Presentation of Financial Statement Disclosures Affiliate Relationships

Transcription

1 Presentation of Financial Statement Disclosures Affiliate Relationships (The following section of the sample disclosure applies to organizations that own real estate) ABC and affiliates control limited partnerships, which own affordable housing and commercial properties. Most of the partnerships participate in the Low-Income Housing Tax Credit program described in Section 42 of the Internal Revenue Code. ABC, or an affiliate, typically are the managing general partners of the limited partnerships and since ABC or an affiliate controls each partnership as defined by GAAP, the partnerships are consolidated in these financial statements. ABC also forms limited liability companies, general partnerships and not-for-profit organizations to own affordable housing properties that do not participate in the Low-Income Housing Tax Credit program. The following entities own affordable housing properties and commercial properties that are included in these financial statements: Entity Name Entity Type Relationship Property Location Property Placed in Service Date Property Size Property Type ABC Housing I, L.P. LP (1) San Francisco, units Multi-family CA ABC Housing II, L.P. LP (1) Fremont, CA units Multi-family ABC Housing III, L.P. LP (1) San Diego, CA units Senior Oceanview Homes, Inc. NPO (4) Austin, TX units Senior Bayview Housing, Inc. NPO (5) New Orleans, units Multi-family LA ABC, Inc. NPO (8) Los Angeles, units Multi-family CA Crestview Partners LP (6) New York, NY ,000 sq. ft Commercial Happy Valley LP (6) Memphis, TN units Multi-family Associates ABC Housing V, L.P. LP (2) Honolulu, HI units Multi-family Lonestar LLC LLC (7) Dallas, TX units Multi-family ABC Housing VI, L.P. LP (3) Minneapolis, MN Est units Senior Entity types in the table above consist of limited partnerships (LP), not-for-profit organizations (NPO) and limited liability companies (LLC). Relationships are as follows: (1) ABC directly owns managing general partner interests ranging between.01% and 1% of each limited partnership. 3

2 Presentation of Financial Statement Disclosures Affiliate Relationships (2) One or more of ABC s affiliates owns the managing and any other general partner interests ranging between.01% and 1% of each limited partnership. (3) One of ABC s affiliates is the controlling co-general partner with another organization. Each organization s general partner interest ranges between.005% and.5% of each limited partnership. (4) The entity is controlled by ABC s board of directors through 100% common board membership. (5) The entity is controlled by ABC s board of directors through 51% to 99% common board membership. (6) ABC and/or one of its affiliates owns a 50% or greater general partner interest in the entity. As the managing general partner, ABC is deemed to control the partnership. (7) ABC and/or one of its affiliates is the sole member of the LLC or the sole partner in the partnership. (8) ABC owns the property directly. ABC forms subsidiaries to hold partner interests in the partnerships listed above, to own land leased to affiliated entities listed above and to perform other functions. These entities are also included in the combined financial statements of ABC and affiliates in accordance with generally accepted accounting principles (GAAP) because of common or majority board control of the not-for-profit organizations, or because ABC is the sole member of the limited liability companies: ABC GP, Inc., Crestview, Inc., Happy Valley, Inc., ABC Land Holdings, LLC, ABC Master Tenant, LLC, and ABC Support Corporation. An alternative to the table format is to use a paragraph describing each property such as the following example: ABC Housing III, LP was formed in 1999 to develop a 78-unit property located in San Diego, California. The 99.99% limited partnership interest was sold in 1999 to raise tax credit equity for the project. The project costs, totaling approximately $7,850,000 were financed by the tax credit equity, loans from the City of San Diego and a conventional lender. 4

