SP Redevelopment LP. Financial Statements (With Supplementary Information) and Independent Auditor's Report. December 31, 2015 and 2014

Transcription

1 Financial Statements (With Supplementary Information) and Independent Auditor's Report December 31, 2015 and 2014

2 Index Mortgagor's Certification 2 Independent Auditor's Report 3 Financial Statements Balance Sheets 5 Statements of Operations 6 Statements of Partners' Equity 7 Statements of Cash Flows 8 Notes to Financial Statements 9 Supplementary Information Schedules of Certain Income and Expenses 17 1

3 December 31, 2015 Mortgagor's Certification I hereby certify that I have examined the accompanying financial statements and supplementary data of SP Redevelopment LP and, to the best of my knowledge and belief, the same are complete and accurate. GENERAL PARTNER um"'{j:!''p ~~:~ey GP, LLC ent LLC MANAGING AGENT Patrick McKenzie Property Manager Managing Agent Taxpayer Identification Number:

4 COHN ACCOUNTJNG TAX ADV!S:ORY REZNICK Cohn Reznick LLP cohnreznlck.com Independent Auditor's Report To the Partners SP Redevelopment LP Report on the Financial Statements We have audited the accompanying financial statements of SP Redevelopment LP, which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, partners' equity and cash flows for the years 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 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 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 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 SP Redevelopment LP as of December 31, 2015 and 2014, 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. 3

5 Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information on pages 17 and 18 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedufeis in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Bethesda, Maryland February 25,

6 Balance Sheets December 31, 2015 and 2014 Assets Investment in rental property, net $ 15,435,656 $ 16,160,693 Cash and cash equivalents 231, ,913 Restricted cash Escrows 85,536 83,733 Tenants' security deposits 141, ,309 Replacement reserve 449, ,500 Restricted funds 238, ,416 Total restricted cash 915, ,958 Tenant receivables 86,575 78,885 Prepaid expenses 22,429 13,856 Deferred loan costs, net 663, ,313 Investment in certificate of deposit 62,577 62,204 Other assets 8,338 Accounts receivable- affiliate 29,602 27,402 Total assets $ 17,447,715 $ 18,171,562 Liabilities and Partners' Equity Liabilities Accounts payable - operations $ 54,106 $ 73,068 Accrued property management fees 65,830 62,241 Other accrued liabilities 37,868 17,677 Accrued real estate taxes 29,458 29,458 Accrued interest - first mortgage 53,682 54,789 Accrued interest - other Joan 5,703 6,045 Tenants' security deposits liability 140, ,108 Payable to general partner and affiliates 44,228 70,491 Annual fee payable to affiliate of limited partner 750 1,500 Mortgages and notes payable 13,986,944 14,302,244 Total liabilities 14,419,322 14,757,621 Contingencies Partners' equity 3,028,393 3,413,941 Total liabilities and partners' equity $ 17,447,715 $ 18,171,562 See Notes to Financial Statements. 5

7 Statements of Operations Revenue Rental income $ 2,667,751 $ 2,607,959 Vacancies and concessions (92,357) (98,027) Other operating income 155, ,270 Total revenue 2,730,819 2,613,202 Operating expenses Salaries and employee benefits 350, ,220 Repairs and maintenance 294, ,345 Utilities 230, ,611 Property management fee 164, ,601 Real estate taxes 117, ,128 Property insurance 48,555 47,927 Miscellaneous operating expenses 264, ,808 Total operating expenses 1,471,763 1,368,640 Net operating income (loss) 1,259,056 1,244,562 Other income (expense) Interest income Interest expense- first mortgage (650,431) (663,269) Interest expense- other loan (70, 125) (72,444) Annual fee to affiliate of limited partner (3,000) (3,000) Other related party fees and expenses (38,676) (65, 114) Depreciation (822,623) (824,827) Amortization (34,664) (33,927) Total other income (expense) (1,618,859) (1,661,763) Net loss $ (359,803) $ (417,201) See Notes to Financial Statements. 6

8 Statements of Partners' Equity Special limited Total partners' General partner partner Limited partner equity (deficit) Balance, January 1, 2014 $ (57,962) $ (442) $ 3,896,240 $ 3,837,836 Net loss (41) (42) (417,118) (417,201) Distributions (5,020) 1 (1,673) (6,694) Balance, December 31,2014 (63,023) (485) 3,477,449 3,413,941 Net Joss (36) (36) (359,731) (359,803) Distributions (25,745) - (25,745) Balance, December 31, 2015 $ (88,804) $ (521) $ 3, $ 3,028,393 Partners' percentage of partnership losses 0.01% 0.01% 99.98% % See Notes to Financial Statements. 7

