EHDOC Robert Sharp Towers II Limited Partnership Financial Report October 31, 2014
Contents Independent Auditor's Report 1 Financial Statements Balance sheet 2 3 Statement of income 4 Statement of changes in partners' equity 5 Statement of cash flows 6 7 Notes to financial statements 8 10
McGladrey LLP To the Partners EHDOC Robert Sharp Towers II Limited Partnership Report on the Financial Statements Independent Auditor's Report We have audited the accompanying balance sheet of EHDOC Robert Sharp Towers II Limited Partnership (the Partnership), a Florida limited partnership, as of October 31, 2014, and the related statements of income, changes in partners' equity and cash flows for the period December 18, 2012 (inception) to October 31, 2014 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 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 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 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 entity 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 entity 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EHDOC Robert Sharp Towers II Limited Partnership as of October 31, 2014, and the results of its operations and its cash flows for the period December 18, 2012 (inception) to October 31, 2014 in accordance with accounting principles generally accepted in the United States of America. Chicago, Illinois April 29, 2015
Balance Sheet October 31, 2014 Assets Rental Property Land $ 363,231 Building 946,543 Furniture and equipment 6,352 Construction in progress 6,083,410 7,399,536 Less accumulated depreciation 65,454 7,334,082 Other Assets Cash and cash equivalents 269,512 Cash held in reserves 702,859 Tenant accounts receivable 1,882 Prepaid insurance 28,634 Utility deposits 3,030 1,005,917 $ 8,339,999 2
Balance Sheet (Continued) October 31, 2014 Liabilities and Partners' Equity Liabilities Current liabilities Accounts payable $ 496 Prepaid HAP 1,727 Accrued loan interest 46,538 Accrued property taxes 72,121 Tenant security deposits 25,458 Accrued expenses - other 15,108 Accrued renovation costs 334,657 Accrued asset management fee 4,583 Accrued property management fee 5,913 Deferred revenue 590 Mortgage loan payable - current 42,189 549,380 Long-term liabilities Deferred grant income 355,278 Deferred developer fee 1,571,621 Mortgage loan payable 7,744,208 Seller loan payable 1,200,000 10,871,107 Total liabilities 11,420,487 Partners' Equity (3,080,488) $ 8,339,999 See Notes to Financial Statements. 3
Statement of Income For the Period December 18, 2012 (inception) to October 31, 2014 Revenue: Rental Net apartment rentals $ 127,157 Housing assistance payments 477,867 605,024 Other Other income 16,258 621,282 Expenses: Administrative Payroll 76,002 Office 54,590 Property management fees 34,393 Legal 230 Audit 11,000 Miscellaneous 1,729 177,944 Utilities Electricity 15,379 Gas 3,755 Water and sewer 20,153 39,287 Operating and maintenance Maintenance and supplies 50,269 Contracts 15,065 Garbage and trash removal 15,076 80,410 Depreciation and amortization 65,454 Taxes and insurance Real estate taxes 44,000 Property and liability insurance 30,778 Miscellaneous taxes, licenses, permits and insurance 571 75,349 Financial Acquisition costs 100,000 Entity expense - asset management fee 4,583 104,583 543,027 Net income $ 78,255 See Notes to Financial Statements. 4
Statement of Changes In Partners' Equity (Deficit) For the Period December 18, 2012 (inception) to October 31, 2014 Special Investor General Limited Limited Partner Partner Partner Total Capital contributions $ 283,313 $ - $ 737,000 $ 1,020,313 Acquired property basis adjustment (4,179,056) - - (4,179,056) Net income 8 8 78,239 78,255 Balance, October 31, 2014 $ (3,895,735) $ 8 $ 815,239 $ (3,080,488) See Notes to Financial Statements. 5
Statement of Cash Flows For the Period December 18, 2012 (inception) to October 31, 2014 Cash Flows from Operating Activities Net income $ 78,255 Depreciation and amortization 65,454 Changes in: Tenant accounts receivable (1,882) Prepaid insurance (28,634) Prepaid utility deposits (3,030) Tenant security deposits payable 25,458 Accounts payable 496 Prepaid HAP 1,727 Accrued expenses - other 15,108 Accrued property taxes 72,121 Accrued management fee 5,913 Accrued asset management fees 4,583 Deferred revenue 590 Net cash provided by operating activities 236,159 Cash Flows from Investing Activities Deposits to cash reserves, net (702,859) Renovation costs paid (4,025,776) Purchase of building (5,600,000) Net cash used in investing activities (10,328,635) Cash Flows from Financing Activities Capital contributions 1,020,313 Grant proceeds 355,278 Mortgage loan proceeds 7,786,397 Seller loan proceeds 1,200,000 Net cash provided by financing activities 10,361,988 Increase in cash, and cash end of period $ 269,512 6