3 Presentation of Financial Statement Disclosures Net Assets Lenders are interested in the amount of an organization s operating cash account that is included in temporarily restricted net assets. This may not be evident from the balance sheet since GAAP only requires restricted cash to be separated from operating cash if it will be used for long-term purposes, such as purchasing a fixed asset or if it will be held longer than one year. A suggested supplementary cash composition table can be found in Strength Matters Financial Reporting Best Practice Paper 15, Cash Presentation. An alternative is to include a disclosure of the amount of temporarily restricted net assets held in either the operating or the restricted cash account. Permanently Restricted Net Assets Most organizations disclosures of permanently restricted net assets are in paragraph form, since there are usually a small number of such restrictions. Contributions with restrictions on use that last into perpetuity are generally either endowment funds or land. While some donors require disclosure of the balance sheet accounts that comprise the permanently restricted net assets, this level of detail is not required by GAAP. The nature of the underlying asset is usually described in the disclosure, along with the terms of the permanent restriction. A donor may modify their intent, which could result in the release of a permanent restriction. Sample Financial Statement Disclosures NOTE BOARD-DESIGNATED UNRESTRICTED NET ASSETS The Board of Directors of ABC, Inc. designated $500,000 as a general operating reserve. NOTE TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets consist of the following: 12/31/11 Contributions Releases 12/31/12 Capital Improvements: HUD Capital Advances (1) $ 8,199,046 $ - $ (312,312) $ 7,886,734 ARRA Recoverable Grants (2) 21,466,540 - (1,589,321) 19,877,219 Resident Services Programs: XYZ Foundation 251, ,796 (126,224) 231,543 Other Program Support - 9,600-9,600 Multi-year pledges and grants: (3) EFG Foundation Grant - 15,000-15,000 Individuals and Others - 5,000-5,000 Total $ 29,917,557 $ 135,396 $ (2,027,857) $ 28,025,096 2

4 Presentation of Financial Statement Disclosures Net Assets 12/31/10 Contributions Releases 12/31/11 Capital Improvements: HUD Capital Advances (1) $ 8,511,358 $ - $ (312,312) $ 8,199,046 ARRA Recoverable Grants (2) 11,080,490 11,177,014 (790,964) 21,466,540 Resident Services Programs: XYZ Foundation 168, ,453 (66,300) 251,971 Total $ 19,760,666 $ 11,326,467 $ (1,169,576) $ 29,917,557 (1) (2) (3) HUD Capital Advances HUD has granted capital advances to certain multi-family properties under the Section 202 or Section 811 programs. These advances are secured by deeds of trust with assignment of rents. The capital advances bear no interest and shall be repayable if the properties do not remain available for very low-income housing through specific terms or the notes become due and payable by reason of default under the regulatory agreements. In the event of noncompliance with affordability provisions as described in the notes, interest and principal are payable on demand. Otherwise, the capital advances will not otherwise have to be repaid. Since it is expected that the capital advances will be forgiven, they are released over 40 years from temporarily restricted net assets to unrestricted net assets. ARRA Recoverable Grants The federal recoverable grants were awarded to qualifying multi-family properties. These recoverable grants shall be repayable if the properties do not remain available for very lowincome housing through specific terms or the recoverable grants become due and payable by reason of default under the recoverable grant agreements. In the event of noncompliance as described in the recoverable grant agreements, the recoverable grants will be payable on demand. Otherwise, they will not need to be repaid. Since the properties are expected to comply with the recoverable grant provisions, the recoverable grants will be released over 15 years from temporarily restricted net assets to unrestricted net assets. Multi-year pledges are for unrestricted purposes for use in the following years: 2013 $12, ,500 NOTE PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets as of December 31, 2012 and 2011 consists of land valued at $1,660,000 when it was donated to ABC in 2009 with the requirement that it be used for very low-income housing in perpetuity. 3

5 Presentation of Financial Statement Disclosures Notes Payable Sample Real Estate Properties are Owned by Parent Company and by Affiliates NOTE - NOTES PAYABLE Notes payable are generally nonrecourse and secured by the respective properties and bear simple interest rates unless otherwise noted: Interest Payable Interest Principal Payable Principal Parent-Company Loans: Permanent secured full-recourse conventional loan for office building, bearing compounded interest at 6.5%, with principal and interest due monthly, to be repaid in full in June Interest expense was $10,401 and $4,112 in 2012 and 2011, respectively. $ 186 $ 227,177 $ 297 $ 58,276 Deferred payment loans from local agencies, bearing interest from 0% to 6%, generally payable annually from property net cash flow, if any, to be repaid in full at various dates through Interest expense was $348,945 and $338,600 in 2012 and 2011, respectively. 6,493,021 19,731,751 6,144,075 19,770,429 Deferred payment loans from local agencies, bearing interest from 5.67% to 6%, with principal and interest payments deferred until maturity at various dates through Interest expense was $123,588 and $123,589 in 2012 and 2011, respectively. 1,828,265 2,169,813 1,704,677 2,169,813 Deferred payment loans from state agencies, bearing interest at 3%, with interest payable annually from property net cash flow, if any, to be repaid in full at various dates through Interest expense was $18,903 annually for 2012 and , , , ,100 Deferred payment loan from federal Affordable Housing Program bearing no interest, with entire principal to be repaid in full by , ,673 Working capital unsecured full-recourse loans from a bank, bearing 2% interest, generally with interest due quarterly, to be repaid in full in various dates through Interest expense was $25,074 and $26,000 in 2012 and 2011, respectively. - 1,120,826-1,300,000 Subtotal Parent-Company Loans 8,649,814 24,555,667 8,158,488 24,501,291 4