9 Statements of Cash Flows Cash flows from operating activities Net loss $ (359,803) $ (417,201) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation 822, ,827 Amortization 34,664 33,927 Changes in: Escrows (1,803) (575) Tenants' accounts receivable (7,690) (11,585) Prepaid expenses (8,573) 7,523 Other assets 7,678 Accounts payable - operations (18,962) 17,479 Accrued property management fees 3,589 1,282 Other accrued liabilities 20,191 (8,279) Accrued real estate taxes 568 Accrued interest- first mortgage (1,107) (1,043) Accrued interest- other loan (342) (363) Tenants' security deposits liability, net (3,919) (23,379) Annual fee payable to affiliate of limited partner (750) 1,500 Payable to general partner and affiliates (26,263) Net cash provided by operating activities 459, Cash flows from investing activities Investment in rental property (97,586) (54,219) Change in reserve for replacements (46,947) (43,457) Net deposits to/ (withdrawals from) other restricted funds (151) (5,514) (Investment in)/withdrawals from certificate of deposit (373) (373) Repayments from (advances to) affiliate (1,540) (1,540) Net cash used in investing activities (146,597) (105, 103) Cash flows from financing activities Payments on mortgages payable (315,300) (300,098) Distributions to partners (25,745) (6,694) Net cash used in financing activities (341,045) (306,792) Net (decrease) increase in cash and cash equivalents (28, 1 09) 67,859 Cash and cash equivalents, beginning Cash and cash equivalents, end $ 231,804 $ 259,913 Supplemental disclosure of cash flow information Cash paid for interest $ 722,005 $ 737,119 See Notes to Financial Statements. 8

10 Notes to Financial Statements Note 1 - Organization and nature of operations SP Redevelopment LP (the "Partnership") was formed as a limited partnership under the provisions of the District of Columbia Uniform Limited Partnership Act of 1987 on May 6, 2004, for the purpose of acquiring, redeveloping and operating a rental housing project. The partnership agreement was amended and restated as of July 1, The project consists of 250 units located in the District of Columbia and is currently operating under the name of Shipley Park Apartments. On July 29, 2005, the Partnership acquired land and buildings comprising the apartment complex known as Shipley Park Apartments for a purchase price of $8,000,000. The property was acquired for the purpose of rehabilitation and operation as a rental property qualifying for acquisition and rehabilitation Low-Income Housing Tax Credits in accordance with Section 42 of the Internal Revenue Code. In addition to the land and buildings, the Seller provided the Partnership with cash equal to the liability assumed for security deposits related to tenants occupying the units on the date of acquisition. The purchase price was allocated to land and buildings based on their respective fair values as set forth below. A summary of the purchase price allocated to land and buildings follows: Land Building $ 1,600,000 6,400,000 $ 8,000,000 The Partnership consists of the following partners: Shipley GP, LLC, a general partner which owns a.01% interest, Centerline Corporate Partners XXX, LP, a limited partner with a 99.98% interest, and Related Corporate XXX SLP, LLC, a special limited partner with a.01% interest. The partnership agreement is in effect until December 31, The project has qualified for and been allocated low-income housing tax credits pursuant to Internal Revenue Code Section 42 ("Section 42"), which regulates the use of the project as to occupant eligibility and unit gross rent, among other requirements. The project must meet the provisions of these regulations during each of 15 consecutive years in order to remain qualified to receive the credits. In addition, SP Redevelopment LP has entered into an Extended Use Commitment, which requires the utilization of the project pursuant to Section 42 for a minimum of 30 years, even if disposition of the project by the Partnership occurs. Note 2 -Significant accounting policies Accounting method The financial statements have been prepared on the accrual basis of accounting. Accordingly, income is recognized as earned and expenses as incurred, regardless of the timing of payments. Cash equivalents For purposes of the statement of cash flows, the Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Tenant receivables Tenant receivables are charged to bad debt expense when they are determined to be uncollectible based upon a periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize 9

