RIVERSIDE CENTER PARCEL 2 BIT ASSOCIATES, LLC AND CONSOLIDATED COMPANIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016

Transcription

1 RIVERSIDE CENTER PARCEL 2 BIT ASSOCIATES, LLC CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016

2 Contents Page Independent Auditors Report Consolidated Financial Statements Consolidated Balance Sheet... 3 Consolidated Statement Of Operations... 4 Consolidated Statement Of Members Equity... 5 Consolidated Statement Of Cash Flows... 6 Notes To Consolidated Financial Statements

3 Independent Auditors Report Members Riverside Center Parcel 2 BIT Associates, LLC And Consolidated Companies New York, New York Report On The Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Riverside Center Parcel 2 BIT Associates, LLC and consolidated companies, which comprise the consolidated balance sheet as of December 31, 2016 and 2015, and the consolidated statements of operations, members equity and cash flows for the years then ended, and the related notes to the consolidated financial statements. 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 the consolidated 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 consolidated financial statements based on our audits. 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 audit 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 the auditors 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, the auditor considers internal control relevant to the entity 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 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 consolidated financial statements.

4 Members Riverside Center Parcel 2 BIT Associates, LLC And Consolidated Companies 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Riverside Center Parcel 2 BIT Associates, LLC and consolidated companies as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, in 2016, Riverside Center Parcel 2 BIT Associates, LLC and consolidated companies implemented new guidance within the Accounting Standards Codification which changed the presentation of debt issuance costs. Our opinion is not modified with respect to that matter. April 25, 2017 Page 2

5 CONSOLIDATED BALANCE SHEET Assets December 31, Rental Property (Notes 2 And 4) $ 451,622,514 $ 383,150,769 Other Assets Cash and cash equivalents, including security deposits of $196,118 in 2016 and none in , ,108 Tenant accounts receivable 20,873 Restricted cash (Note 1) 32,320,765 90,170,795 Accounts receivable - NYSCA (Note 1) 318, ,655 Prepaid expenses 14, ,178 Due from affiliates (Note 3) 971,179 Deferred lease commissions (Note 1) 98,586 Deferred tax credit fees, net (Note 1) 939,662 Deferred 421(a) costs (Note 1) 1,683,700 1,683,700 Total Other Assets 36,754,133 92,737,436 $ 488,376,647 $ 475,888,205 Liabilities And Members' Equity Liabilities Mortgage note payable (Note 2) Principal amount $ 275,000,000 $ 275,000,000 Less: Unamortized debt issuance costs (Note 1) 3,263,673 3,304,985 Mortgage note payable - less unamortized debt issuance costs 271,736, ,695,015 Construction payables 16,466,787 19,865,218 Accounts payable 411,570 Due to affiliates (Note 3) 58,199,251 43,927,972 Prepaid rent 928,559 Tenant security deposits 279,772 Total Liabilities 348,022, ,488,205 Members' Equity Members' equity 139,353, ,400,000 Non-controlling interest 1,000,720 Total Members' Equity 140,354, ,400,000 $ 488,376,647 $ 475,888,205 See the accompanying notes to the consolidated financial statements. Page 3

6 CONSOLIDATED STATEMENT OF OPERATIONS For The Years Ended December 31, Revenue Rental revenue $ 267,161 $ Interest income 25,505 Other revenue 16,002 Total Revenue 308,668 Operating Expenses Rental expenses 215,627 Administrative expenses 603,323 Utility expenses 108,281 Maintenance expenses 753,719 Taxes and insurance expenses 30,449 Marketing and advertising 152,183 Other professional fees 27,565 Total Operating Expenses 1,891,147 Loss From Operations (1,582,479) Other Expenses Interest expense - mortgage (Notes 1 and 2) 1,233,184 Depreciation 2,422,986 Financial expenses 1,600,369 Total Other Expenses 5,256,539 Net Loss (6,839,018) Net Loss - Non-Controlling Interest (99,280) Net Loss Attributable To Riverside Center Parcel 2 BIT, LLC $ (6,739,738) $ See the accompanying notes to the consolidated financial statements. Page 4

