the new lease standard, the Organization does not anticipate significant impact to the recognition of lease income for those leases in which the Organization is acting as the lessor. 10

13 3. Property and Equipment Property and equipment at consist of the following: Furniture and fixtures $ 5,818,878 $ 5,084,703 Appliances 608, ,848 Leasehold improvements 9,980,641 9,698,569 Computers and office equipment 1,528,951 1,041,330 Student residence 60,946,624 60,792,537 Construction in progress 402,102-79,286,096 77,593,987 Less: Accumulated depreciation and amortization 28,837,956 25,871,753 Property and equipment, net $ 50,448,140 $ 51,722,234 Depreciation and amortization expense for the years ended was $2,966,203 and $2,832,362, respectively. 4. Notes Payable Unless otherwise specified, the Organization s notes payable to third parties are collateralized by property and equipment owned by the Organization. The following is a summary of notes payable as of : $3,365,750 note payable, net of discount, to a real estate broker for real estate commissions on the uptown residence. The note is non-interest bearing, and was initially amended in November 2011 with a second amendment in January Under the terms if the January 2013 amendment, the monthly payments were reduced to $50,000 for the 48 month period from January 2013 through December 2016, with a final payment of $145,750 due January $ 733,605 $ 1,307,002 Total notes payable to third parties 733,605 1,307,002 Less: Current portion (588,160) (573,397) Long term notes payable $ 145,445 $ 733,605 The carrying value of the noninterest bearing obligation is shown net of an unamortized discount of $12,149 and $38,749 at, respectively. The note was initially discounted to net present value at imputed interest rate of 5%. As a result of the January 2013 amendment whereby the payment terms were extended by an additional 24 months, the effective rate of interest was reduced to approximately 2.5%. The discount is being amortized over the life of the loan and is reported as interest expense in the year of amortization. Such interest expense amounted to $26,603 and $40,996 for 2015 and 2014, respectively. 11

14 The following are the aggregate maturities of the notes payable: Years Ended December 31, 2016 $ 588, $ 145, , Line of Credit In November 2014, the Organization executed agreements for a revolving 1-year bank line of credit with JPMorgan Chase & Co. totaling $3,000,000, under which the Organization may borrow on a secured basis. The credit line requires the Organization to pay interest at the Bank s Adjusted LIBOR Rate (defined as, the Applicable Margin of 4.096% plus the one month LIBOR Rate). At December 31, 2015, the stated LIBOR rate was.4295% and the combined LIBOR rate plus Applicable Margin was %. The Organization has granted the bank a continuing security interest in all of the collateral owned by the Organization. There were no amounts outstanding under this line of credit at December 31, The credit agreement also requires compliance with certain non-financial covenants. The Organization is compliant with these covenants at December 31, The aforesaid bank line of credit was extended through February During March 2016, the Organization executed agreements to renew the revolving 1 year bank line of credit for an additional period of one year expiring on March 1, 2017 at the Bank s adjusted LIBOR Rate (defined as the Applicable Margin of 3.822% plus the one month LIBOR Rate). Additionally, the Organization executed agreements effective March 1, 2016 to avail a term loan from JPMorgan Chase & Co. totaling $3,000,000 on a secured basis. During the draw period ending on April 1, 2017, the term loan requires the Organization to pay interest at the applicable margin of 3.822% plus the one month LIBOR rate. Post the draw period, the term loan will attract at an interest rate set on April 1, 2017 comprising of an applicable margin of 3.350% plus the 5 year Treasury Securities Rate. The repayment of the term loan with applicable interest rate will start on April 1, 2017 with final payment due on March 1, 2021 in 48 equal installments. While availing the term loan, the Organization is expected to comply with certain conditions relating to liquidity maintenance and debt service coverage. The Organization has granted the bank a continuing security interest in all of the collateral owned by the Organization. There was no amounts outstanding under the line of credit and the term loan on the date of issuance of the consolidated financial statements. 12