11 Notes to Financial Statements bad debts; however, the effect of using the direct write-off method is not materially different from the results that would have been obtained under the allowance method. Rental property Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, from 5 to 40 years, principally by use of the straight-line and declining-balance methods. Impairment of long-lived assets The Partnership reviews its rental property for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When recovery is reviewed, if the undiscounted cash flows estimated to be generated by the property are less than its carrying amount, management compares the carrying amount of the property to its fair value in order to determine whether an impairment loss has occurred. The amount of the impairment loss is equal to the excess of the asset's carrying value over its estimated fair value. No impairment loss has been recognized during the years ended December 31, 2015 and Deferred loan fees Deferred loan fees totaling $916,041 related to the permanent financing were capitalized and are being amortized using the effective yield method over 15 years beginning on February Accumulated amortization totals $252,392 and $217,728 at December 31, 2015 and 2014, respectively. Amortization expense for the years ended December 31, 2015 and 2014 was $34,664 and $33,927, respectively. Estimated annual amortization expense for the ensuing years through December 31, 2020 is $35,348, $35,969, $36,515, $36,973 and $37,329, respectively. Rental income Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. All leases between the Partnership and the tenants of the property are operating leases. Advertising costs The Partnership's policy is to expense advertising costs when incurred. Income taxes The Partnership has elected to be treated as a pass-through entity for income tax purposes and, as such, is not subject to income taxes. Rather, all items of taxable income, deductions and tax credits are passed through to and are reported by its owners on their respective income tax returns. The Partnership's federal tax status as a pass-through entity is based on its legal status as a partnership. Accordingly, the Partnership is not required to take any tax positions in order to qualify as a pass-through entity. The Partnership is required to file and does file tax returns with the Internal Revenue Service and other taxing authorities. Accordingly, these financial statements do not reflect a provision for income taxes, and the Partnership has no other tax positions which must be considered for disclosure. Income tax returns filed by the Partnership are subject to examination by the Internal Revenue Service for a period of three years. While no income tax returns are currently being examined by the Internal Revenue Service, tax years since 2012 remain open. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and 10

12 Notes to Financial Statements liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Investment The Partnership's investment consists of a certificate of deposit with a maturity of 21 months in duration. It is carried at cost plus accrued interest, which approximates fair value. The certificate of deposit earns interest at a rate of.6% and matures on September 30, Note 3 - Rental property Rental property is comprised of the following as of December 31: Land Land improvements Buildings and improvements Equipment $ 1,654, ,775 20,753, ,146 $ 1,654, ,620 20,746, ,090 Subtotal Accumulated depreciation 23,458,060 (8,022,404) 23,360,474 (7,199,781) Net $ 15,435,656 $ 16,160,693 Note 4 - Restricted cash Replacement reserves In accordance with the terms of the first mortgage, the Partnership is required to make monthly deposits of $6,250 to the replacement reserve. The activity is comprised of the following for the years ended December 31, 2015 and 2014: Balance, January 1 Deposits Interest earnings Withdrawals Balance, December 31 $ $ 402,500 $ 359,043 75,000 75, (28,270) (31,908) 449,44 7,;$'====4;,;;0;;;;2,~50;;,;0~ 11

13 Notes to Financial Statements Tax and insurance escrow The Partnership is required to make monthly deposits to the tax and insurance escrow. The activity for the years 2015 and 2014 is as follows: Balance, January 1 Deposits Payments Note 5 - Restricted funds Balance, December 31 $ $ 83,733 $ 83, , ,309 (166,469) (163,734) 85' 536.,;$~=~8;;;:;3;.;,, 7;;;,;33;;, The Partnership is required by the trust indenture to establish and maintain reserve accounts. These restricted funds, totaling $238,567 and $238,416 at December 31, 2015 and 2014, respectively, are maintained by the trustee, U.S. Bank Corporate Trust Service, in money market funds bearing interest averaging from.02% to.40% per annum. Releases from the funds are permitted under the terms and conditions set forth in the trust indenture. Note 6 - Related party transactions Management fee The property is managed by William C. Smith & Co., Inc., an affiliate of the general partner, pursuant to a management agreement. The management agreement provides for a management fee of 6% of monthly rental collections. The total management fee incurred during the years ended December 31, 2015 and 2014 was $164,605 and $155,601, respectively. As provided for in the partnership agreement, 60% of the monthly calculated fee is payable from monthly cash flow. The remainder 40% of the fee is paid quarterly. As of December 31, 2015 and 2014, $65,830 and $62,241, respectively, remains payable. Capital contributions receivable The investor limited partner is required to make contributions to the Partnership in the aggregate amount of $8,390,736, which included an upward credit adjuster of $168,736. The contributions are payable at various stages of completion of construction of the project, with the final payment due upon Rental Achievement. As of December 31, 2015, $8,390,736 has been contributed. Annual local administrative fee The Partnership has entered into an agreement with the special limited partner for the payment of an annual local administrative fee in the amount of $3,000 per annum, beginning on the placed-inservice date, for its services in monitoring the operations of the Partnership. The fee shall be cumulative and is payable out of available cash flow in subsequent years. During the years ended December 31, 2015 and 2014, $3,000 and $3,000, respectively, was incurred and as of December 31, 2015 and 2014, $750 and $1,500, respectively, remains payable. Supervisory management fee The Partnership has entered into an agreement with the general partner for the payment of a noncumulative supervisory management fee of 60% of cash flow for management services. The fee will be paid from cash flow as defined in the partnership agreement. During the years ended December 12