7 CONSOLIDATED STATEMENT OF MEMBERS EQUITY For The Years Ended December 31, 2016 And 2015 Developer BIT Member Member Riverside BIT Center Parcel Investment 2 MM, Sixty-Two, Members' Non-Controlling LLC LLC Equity Interest Total Balance - January 1, 2015 $ 38,200,000 $ 102,200,000 $ 140,400,000 $ $ 140,400,000 Net Loss Balance - December 31, ,200, ,200, ,400, ,400,000 Contributions 5,693,399 5,693,399 1,100,000 6,793,399 Net Loss (2,021,921) (4,717,817) (6,739,738) (99,280) (6,839,018) Balance - December 31, 2016 $ 41,871,478 $ 97,482,183 $ 139,353,661 $ 1,000,720 $ 140,354,381 See the accompanying notes to the consolidated financial statements. Page 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS For The Years Ended December 31, Cash Flows From Operating Activities Net loss $ (6,839,018) $ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 2,422,986 Amortization of debt issuance costs reported as interest expense 41,312 Interest and other expenses funded through construction draws 2,771,682 Changes in assets and liabilities: Increase in tenant accounts receivable (20,873) Increase in accounts receivable - NYSCA (31,669) Decrease in prepaid expenses 208,239 Increase in accounts payable 411,570 Increase in prepaid rent 928,559 Increase in tenant security deposits 279,772 Net Cash Provided By (Used In) Operating Activities (35,679) 208,239 Cash And Cash Equivalents - Beginning Of Year 422, ,869 Cash And Cash Equivalents - End Of Year $ 386,429 $ 422,108 Supplemental Disclosure Of Cash Flow Information (Note 6) See the accompanying notes to the consolidated financial statements. Page 6

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 And Summary Of Significant Accounting Policies And Organization Organization Riverside Center Parcel 2 BIT Associates, LLC, a Delaware Limited Liability Company, was originally formed on June 14, 2012 and executed on December 12, The Company was formed to acquire land located at 21 West End Avenue, Manhattan, New York and to construct, own and operate a building (the Project) consisting of approximately 489 market rate rental units, 127 affordable rental units, 14,540 square feet of ground floor retail space, and a public school. On May 23, 2016, the Company transferred ownership of the school condo unit to a wholly owned affiliate, Riverside Center Shell Holdings, LLC. The Project is regulated by the New York State Housing Finance Agency (NYSHFA) and the New York City Department of Housing Preservation and Development as to rent charges and operating methods. Construction on the rental units commenced in December 2012 and is not anticipated to be completed until mid At December 31, 2016 and 2015, the members are as follows: Developer Member: BIT Member: Riverside Center Parcel 2 MM, LLC BIT Investment Sixty-Two, LLC Principles Of Consolidation The accompanying consolidated financial statements include the accounts of Riverside Center Parcel 2 BIT Associates, LLC, Riverside Center Shell Holdings, LLC (Shell), a wholly owned subsidiary, and Riverside Center Parcel 2 BIT LI Owner, LLC (LI Owner),an affiliate through common ownership (collectively, the Company). Page 7

10 Consolidation principles apply to a Variable Interest Entity (VIE) if it has: (1) equity at risk that is insufficient to permit the entity to finance its activities without subordinated financial support; (2) equity investors that cannot make significant decisions about the entity s operations either through voting or similar rights, or that do not absorb the expected losses, or receive the expected returns of the entity; or (3) equity investors that have obligations to absorb the expected losses not on behalf of any of the partners that have disproportionately few voting rights. A VIE is consolidated by its primary beneficiary, which is the party that has the power to direct the activities of the VIE that most significantly impact the VIE s economic performance, and the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. All other entities not considered VIEs are evaluated for consolidation under existing guidance. Low-Income Housing Tax Credits Pursuant to Section 42 of the Internal Revenue Code (IRC), the LI Owner is expecting an allocation of low-income housing tax credits in the amount of $2,661,909 in 2017, $2,752,204 per annum from 2018 through 2026, and $90,295 in No tax credits were allocated to the Company in The Property s low-income housing tax credits will be contingent on its ability to maintain compliance with applicable sections of Section 42. Failure to maintain compliance with occupant eligibility and/or unit gross rent, or to correct noncompliance within a specified time period could result in recapture of previously taken tax credits, plus interest. In addition, such potential noncompliance may require an adjustment to the contributed capital by the Investment Member of Riverside Center Parcel 2 BIT LI Owner, LLC. Estimates And Assumptions Management uses estimates and assumptions in preparing the consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could differ from those estimates. Rental Property Rental property is stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over estimated useful lives of the assets ranging from 5 to 40 years. Page 8

