Cornerstone Real Estate Fund B, LLC (A Washington State Limited Liability Company)

Transcription

1 Cornerstone Real Estate Fund B, LLC Financial Statements as of and for the Year Ended December 31, 2015 Income Tax Basis, and Independent Auditors Report

2 TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT 1 2 FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2015: Statement of Assets, Liabilities, and Members Capital Income Tax Basis 3 Schedule of Investments Income Tax Basis 4 Statement of Operations Income Tax Basis 5 Statement of Changes in Members Capital Income Tax Basis 6 Statement of Cash Flows Income Tax Basis 7 Notes to Financial Statements Income Tax Basis 8 11

3 INDEPENDENT AUDITORS REPORT To the Manager of Cornerstone Real Estate Fund B, LLC Bellevue, Washington We have audited the accompanying financial statements of Cornerstone Real Estate Fund B, LLC (the Partnership ), which comprise the statement of assets, liabilities, and members capital income tax basis, including the schedule of investments income tax basis, as of December 31, 2015, and the related statements of operations income tax basis, changes in members capital income tax basis, and cash flows income tax basis for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the basis of accounting the Partnership uses for income tax purposes; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Partnership s preparation and fair presentation of the 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 Partnership 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities, and members capital of Cornerstone Real Estate Fund B, LLC as of December 31, 2015, the results of its operations and changes in its members capital, and its cash flows for the year then ended, in accordance with the basis of accounting the Partnership uses for income tax purposes described in Note 2 to the financial statements. Basis of Accounting We draw attention to Note 2 of the financial statements, which describes the basis of accounting. The financial statements are prepared on the basis of accounting the Partnership uses for income tax purposes, which is a basis of accounting other than accounting principles generally accepted in the United States of America. October 28,

5 STATEMENT OF ASSETS, LIABILITIES, AND MEMBERS CAPITAL INCOME TAX BASIS AS OF DECEMBER 31, 2015 ASSETS ASSETS: Investments income tax basis $ 1,127,329 Cash and cash equivalents 102,286 Distributions receivable from investments 3,318 TOTAL $ 1,232,933 LIABILITIES AND MEMBERS CAPITAL LIABILITIES Accrued expenses $ 13,485 MEMBERS CAPITAL 1,219,448 TOTAL $ 1,232,933 See notes to financial statements income tax basis

6 SCHEDULE OF INVESTMENTS INCOME TAX BASIS AS OF DECEMBER 31, 2015 Tax Basis Percent of Members Capital Investments in Underlying Funds: (92.6%) Unico Northwest Fund II, LLC $ 510, % Hotel Group Opportunity Fund III, LLC 264, RS Investors II, LLC 188, Custos Income and Growth Fund I, LLC 89, University Park Properties, LLC 33, Des Moines Place Investors, LLC 26, Unico Northwest Fund III, LLC 25, Metzler North America Partners, LP 15, PDS Napa Investors, LLC Hotel Group Opportunity Fund IV, LLC (28,095) (2.3) TOTAL INVESTMENTS IN UNDERLYING FUNDS $ 1,127, % See notes to financial statements income tax basis

7 STATEMENT OF OPERATIONS INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2015 INCOME: Income from pass-through investments, net $ 1,471,592 Interest income 33 Net investment income 1,471,625 EXPENSES: Professional fees and other expenses 14,393 Administrative expenses 2,839 Other expenses 3,174 Total expenses 20,406 NET INCREASE IN MEMBERS' CAPITAL FROM OPERATIONS $ 1,451,219 See notes to financial statements income tax basis

8 STATEMENT OF CHANGES IN MEMBERS CAPITAL INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2015 BALANCE January 1, 2015 $ 2,004,734 Capital distributions (2,236,505) Net increase in members' capital from operations 1,451,219 BALANCE December 31, 2015 $ 1,219,448 See notes to financial statements income tax basis

9 STATEMENT OF CASH FLOWS INCOME TAX BASIS FOR THE YEAR ENDED DECEMBER 31, 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in members' capital from operations $ 1,451,219 Adjustments to reconcile net increase in members' capital from operations to net cash provided by operating activities: Income from pass-through investments, net (1,471,592) Distributions from investments 2,084,870 Increase in accrued expenses 508 Net cash provided by operating activities 2,065,005 CASH FLOWS FROM FINANCING ACTIVITY Distributions to members (2,236,505) NET CHANGE IN CASH AND CASH EQUIVALENTS (171,500) CASH AND CASH EQUIVALENTS Beginning of year 273,786 CASH AND CASH EQUIVALENTS End of year $ 102,286 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Distributions to members includes $3,085 distributed directly to taxing authorities on behalf of the members. See notes to financial statements income tax basis