14 Notes to Financial Statements 31, 2015 and 2014, fees of $38,676 and $65,114, respectively, were earned and $44,228 and $70,491, respectively, remains payable. Replacement reserve guaranty The general partner and affiliates of the general partner guarantee that they will fund the Replacement Reserve in an amount equal to the Mandatory Reserve as set forth in the contribution agreement in the event that sufficient funds are not available from cash flow. Recapture guaranty The general partner and affiliates of the general partner guarantee that they will reimburse the limited partners for certain amounts if there is a "tax credit recapture event," as set forth in the contribution agreement. Account receivable -affiliate The Partnership advanced $1,540 and $1,540 to an affiliate of the general partner during the years ended as of December 31,2015 and 2014, respectively. The advances are noninterest-bearing and due on demand. As of December 31, 2015 and 2014, $29,602 and $27,402, respectively, remains receivable. Note 7 - Mortgage notes payable First mortgage payable The Partnership entered into a loan agreement with U.S. Bank Corporate Trust Service (the "trustee") and the District of Columbia Housing Finance Agency (the "Issuer") on July 1, This loan is funded with the issuance of tax-exempt Multi-Unit Housing Revenue Bonds in the amount of $11,920,000. The mortgage bears interest at 5.42% through the Conversion Date, February 1, 2008, and 6.12% from the conversion date through the initial remarketing date of June 1, The loan is secured by a deed of trust and a letter of credit in the amount of the bonds. Beginning July 29, 2005, the funding date of the loan, interest only payments were payable in monthly installments of $53,839. Following the date on which the rehabilitation of the mortgaged property is completed (the "Conversion Date"), principal and interest payments are payable in monthly installments of $72,389. In addition, as of the Conversion Date, the Partnership is required to make monthly deposits to the tax and insurance escrows and establish a replacement reserve, which is being funded monthly. The bonds mature 30 years from the Conversion Date, but, in any event, not later than February 1, As of December 31, 2015 and 2014, the mortgage balance is $10,525,814 and $10,743,030, respectively. Aggregate annual maturities of the mortgage payable for the next five years and thereafter are as follows: 2016 $ 230, , , , ,746 Thereafter 9,216,594 Total $ 10,525,814 13

15 Notes to Financial Statements Subordinated mortgage payable The Partnership entered into a loan agreement on July 1, 2005 with the District of Columbia in the amount of $3,800,000 for the purpose of acquiring the rental property. The loan bears interest at 2% per annum and is collateralized by a second deed of trust on the property. Interest began accruing on July 29, 2005, the funding date of the loan; however, repayment of the loan and interest was deferred until March 1, 2008, at which time the Partnership began making monthly interest payments from available surplus cash until all of the accrued interest was paid. Beginning on March 1, 2012, principal and interest payments are payable in monthly installments of $14,046. As of December 31, 2015 and 2014, the loan balance is $3,461,130 and $3,559,214, respectively. The loan matures March 1, Aggregate annual maturities of the mortgage payable for the next five years and thereafter are as follows: 2016 $ 98, , , , ,255 Thereafter 2,945,674 Total $ 3,461 '130 Note 8 - Partnership profits, losses and distributions Profits and losses for any fiscal year calculated shall be allocated 99.98% to the limited partner,.01% to the special limited partner and.01% to the general partner. Cash flow shall be distributed in the following priority: 1. To the payment of any fee to the management agent that has been deferred; 2. To the partners, other than the general partner for any loans made by them; 3. To the general partner for any loans made by it; 4. To the special limited partner for the annual local administrative fee; 5. To the developer for accrued interest on the deferred developer fee; 6. To the developer for any unpaid principal of the deferred developer fee; 7. To the extent of 50% of the remaining cash flow, to repay any operating deficit loan; 8. To the general partner to pay the GP supervisory management fee; and 9. The balance, 25% to the limited partner, 74.99% to the general partner and.01% to the special limited partner. 14