Statement of Cash Flows (Continued) For the Period December 18, 2012 (inception) to October 31, 2014 Supplemental Disclosure of Non-Cash Activities Deferred developer fee $ 1,571,621 Accrued renovation costs $ 334,657 Acquisition property acquired reconciliation Purchase of building $ 5,600,000 Purchase transaction and financing costs 884,291 Deposits to cash reserves $ 584,578 7,068,869 Mortgage loan $ 4,638,996 Seller loan 1,200,000 Acquisition Grant 355,278 Initial partner capital contributions $ 874,595 7,068,869 See Notes to Financial Statements. 7
Notes to Financial Statements Note 1. Organization and Summary of Significant Accounting Policies Organization: The Partnership was formed December 18, 2012 to acquire, renovate and operate a 109-unit apartment building (the project) located in Miami Gardens, Florida. Effective May 1, 2014, the Partners entered into an Amended and Restated Limited Partnership Agreement (the Agreement). The project has been designed to meet the demand for affordable housing and is eligible to receive federal low-income housing tax credits. In that regard, the Partnership has received a commitment for tax credits under Internal Revenue Code Section 42, which further regulates the Partnership as to rent charges and operating methods. EHDOC Robert Sharp Towers II Charitable Corporation, a Florida not-for-profit corporation, is the General Partner. Stratford SLP, Inc., a Delaware corporation, is the Special Limited Partner. Stratford Robert Sharp II Investors Limited Partnership, a Delaware limited partnership, is the Investor Limited Partner. The Investor Limited Partner has made a capital commitment of $3,644,000, and at October 31, 2014 has contributed $737,000. The General Partner has made a capital commitment of $100, and as of October 31, 2014 has contributed $283,313. Profits and losses from operations are allocated among the partners 0.01 percent to the General Partner, 0.01 percent to the Special Limited Partner and 99.98 percent to the Investor Limited Partner. Cash is distributed based generally on the partners' respective ownership interests, subject to the priority distributions set forth in the Agreement. Estimates: In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Rental revenue: Rental revenue is principally derived from one-year or shorter leases on apartment units, which are accounted for as operating leases. Accordingly, rental revenue is recorded as revenue when the rentals become due. The Partnership receives housing assistance for subsidized units. Through October 31, 2014, $477,867 of housing assistance payments have been received. Tenant accounts receivable: Tenant accounts receivable are recorded at management's estimate of the amounts that will ultimately be collected. The allowance for doubtful accounts is based on specific identification of uncollectible accounts and the Partnership's historical collection experience. No allowance for doubtful accounts was deemed necessary at October 31, 2014. Reserve deposits: The lender requires monthly deposits into reserve accounts from which funds are released for real estate taxes, insurance, interest and working capital. Rental property and depreciation: See below regarding the acquired property. The Partnership is computing depreciation on the building using the straight-line method over the estimated remaining useful life of 7 years. Depreciation on the renovation expenditures which were placed in service in December 2014 will be on a straight-line method over 40 years, and furniture and equipment will be computed using the straight-line method over 5 years. In May 2014, the land and building were purchased for $5,600,000 from a commonly controlled affiliate of the General Partner. The acquired property is recorded at the affiliate s depreciated amount at the date of sale, since for financial reporting purposes the General Partner and the affiliate did not have an armslength sale. The seller s carrying value for the property was $1,309,774 at the date of sale, and this is the amount at which the Partnership has recorded the acquired property. The $4,179,056 difference from the transaction amount (net of the $355,278 grant described in Note 5) has been recorded as a reduction of the General Partner s capital account. Depreciation on the acquired building will be recorded on a straight line basis over the seller s 8-year remaining useful life. 8
Notes to Financial Statements Note 1. Organization and Summary of Significant Accounting Policies (Continued) Rental property and depreciation (continued): The Partnership has charged to expense $100,000 of transaction costs related to the acquisition. The Partnership has made a $5,964,293 commitment to carry out renovations on the project. During renovations, the project will remain occupied. Impairment of long-lived assets: The Partnership 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 from future operations and asset sale. If the sum of the expected future undiscounted cash flows before debt service is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. The absence of an impairment adjustment does not imply that the recorded value of asset is presently attainable. No impairment loss was recognized for the period ended October 31, 2014. Income taxes: The Partnership is