10 NOTES TO FINANCIAL STATEMENTS INCOME TAX BASIS AS OF AND FOR THE YEAR ENDED DECEMBER 31, ORGANIZATION AND BUSINESS Cornerstone Real Estate Fund B, LLC (the Fund ) is a Washington state limited liability company (LLC) organized on November 8, 2006, to engage in the business of investing the Fund s capital in a portfolio of U.S. real estate-related equity investments, including real estate project limited partnerships, limited liability companies and diversified real estate funds ( Underlying Funds ). The Fund commenced operations on January 23, Cornerstone Advisors, Inc. ( Cornerstone or the Manager ), a Washington state corporation, serves as the Manager of the Fund. The Manager is responsible for all investment activities with respect to the Fund. This process includes identifying, selecting, evaluating, and monitoring the Fund s investments. The term of the Fund will continue until the date two years following the date upon which all of the Underlying Funds have terminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting utilized for income tax reporting purposes ( income tax basis ), which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America ( generally accepted accounting principles ). Consequently, certain asset items and transactions have been recorded differently than if the financial statements were prepared in conformity with generally accepted accounting principles. The principal differences between the income tax basis and generally accepted accounting principles are as follows: a. Select costs related to the organization of the Fund are capitalized and amortized in a manner that differs from that of generally accepted accounting principles. b. Investments are presented at cost, adjusted for distributions, taxable income, and allowable deductions, rather than fair value in the financial statements. c. Certain financial statement disclosures, including but not limited to financial highlights, are not included in the financial statements. The tax return filed with the IRS may differ from the financial statements due to estimates used in the tax return process. Any material differences will be treated as true-ups in the subsequent year tax filing. Income and Expense Recognition Interest income is recognized on an accrual basis. Expenses are charged to the Fund on an accrual basis when incurred. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that may affect certain reported amounts and disclosures. Actual results could differ from those estimates

11 Cash and Cash Equivalents The Fund considers cash in demand deposit accounts and short-term investments with original maturities at the date of purchase of three months or less, such as money market instruments, to be cash equivalents. As of December 31, 2015, cash and cash equivalents consist primarily of cash invested in money market mutual funds held by one financial institution. The Fund is subject to credit risk should the financial institution be unable to fulfill its obligations, and at times the Fund s deposits may be in excess of federally insured limits. Allocation of Net Income and Loss The LLC Agreement specifies that a capital account shall be established for each member. Each capital account is maintained in accordance with the principles of Treasury Regulations Sections and The capital account of a member shall be credited by the amount of cash initially contributed by the member. The capital account shall be decreased by the amount of net losses allocated to the member, any cash distributed to the member, and the fair market value of property distributed to such member. Net income and net losses will generally be allocated to the members in proportion of their respective capital percentages, except that the allocation of losses to a member is limited to the available balance in the member s capital account. Investments Investments are stated at cost adjusted for distributions, taxable income or losses, and deductions. The Investments fair value may differ significantly from the adjusted cost disclosed in the financial statements and accompanying notes. Income Taxes There is no provision for income taxes in the financial statements of the Fund as the Fund is not subject to income tax. Each member is individually liable for its own tax payments based on its allocable share of income, expenses, gains, and losses from the Fund. Any withholding tax paid by the Fund is allocated to the affected member. The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Fund is subject to examination by federal and state jurisdictions. As of December 31, 2015, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2012 forward (with limited exceptions). The Manager has reviewed its tax positions and concluded the Fund has no unrecognized tax benefits as of December 31, 2015, and does not expect a change in unrecognized tax benefits in the next 12 months. During 2015, the Fund had no interest or penalties related to uncertain tax positions. Indemnification Consistent with standard business practices, the Fund has provided general indemnifications to the Manager and its principals, affiliates, and employees when they act, in good faith, in the best interests of the Fund. In addition, in the normal course of business, the Fund has entered into certain contracts with Underlying Funds that contain a variety of representations and which provide general indemnifications, provided certain standard requirements are met. The Fund s maximum exposure under these arrangements is unknown. However, the Fund expects the risk of having to make any payments under these general business indemnifications to be remote. 3. INVESTMENTS IN UNDERLYING FUNDS The Fund invests in a portfolio of Underlying Funds with a real estate focused investment strategy. As of December 31, 2015, the Fund had committed $7,699,513 to Underlying Funds, all of which had been funded