16 Notes to Financial Statements Note 9- Distributable cash flow (unaudited) Cash flow available for distribution Cash flow shall be applied in the following priority: Deferred management fee Voluntary loan to Limited Partners Voluntary loan to General Partner Annual local administrative fee to the Special Limited Partner Deferred developer fee - interest Deferred developer fee -principal Operating loan (50% of remaining cash flow) GP supervisory management fee Remaining cash fiow shall be distributed as follows: Shipley GP, LLC Centerline Corporate Partners XXX, LP Related Corporate XXX SLP, LLC $ 143,294 $ 65,830 3,750 44, % 22, % 7, % :::3_ $ 143,294 Note 10- Concentration of credit risk The Partnership maintains cash and cash equivalents with financial institutions. The Partnership also maintains bond funded escrows and reserves. All escrows and reserves are held in trust accounts in the Partnership's name. At times, these balances may exceed the federal insurance limits; however, the Partnership has not experienced any losses with respect to its bank balances in excess of government provided insurance. Management believes that no significant concentration of credit risk exists with respect to these balances at December 31, Note 11 - Contingency The project's low-income housing tax credits are 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 contributed capital by the limited partner. Note 12- Subsequent events Events that occur after the balance sheet date but before the financial statements were available to be issued must be evaluated for recognition or disclosure. The effects of subsequent events that provide evidence about conditions that existed at the balance sheet date are recognized in the accompanying financial statements. Subsequent events which provide evidence about conditions that existed after the balance sheet date require disclosure in the accompanying notes. Management evaluated the activity of the Partnership through February 25, 2016 (the date the financial statements were available to be issued) and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements. 15

17 Supplementary Information

18 Schedules of Certain Income and Expenses Rental income Rent revenue- gross potential $ 2,667,751 $ 2,607,959 Total rental income $ 2,667,751 $ 2,607,959 Vacancies and concessions Apartments vacancies $ 92,357 $ 98,027 Total vacancies and concessions $ 92,357 $ 98,027 Other operating income Laundry and vending $ 18,827 $ 17,732 Application fees 5,545 3,007 Miscellaneous other income 131,053 82,531 Total other operating income $ 155,425 $ 103,270 Salaries and employee benefits Salaries - administrative $ 130,609 $ 135,600 Salaries - maintenance 132,036 73,108 Salaries - security 40,044 25,964 Payroll taxes 25,566 18,919 Health insurance and other benefits 15,058 10,670 Workmen's compensation insurance 7,524 3,959 Total salaries and employee benefits $ 350,837 $ 268,220 Repairs and maintenance Exterminating $ 14,630 $ 7,502 Grounds 35,383 33,420 Fire protection 3,809 3,662 Security services/contract 6,955 5,770 Supplies 50,981 47,874 HVAC expense 5,176 8,490 Painting - exterior 61,878 65,842 Repairs and maintenance- other than contracts 57,625 56,709 Repairs and maintenance- contracts 55,402 93,549 Miscellaneous maintenance expenses 3,157 5,527 Total repairs and maintenance $ 294,996 $ 328,345 17

19 Schedules of Certain Income and Expenses Utilities Electricity $ 23,393 $ 23,716 Water 173, ,919 Trash removal 28,102 29,894 Gas 4,874 9,082 Total utilities $ 230,351 $ 205,611 Miscellaneous operating expenses Office supplies and expense $ 8,115 $ 10,244 Training and travel 3,154 1,935 Telephone and answering service 10,049 8,511 Credit collection and eviction 2,759 4,230 Computer supplies and expense 3,078 1,600 Miscellaneous administrative 105,984 73,247 Advertising and newspaper 12,307 17,001 Legal 39,338 54,569 Audit 16,400 10,800 Other professional fees 5,051 4,500 Other taxes, licenses and insurance 58,345 60,171 Total miscellaneous operating expenses $ 264,580 $ 246,808 Interest expense- other loan Interest expense - other loan $ 70,125 $ 72,444 Total interest expense- other loan $ 70,125 $ 72,444 Other related party fees and expenses GP supervisory management fee $ 38,676 $ 65,114 Total other related party fees and expenses $ 38,676 $ 65,114 See Independent Auditor's Report. 113