not subject to federal income tax because its income and losses are includable in the tax returns of its partners, but may be subject to certain state taxes. FASB codification has provided guidance for how uncertain tax positions should be recognized, measured, disclosed and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the entity s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Partnership adopted the provisions of the Accounting for Uncertainty in Income Taxes section of the Income Taxes Topic of the FASB Accounting Standards Codification. As of October 31, 2014, management has determined that there are no material uncertain income tax positions. Tax returns filed by the entity generally are subject to examination by U.S. and state taxing authorities. Subsequent events: The Partnership has evaluated subsequent events for potential recognition and/or disclosure through April 29, 2015, the date the financial statements were available to be issued. Note 2. Cash Held in Reserves Replacement reserve: According to the Agreement, the Partnership is required to establish a replacement reserve with annual deposits equal to the greater of the amount required by the mortgage loan or $300 per unit. Releases of the replacement reserve will be used for repairs and replacements to the property. At October 31, 2014, an initial $301,116 reserve has been funded. Operating deficit reserve: According to the Agreement, the Partnership is required to establish an operating reserve in the amount of $562,000. Releases will be used to fund operating deficits. The reserve is expected to be funded in 2015. Residual receipts reserve: According to the Agreement, the Partnership is required to establish a residual receipts reserve. As of October 31, 2014, $2,462 of residual receipts reserve has been funded. Insurance escrow: As of October 31, 2014, $115,819 of insurance escrow has been funded for future property insurance premiums. Interest reserve: As of October 31, 2014, $121,452 of interest reserve has been funded for future debt service payments. Working capital reserve: As of October 31, 2014, $162,010 of working capital reserve has been funded, for future cash flow deficits, if needed. 9
Notes to Financial Statements Note 3. Debt Mortgage loan: In May 2014, the Partnership obtained a mortgage loan with Wells Fargo, N.A. in an amount not to exceed $8,100,500. The loan was funded in part by $7,000,000 Series 2014 Housing Revenue Bonds. The loan matures August 1, 2055, is secured by a first deed of trust on the rental property and is insured by the U.S. Department of Housing and Urban Development (HUD). In addition to interest, the Partnership pays an annual mortgage insurance premium of 0.45 percent. During the renovation period, interest-only payments at a 7.75 percent rate are due. Beginning September 1, 2015, the interest rate is reduced to 3.93 percent. Through October 31, 2014, interest expense of $220,775 has been incurred which has been capitalized to the cost of the renovation. The outstanding principal balance of the loan was $7,786,397 at October 31, 2014. Annual future principal maturities are as follows: 2015 $ 42,189 2016 86,902 2017 90,380 2018 93,996 2019 97,758 Thereafter $ 7,332,983 7,786,397 Seller loan: In May 2014, as part of the property acquisition, the Partnership obtained a loan for $1,200,000 from the affiliated seller. Unpaid principal and interest are due in August 2055. Annual debt service payments are due from project surplus cash. The loan bears interest at 3.27 percent commencing after renovation is complete. Note 4. Related-Party Transactions Asset Management fee: The Partnership is to pay an annual fee of $10,000 to the asset manager, Stratford Asset Management Co., LLC, an affiliate of the limited partners. The fee is payable solely from surplus cash. The Partnership incurred fees of $4,583 all of which are unpaid at October 31, 2014. Property Management fee: The project is managed by an affiliate of the General Partner. Pursuant to the Management Agreement, the Partnership pays a fee of 5.55 percent of gross revenues. The Partnership incurred fees of $34,393 through October 31, 2014, including $5,913 of management fees which is accrued at October 31, 2014. Developer fee: The Partnership entered into a development agreement with EHDOC Development Services LLC, an affiliate of the general partner. The agreement provides for a fee in the amount of $1,571,621 for services rendered in connection with the project renovation. The fee will be paid from limited partner capital contributions. At October 31, 2014, the fee has been added to the cost of the renovation. Note 5. Grant In May 2014, the Partnership received a $355,278 grant from EHDOC Pepper Towers Limited Partnership (an affiliate of the general partner) to finance the purchase of the property. The grant is not repayable under any circumstances, and has been recorded as a reduction of the difference between the acquisition transaction price and the related party seller s carrying value of the acquired property. 10