12 The Fund s investments in Underlying Funds are subject to the terms of the respective Underlying Funds agreements, private placement memoranda, and other governing agreements of such funds. The agreements and governing documents related to investments in the Underlying Funds provide for compensation to the investment managers/general partners of the Underlying Funds in the form of management fees and carried interest allocations. Management fees range from 1% to 2% annually, and carried interest allocations range from 0% to 20% of net income, subject to certain provisions as detailed in the Underlying Funds governing documents. The Fund generally invests in closed-end Underlying Funds that are commitment based and do not permit redemptions. As of December 31, 2015, 100% of investments held by the Fund represent investments in Underlying Funds that do not permit redemptions. 4. MEMBERS CAPITAL As of December 31, 2015, the Fund has received capital commitments of $8,600,000 from the members. Contributions totaling $7,528,578, or approximately 87.5% of committed capital, have been made through December 31, Distributions will be made to the members in accordance with the LLC Agreement. In accordance with the terms of the LLC Agreement, members shall be obligated and required to make cash contributions to the extent of their Unfunded Capital Commitments through the remaining term of the Fund to (i) fund transactions or commitments in which the Fund has entered into, prior to the Investment Period Termination Date or (ii) pay Fund expenses. As of December 31, 2015, the members Unfunded Capital Commitments equal $1,071, RELATED-PARTY ACTIVITY The Manager is also the manager of Cornerstone Real Estate Fund A, LLC ( Fund A ). Fund A was established concurrent with the establishment of the Fund to accommodate investors who are qualified purchasers (as defined in Section 2(a)(51) of the Investment Company Act of 1940) in addition to being accredited investors. Fund A is operated on substantially the same terms as the Fund to invest in parallel with the Fund. In accordance with the terms of the respective LLC agreements, each portfolio investment was adjusted after the final closing so that the ratio of such holdings between the Fund and Fund A is in proportion to the respective commitment percentages of each entity. The Fund was formed primarily for the benefit of current clients of the Manager. Accordingly, pursuant to the LLC Agreement, the Manager will not charge the Fund or the members a separate management fee for managing the affairs and operations of the Fund; provided, however, that the Manager may assess a separate management fee against any member who is not an active client of the Fund, which will be determined at the Manager s sole discretion. The management fee will be no greater than 0.25% per quarter of the allocable carrying value (as defined in the LLC Agreement) of such member. Any management fee assessed against such member shall be a separate and personal liability of such member. The Manager shall have the right to apply distributions otherwise payable to such member against any such management fee. No such separate fees were assessed against members for the year ended December 31, The Fund also pays an administration fee to the Manager to cover the normal operating costs and expenses incurred by it in connection with the management and administration of the Fund s affairs and operations. The administration fee shall not exceed 0.025% of the allocable carrying value (as defined in the LLC Agreement) of all members interest in the Fund as of the last day of the preceding quarter. For the year ended December 31, 2015, the Fund recorded administration fees of $2,

13 The Fund bears all costs and expenses incurred in the purchase, holding, sale, or exchange of investments in Underlying Funds and securities, and certain legal and accounting fees and other expenses that are specifically defined in the LLC Agreement. In certain cases, the expense may be paid by the Manager on behalf of the Fund and reimbursed subsequently by the Fund. Such reimbursement of expenses is recognized as an expense of the Fund and included in the statement of operations income tax basis. For the year ended December 31, 2015, $1,987 of Fund expenses included on the statement of operations income tax basis were paid by the Manager, and the Fund reimbursed the Manager for such expenses. 6. INVESTMENTS AND ASSOCIATED RISKS In the normal course of business, the Fund invests in real estate-related equity investments, which exposes the Fund to various risk factors including market and credit risk. The investments are also subject to the terms of subscription agreements, private placement memoranda, and other governing agreements, which may include provisions that restrict both the transferability of the Fund s interest and ability to withdraw, subjecting the Fund to liquidity risk. Additionally, the investments are dependent on factors such as the general state of the economy, consumer spending, and the commercial and residential real estate markets. Due to the level of risk associated with the investments, it is at least reasonably possible that change in the values of the investments will occur in the near term and that such changes could materially affect the Fund. 7. SUBSEQUENT EVENTS The Fund s management has evaluated subsequent events through October 28, 2016, the date which the financial statements were available to be issued. There were no subsequent events identified that required adjustment or disclosure. ******