11 The Company reviews its investments in rental property for impairment whenever events or changes in circumstances indicate that the carrying value of such property may not be recoverable. Recoverability is measured by comparison of the carrying amount of the rental property, including the residual value. If the rental property is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the rental property exceeds the fair value of such property. There was no impairment loss recognized at December 31, 2016 or Tenant Accounts Receivable Tenant accounts receivable are stated at the amount management expects to collect from balances outstanding at year end based on management s assessment of the credit history with tenants having outstanding balances and current relationships with them. Management has concluded that realized losses on balances outstanding at year end will be immaterial. Debt Issuance Costs Debt issuance costs totaling $3,304,985 consist of fees for obtaining the mortgage note payable, are being amortized using the straight-line method over the life of the loan. Amortization is included in interest expense mortgage on the statement of operations. Amortization expense and accumulated amortization amounted to $41,312 as of December 31, No amortization was accumulated at December 31, 2015 as the Project had not begun operations. Accounting principles generally accepted in the United States of America require that the effective yield method be used to amortize financing costs; however, the effect of using the straight-line method is not materially different from the results that would have been obtained under the effective yield method. Residential Rental Revenue Residential rental revenue is recorded as earned in accordance with the terms of the leases. The residential rental property is generally leased to tenants under oneyear, noncancellable operating leases. Residential rental payments received in advance are deferred until earned. Page 9

12 Fair Value Of Financial Instruments The carrying amount of the mortgage note payable approximates the fair value as the stated rate of the note approximates the current rate at which the Company could borrow funds with similar terms, degree of risk and remaining maturities. Construction payables approximate the fair value due to the short-term nature of the payables. Cash And Cash Equivalents The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents primarily on deposit with two financial institutions and at times these balances exceed federally insurable limits. Restricted Cash Restricted cash consists of the unused funds available from the proceeds of the mortgage note payable. The escrow is held by U.S. Bank N.A. As of December 31, 2016 and 2015, unused funds available from the mortgage note payable amount to $27,109,327 and $87,096,820, respectively. An interest reserve was established in 2012 in the amount of $3,073,975. As of December 31, 2016 and 2015, the interest reserve amounted to $2,411,428 and $3,073,975, respectively. In September 2016, a reserve to be used to fund monthly letter of credit fees was established in the amount of $1,400,000. As of December 31, 2016, the reserve amounted to $1,400,000. In November 2016, the Company was required by the Department of City Planning of the City of New York (DCP) to establish an escrow of $300,000 to secure the completion of construction of the public space and access areas of the development. Such escrow funds are anticipated to be released upon the DCP s approval of certificates of substantial completion of the public space and access areas of the development. As of December 31, 2016, the escrow amounted to $300,000. No funds were held as of December 31, Pursuant to the Operating Agreement of the LI Owner, an escrow shall be established for deposits of installments of capital contributions made from the Investment Member to Riverside Center Parcel 2 BIT LI Owner, LLC. As of December 31, 2016, the escrow amounted to $1,100,010. The escrow was not funded as of December 31, Page 10

13 New York School Construction Authority Agreement The Company entered into a School Design, Construction, and Conveyance Agreement with the New York City School Construction Authority School (NYSCA) on October 22, 2012, which states the Company is to construct and develop on the Premises a public school, which is to be transferred to NYSCA or its designee. The Developer Member shall fund all Cost Overruns necessary to construct and Complete the School in a timely manner and otherwise in accordance with the School Design, Construction, and Conveyance Agreement and the Development Plan and Budget. As of December 31, 2016 and 2015, construction receivables related to the school of $318,324 and $286,655, respectively, are included in accounts receivable - NYSCA. Construction In Progress Costs that relate to the acquisition, development and construction of the Project, including pre-acquisition costs, are capitalized as a cost of the Project. Operating and carrying costs such as interest costs and insurance costs pertaining to the property development are capitalized while the development is in progress until the building of the Project is substantially complete and ready for its intended use. Costs are allocated to project components by the specific identification method. Deferred Lease Costs The Company capitalizes lease commissions, tenant incentives and direct legal costs incurred related to the commercial leases. These costs are being amortized on a straight-line basis over the terms of the related leases. As of December 31, 2016, deferred lease costs totaled $98,586. As of December 31, 2015, there were no deferred lease costs. No amortization has been recorded on the deferred lease costs as of December 31, 2016 or Deferred Tax Credit Fees The Company paid $939,662 of fees associated with the low-income housing tax credits received by the Company. The fees are being amortized over a period of fifteen years beginning in the first year the credits were taken. No amortization was recorded for 2016 or 2015, as no credits were claimed as of December 31, 2016 or Page 11