15 6. Tax-Exempt Bonds Payable In March 2005, EHSI issued $63,050,000 in Dormitory Authority of the State of New York Educational Housing Services- The City University of New York ( CUNY ) Student Housing Project Insured Revenue Bonds, Series 2005 ( Series 2005 Bonds ) for a Student Housing Project to finance construction of a student residence designed to house approximately 600 students on the campus of City College of New York, which is a senior college within CUNY (the Project ). The Series 2005 Bonds are special obligations of DASNY. Principal and interest on the Series 2005 Bonds are payable solely from and secured by a pledge of certain payments to be made under a nonrecourse Loan Agreement between EHSI and DASNY, amounts payable by CUNY pursuant to a Support Agreement between CUNY and DASNY, and all funds and accounts authorized under the Authority s Educational Housing Services CUNY Student Housing Project Insured Revenue Bond Resolution. Under the non-recourse loan agreement, EHSI is obligated to pay the principal and interest on the Series 2005 Bonds solely from the revenues derived from EHSI s interest in and operation of the Project, as such payments become due. CUNY entered into a support agreement to support the continued operation of the Project, including payment of debt service on the Series 2005 Bonds. Pursuant to the terms of the Support Agreement, in the event Project revenues are not sufficient to cover the operations of the Project including debt service, CUNY is obligated to cover the deficiency. The Project is constructed on land owned by DASNY and leased to EHSI, for a nominal amount, pursuant to a Ground Lease dated March 2, The term of the Ground Lease shall terminate on the date on which the Series 2005 Bonds are no longer outstanding. Pursuant to a Leasehold Mortgage from EHSI to DASNY, EHSI s obligations to DASNY under the Loan Agreement are additionally secured by a mortgage on EHSI s leasehold interest in the Project. The construction costs related to the Project were capitalized and recorded in Property and equipment and depreciated over 30 years, which represents the term of the Ground lease through the date the Series 2005 Bonds are no longer outstanding. The Project was financed with the proceeds of the Series 2005 Revenue Bonds and the liability is recorded in Tax-exempt bonds payable in the Consolidated Statement of Financial Position. The Series 2005 Bonds, secured by a mortgage on the underlying property carry true interest costs at a rate of 4.9% per annum with total annual payments increasing from $3,282,938 to $4,510,125 through June At December 31, 2015, the carrying amount of assets pledged was $45,906,395. Additionally, the loan agreement contains provisions whereby a debt service coverage ratio requirement of 120% must be maintained. The Organization is compliant with its financial bond covenant at December 31, Payment of the principal and sinking fund installments of interest on the Series 2005 Bonds is insured in accordance with the terms of a financial guaranty insurance policy of the Series 2005 Bonds by Ambac Assurance Corporation. 13

16 Maturities of bonds are as follows: Years Ended December 31, Principal Interest Total 2016 $ 1,560,000 $ 2,831,188 $ 4,391, ,640,000 2,749,138 4,389, ,730,000 2,660,675 4,390, ,825,000 2,567,356 4,392, ,920,000 2,469,050 4,389,050 Thereafter 45,155,000 20,719,363 65,874,363 Add: Net unamortized original issue premium 3,829,545 Less: Bond issuance costs (3,263,351) * Add: Accumulated amortization of bond issuance costs 1,164,832 * Total tax-exempt bonds payable 55,561,026 Less: Current portion, including amortization of original issue premium (1,758,508) Long term-tax exempt bonds $ 53,802,518 *2014 amounts have been adjusted for comparative purposes. 53,830,000 $ 33,996,770 $ 87,826,770 At, cash, cash equivalents, and investments held by bond trustees totaled $10,207,964 and $9,114,889, respectively. Included in this amount is approximately $7,909,000 and $9,111,000 of investments at, respectively. These investments consisting primarily of money market funds backed by U.S. treasury instruments and U.S. treasury notes/bills, are carried at cost which approximates fair value. The detailed breakdown of such bond trustee funds are as follows: Revenue fund $ 2,265,066 $ 1,445,243 Debt service fund 2,218,672 2,217,220 Debt service reserve fund 4,513,928 4,512,787 Building equipment reserve fund 751, ,677 Project reserve fund 252, ,977 Building operations fund 206, ,985 Total cash, cash equivalents, and investments held by bond trustee 10,207,964 9,114,889 Less: Current portion (2,995,094) (2,957,219) Cash, cash equivalents, and investments held by bond trustee, net of current portion $ 7,212,870 $ 6,157,670 Interest expense on these bonds amounted to $2,708,805 and $2,781,180 for the years ended, respectively, net of annual amortization of the original issue premium of $198,