14 421(a) Tax Benefit Program The Project is eligible for the City of New York Department of Housing Preservation and Development s 421(a) Tax Benefit Program (the Program). The Program offers partial tax exemption for new multiple dwellings on lots which were vacant, predominantly vacant, or improved with a non-conforming use three years prior to the start of construction. Benefits include a construction period exemption of up to three years plus a twenty year (twelve full years with an eight year phase out beginning in year thirteen) post-construction exemption from the increase in real estate taxes resulting from the construction improvements. As of December 31, 2016 and 2015, application costs totaling $1,683,700 have been deferred and will be amortized over the life of the Program beginning in the year construction is completed. Development Fees Development fees of $5,100,000, incurred for the development of the Project, are being capitalized and added to the basis of the property. New Accounting Standards Implemented During 2016, the Company implemented changes to the Accounting Standards Codification caused by Accounting Standards Update , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. The objective of this change is to simplify the presentation of debt issuance costs. This amendment requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. Previously, debt issuance costs were shown net of accumulated amortization on the balance sheet as an asset. The Company s implementation of this new accounting guidance resulted in certain presentation changes to the consolidated balance sheet. The effect of these changes has been applied retrospectively. Deferred costs and mortgage notes payable on the balance sheet were reduced by $3,263,673 and $3,304,985 at December 31, 2016 and 2015, respectively. This change had no effect on members equity or consolidated net loss. Page 12

15 Income Taxes The Company is formed as a limited liability company (LLC). LLC s are not subject to federal and New York state income taxes. Rather, the income is included in the tax returns of the members in accordance with the provisions of the Code. Consequently, the Company s financial statements reflect no provision for federal or state income taxes. The Company follows accounting rules for uncertain tax positions, which require financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. The rules also provide guidance on measurement, derecognition, classification, interest and penalties, and disclosure requirements for uncertain tax positions. The Company s federal and state tax returns for tax year 2013 and later remain subject to examination by taxing authorities. Capitalized Terms Certain terms defined in the Operating Agreement have been denoted with initial capital letters throughout the notes to the financial statements. Reclassification Certain amounts on the 2015 financial statements have been reclassified, where appropriate, to conform to the presentation Subsequent Events Management has evaluated subsequent events through the date the financial statements are available for issue, which is the date of the Independent Auditors Report. 2. Mortgage Note Payable The Company obtained financing for the Project from NYSHFA, whereby NYSHFA issued and sold its Riverside Center 2 Housing Revenue Bonds 2012 Series A ($25,000,000 in 2012 (2012 Tax-Exempt Bonds)) and its 2013 Series A-1, 2013 Series A-2, and 2013 Series A-3 (collectively $164,000,000 in 2013 (2013 Tax Exempt Bonds)) and loaned the proceeds to the Company in the form of a Mortgage Note Payable. NYSHFA sold a final portion of Series A-4 and Series A-5 (collectively $86,000,000 during 2015 (2015 Tax-Exempt Bonds)) and loaned the proceeds to the Company in the form of a Mortgage Note Payable. As of December 31, 2016 and 2015, $275,000,000 remained payable from the Company to NYSHFA. Page 13

16 The mortgage note bears interest at a variable rate calculated weekly based upon Loop Capital Markets LLC and Goldman Sach s (Remarketing Agent) determination of the rate required to allow the bonds to be sold at par plus accrued interest. These rates follow the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index. As of December 31, 2016 and 2015, the interest rate was 0.7% and 0.03%, respectively. Under certain circumstances described in the Bond Resolution, the Company may change the interest rate to an Adjustable Interest Rate or to a Fixed Interest Rate as defined in the Bond Resolution and after any such change (other than a change to the Fixed Interest Rate), to another Adjustable Interest Rate or back to a Variable Interest Rate. The mortgage note payable is secured by a first deed of trust on the Project. The bonds and mortgage note mature on November 1, Letter Of Credit Concurrently with the sale of the Bonds, the Borrower was required to obtain a letter of credit to cover the face of the bonds of $275,000,000 and 34 days interest at a rate of 12% per year. In November 2016, the initial expiration date of the letter of credit was extended from December 16, 2016 to December 16, The Company may extend the letter of credit for a one-year period if it meets certain requirements under the terms of the letter of credit with Bank of America, N.A. Monthly, the Company pays a letter of credit commission fee at a rate of 2.35% on the Drawn Amount, 0.5% on the Undrawn Amount, and 0.5% on the Collateral Amount. The Drawn Amount, Undrawn Amount, and Collateral Amount as of December 31, 2016 and 2015 are as follows: Drawn Amount $ 247,890,571 $ 187,903,078 Undrawn Amount 27,109,429 87,096,922 Collateral Amount 3,073,975 3,073,975 $ 278,073,975 $ 278,073,975 Page 14