17 7. Settlement with Governmental Organization In October 2012, the Organization s Board of Directors terminated the employment contract it had previously entered into with the existing CEO and President, and, in November 2012, the Organization retained a new executive to fill this position. In December 2012, the Office of the Attorney General of the State of New York (OAG) concluded its investigation of the Organization and entered into an Assurance of Discontinuance (AOD) with the Organization, its former CEO and President and its Board of Directors. The AOD sets forth specific findings and prospective relief whereby the Organization would receive $3,300,000 in cash from the former CEO and President and the Board of Directors, including all deferred compensation funded by the Organization for the benefit of these parties. Additionally, an agreement the Organization had with Student Services, Inc. (SSI), which was wholly owned by the spouse of the former President of EHSI, to provide communication and cable services to EHSI licensees was terminated in December Pursuant to the AOD, the benefits from rescinding the contract with SSI, in the amount of approximately $2,000,000, were funded by the Organization in The net monetary relief pursuant to the AOD totaling $5,300,000 will be applied by the Organization for the benefit of the Organization s student residents in the form of rebates, reduced rent fees and/or capital expenditures to upgrade the rooms and amenities the Organization provides to its student residents. The settlement funds will be held in a separate bank account and reported on the statement of financial position in cash and cash equivalents - restricted funds - OAG settlement. At December 31, 2012, a deferred liability - OAG settlement of $5,307,439 (including interest) was recorded by the Organization in the consolidated statement of financial position for the year then ended. Portions of this deferred liability - OAG settlement amount were scheduled to be recognized in the Organization s consolidated statement of activities (on a pro-rata basis) once the conditions (for each portion of the settlement) set by the AOD were met. During 2013, the Organization recognized the initial pro-rata portion of settlement proceeds in the amount of $855,000 in the Organization s consolidated statement of activities for the year ended December 31, Additionally, the Organization reflected the remaining settlement proceeds as of December 31, 2013 of $3,827,794 as a current liability, as the Organization anticipated that all requirements for recognizing the remaining settlement proceeds would be met during However, the process to identify and ensure that all parties to the agreement were properly notified extended beyond the anticipated date of December 31, Based on the Organization s current information, it is expected that all such requirements by the OAG will be met during the year ending December 31, 2016, therefore, the deferred liability OAG of $979,247 is reflected as a current liability at December 31, The OAG determined that $1,500,000 of the settlement funds should be allocated as telecom rebates to residents ($750,000 to student residents in 2012 and $750,000 to student residents in 2013) and $3,800,000 used for capital expenditures in student residences (including $300,000 for new equipment). Accordingly, the Organization recognized $750,000 in rent rebates as a reduction of Program license fees in 2013 and Additionally, capital expenditures for student residences made in 2015 reduced the deferred liability - OAG settlement and a recovery of $1,974,689, net was recorded as recovery of OAG settlement in the consolidated statement of activities for the year ended December 31,

18 As of December 31, 2015, the balance of the deferred liability OAG settlement account totaled $979,247 and it is considered a current liability based on the Organization s capital expenditure and rebate program, to benefit student residents in accordance with the AOD. The program is expected to be completed in 2016, at that time the liability will be released and the remaining settlement recovery of approximately $979,247 will be recorded as recovery of OAG settlement in the consolidated statement of activities. As of, the cash and cash equivalents-restricted funds - OAG settlement funds balance was $987,266 and $3,504,793, respectively. In addition and pursuant to the AOD, the Organization agreed to take immediate steps to replace its Board of Directors with new Directors, and to amend its by-laws to include new provisions relating to conflicts of interest, interested party transactions, the structure and composition of Board committees, and executive compensation. All of these actions were completed in 2013, after approval by the OAG. 8. Proceeds From Renewal Option to Licensee In November 2006, the Organization amended its license agreement with a major licensee, whereby the Organization granted a renewal option to such licensee for a fee of $2,000,000. The renewal option is for the five-year period of June 1, 2011 through May 30, The Organization recognized the renewal option fee over the remaining term of the license agreement and approximately $159,000 was recorded in other income for each of the years ended December 31, 2015 and The unrecognized renewal option fee was $66,372 and $225,667 as of, respectively, and is recorded in deferred revenue-renewal option to licensee in the consolidated statements of financial position. As part of the renewal agreement, the Organization will provide an annual credit for leasehold renovations to the licensee of approximately $100,000 per year for each of the five years optioned, resulting in a total license fee credit of $500,000. The credit for leasehold renovations has been recorded in other income over the remaining term of the license agreement and the balance as of of approximately $41,667 and $140,000, respectively, is included in other liabilities in the consolidated statements of financial position. 9. Commitments Commitments Under Lease Obligations The Organization has entered into operating leases for its residential and office facilities within New York City for periods through Under the terms of the leases, the Organization is obligated to pay rental payments, plus escalation for certain operating expenses and real estate taxes. 16