17 3. Related Party Transactions Management Fee The Company has entered into a property management agreement with Dermot Realty Management Co. Inc. (DRMC), an affiliate of the Developer Member. The management fee is calculated at 2.25% of monthly gross revenues, of which 2.0% is payable to DRMC and 0.25% to CRP/GF Parcel 2, LP (CRP), an affiliate of the Developer Member. In addition to property management fees, DRMC receives a commercial leasing fee and a lease administration fee as defined in the property management agreement. Fees of $41,550 have been incurred and paid for No fees were charged to operations in Development Fee The Company entered into a Development Agreement with Dermot Riverside Parcel 2, LLC, an affiliate of the Developer Member, in connection with overseeing the construction of the Project in the amount of $8,100,000 which is split 95% to the developer and 5% to CRP. $5,100,000 of the Development Fee is to be incurred incrementally during construction and the remaining $3,000,000 will be incurred upon Completion. As of December 31, 2016, $5,100,000 of the Development Fee has been incurred and paid. As of December 31, 2015, $5,100,000 of the Development Fee has been incurred, $4,836,113 has been paid, and $263,887 is included in due to affiliates. Due From Affiliates During 2016, the Developer Member paid syndication fees with respect to the syndication of the LI Owner. The syndication fees are expected to be reimbursed by the Investment Member in LI Owner in As of December 31, 2016, $971,179 remained receivable from the Investment Member in LI Owner. No amounts remained due from affiliates as of December 31, Due To Affiliates The Members advanced capital call loans to fund cost overruns. The loans are noninterest bearing and due on demand. As of December 31, 2016, the BIT Member and Developer Member had loaned $41,137,790 and $17,061,461, respectively. As of December 31, 2015, the BIT Member and Developer Member had loaned $26,730,329 and $11,333,756, respectively. Page 15

18 On the Acquisition Funding Date, the Developer Member paid a capital contribution to the LI Owner in the amount of $5,600,000 in exchange for a Preferred Equity Interest in LI Owner. LI Owner advanced the proceeds of the capital contribution to the Company to fund construction costs. As of December 31, 2015, the outstanding balance of the LI Owner was $5,600,000. The remaining balance was forgiven as a contribution in 2016 and no amounts remained payable at December 31, Rental Property Rental property is comprised of the following at December 31: Land $ 77,309,977 $ 77,309,977 Buildings and improvements 259,121,217 Personal property 9,809,833 Construction in progress 107,804, ,840, ,045, ,150,769 Less: Accumulated depreciation 2,422,986 $ 451,622,514 $ 383,150, Capital Contributions Contingent upon various requirements as outlined in the LI Owner s Operating Agreement, the Investment Member and Managing Member of LI Owner are to make capital contributions of $28,620,059 and $38,363,363, respectively, to the LI Owner in multiple installments. In addition, the Managing Member of LI Owner made a loan to the Company in the original principal amount of $5,600,000. On November 21, 2016, the Managing Member of LI Owner contributed the existing loan, along with accrued interest of $93,399, to the Company, which was forgiven during the period beginning November 21, 2016 and ended December 31, 2016, and treated as a partial payment from the Company on the capital lease. Page 16

19 The future Investment Member capital installments to LI Owner at December 31, 2016 are due as follows: Year Amount 2017 $ 2,747, ,821, ,801, ,782, ,762,481 Thereafter 13,604,259 $ 27,520,059 In accordance with the LI Owner s Operating Agreement, % of each Investment Member capital installment shall be deemed immediately distributed to the Managing Member as a return of capital. As of December 31, 2016, distributions of $314,287 due to the Managing Member have accumulated and remain unpaid. 6. Supplemental Cash Flow Information The Company had the following noncash investing and financing activities: For the year ended December 31, 2016, additions to rental property of approximately $70,900,000, interest and other expenses of approximately $2,773,000, net payments on construction payables of approximately $3,400,000, tax credit fees of approximately $920,000, lease commissions of approximately $100,000, were funded through net construction cash payments of approximately $57,850,000, capital contributions of approximately $6,793,000, advances from affiliates of approximately $13,300,000, and utilization of prepaid expenses of approximately $150,000. For the year ended December 31, 2015, additions to construction in progress of $147,556,000 and net payments on construction payables of $2,900,000 were funded through mortgage note advances of $86,000,000, net construction cash payments of $42,000,000, advances from affiliates of $20,100,000, reimbursements from NYSCA of $2,000,000, and utilization of prepaid expenses of $356,000. Page 17