19 Future minimum rental payments for the years subsequent to December 31, 2015 are as follows: Years Ended December 31, 2016 $ 39,303, ,580, ,006, ,274, ,740,940 Thereafter 12,822,593 $ 163,728,860 Rent expense for the years ended is as follows: Building rent expense student housing activities $ 41,994,804 $ 41,045,886 Office rent expense 670, ,006 Rent expense before straight lining adjustment 42,665,336 41,676,892 Adjustment to rent expense due to straight lining (951,161) (671,850) Total rent expense $ 41,714,175 $ 41,005,042 In January 2016, the Organization entered into a license agreement with a landlord to lease 268 beds for the summer periods only for 2016, 2017 and The Organization may elect to extend the lease for two consecutive three year terms, provided no default has occurred on May 1, 2018 and May 1, 2021 respectively. In addition the Organization has a long term lease that will be expiring in May 2016 which has not been renewed. Program License Fees The Organization receives license fees from the licensing of beds under license agreements that are both short and long term in nature. Under the terms of the licensing agreements, which are scheduled to expire at various dates through August 2022, minimum future license fees to be received for years subsequent to December 31, 2015 are as follows: Years Ended December 31, 2016 $ 26,993, ,498, ,720, ,324,589 Thereafter $ 3,666,582 57,202,749 17

20 10. Restricted Funds At, restricted funds totaled $1,185,683 and $4,027,396, respectively. The detailed breakdown of such restricted funds is as follows: Restricted funds OAG settlement $ 987,266 $ 3,504,793 Restricted funds CUNY project 198, ,603 Total restricted funds $ 1,185,683 $ 4,027,396 In connection with the AOD (Note 7), the Organization established a separate bank account for the settlement funds received in These funds can only be used for the specified purposes and all disbursements are subject to approval from the OAG. Restricted funds as of in the amounts of $198,417 and $522,603, respectively, represent project-specific funds (CUNY) which, per the DASNY bond documents, are for expenditures of the CUNY project exclusively. 11. Unrestricted Net Assets At, the Organization had a net assets balance of approximately $6,952,982 and $582,155, respectively. Included in the net assets is approximately $5,063,293 and $6,014,000 of rent expense recognized in 2015 and 2014, respectively, pursuant to U.S. GAAP, under the straight-line method, which effectively accelerated rent expense to account for future rent escalations. 12. Concentrations of Risk In 2015, the two largest licensees accounted for a combined total of 26% (16% and 10%) of total revenues, while in 2014, the two largest licensees accounted for a combined total of 30% (20% and 10%) of total revenues. The amounts due from these licensees as of December 31, 2015 and 2014 were insignificant. The Organization leases the majority of its facilities from five landlords. Financial instruments that potentially subject the Organization to concentrations of credit risk consist principally of cash deposits. The Organization s cash and cash equivalents are deposited with one financial institution at. Included in cash and cash equivalents are amounts in excess of $250,000 at, which is the maximum amount insured by the Federal Deposit Insurance Company. However, management believes that this institution is a viable entity and therefore risk of loss is minimized. 13. Employee Benefits All employees of the Organization, with over one year of service, are eligible to participate in a 401(k) plan. The Organization matches employee contributions on a dollar-for-dollar basis up to the statutory limits. The Organization s 401(k) expense was $235,917 and $216,903 for the years ended, respectively. 18

21 Effective January 1, 2015, the Organization established a 457 (f) unfunded deferred compensation plan for the senior executives of the organization. Based on certain criteria and objectives being achieved, the organization provides for amounts to be set aside with a vesting period of 5 years. As of December 31, 2015, the amount calculated as deferred compensation to be paid to eligible employees of the Plan after expiry of a vesting period of 5 years was $66,415, of which $13,283 represents the vested benefit for one year and has been recorded as an expense and corresponding liability for deferred compensation within the 2015 consolidated financial statements. The balance of $53,132 will be accrued/expensed over the remaining 4 years vesting service period. 14. Litigation The Organization is exposed to various asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material effect on the Organization s financial position, changes in net deficit or cash flows. 15. Subsequent Events The Organization has evaluated subsequent events through June 17, 2016, which is the date the consolidated financial statements were issued. See Note 5 and 9. 19