6 Presentation of Financial Statement Disclosures Notes Payable Interest Payable Interest Principal Payable Principal Affiliates Loans: Permanent conventional loans, bearing compound interest from 5.95% to 6.9%, generally with principal and interest due monthly, to be repaid in full at various dates through Interest expense was $750,785 and $753,656 in 2012 and 2011, respectively. 50,766 10,452,944 32,121 11,092,312 Predevelopment / construction loans, bearing interest from 3% to 7%, generally with interestonly payments due monthly, to be repaid in full or partially converted to permanent loans through Interest capitalized was $870,684 and $854,228 in and, respectively. Interest expense was $-0- and $234,524 in 2012 and 2011, respectively. 484,912 17,868, ,051 15,798,867 Bond loans, bearing variable interest rates, generally with principal and interest paid monthly, to be repaid in full at various dates through Principal payments are generally accumulated in a principal fund held by a trustee. Interest expense was $13,305 and $180,431 in 2012 and 2011, respectively. See Note X regarding fixed-rate swap arrangements. 13,770 7,774,498 14,334 8,175,000 Local agency loans, bearing interest from 0% to 10%, generally payable annually from property net cash flow, if any, to be repaid in full at various dates through Interest capitalized was $539,880 and $488,815 in 2012 and 2011, respectively. Interest expense was $3,122,578 and $3,282,260 in 2012 and 2011, respectively. 30,237, ,053,343 27,049, ,688,645 State agency loans, bearing interest from 0% to 7.4%, generally payable annually from property net cash flow, if any, to be repaid in full at various dates through Interest expense was $936,919 and $784,991 in 2012 and 2011, respectively. 3,718,146 29,050,553 3,111,604 27,757,907 Federal agency loans, bearing interest from 0% to 3%, generally with principal and interest deferred through Interest expense was $31,850 and $31,849 in 2012 and 2011, respectively. 321,941 61,466, ,120 50,868,810 Subtotal Affiliates Loans 34,827, ,666,560 30,847, ,381,541 5

7 Presentation of Financial Statement Disclosures Notes Payable Interest Payable Principal Interest Payable Principal Total loans 43,477, ,222,227 39,005, ,882,832 Less: current portion (367,442) (2,298,913) (473,114) (2,880,939) Long-term portion $ 43,109,771 $ 297,923,314 $ 38,532,809 $ 284,001,893 Principal payments toward notes payable for the next five years are subject to changes in net cash flow, which is a contingency that cannot be reasonably estimated. Minimum required payments are estimated as follows: Thereafter Total (In thousands with $000 omitted) Permanent $ 1,923 $ 1,926 $ 2,026 $ 1,304 $ 1,500 $ 1,774 $ 10,453 Construction (1) ,869 17,869 Bonds ,359 7,774 Local , , ,053 State ,000 28,000 29,051 Federal ,000 61,466 Parent-only , ,681 24,556 $ 2,299 $ 2,332 $ 2,467 $ 2,978 $ 15,463 $ 274,683 $ 300,222 (1) Principal payments of construction loans for the next five years cannot be reasonably estimated since the loans will be extended or repaid using funds already committed by permanent lenders and limited partners. Principal payments due under refinanced construction loans within the next five years are not expected to be significant. $200,000 of the construction loans payable will be repaid with limited partner capital contributions. 6

8 Presentation of Financial Statement Disclosures Commitments and Contingencies Sample Financial Statement Disclosures (In the following example ABC, Inc. is the parent organization) NOTE COMMITMENTS AND CONTINGENCIES Commitments: Rental Payments under Non-cancelable Operating Leases Office Space ABC, Inc. has leases for office space in New York, which expire between April 2013 and March The following is a schedule, by year, of the future minimum rental payments under the office space leases: Year ended December 31, 2013 $767, , ,000 Rent costs totaled approximately $946,000 and $965,000 for 2012 and 2011, respectively. Property-Related Leases ABC and affiliates lease property land, facilities, and commercial space under leases ranging from 30 to 55 years. Rent expense totaled approximately $3,489,000 and $3,350,000 for 2012 and 2011, respectively. Certain ground lease payments are subject to changes in net cash flow, which is a contingency that cannot be reasonably estimated. Minimum future lease expenses under the foregoing leases are: Year ended December 31, 2013 $ 352, , , , ,000 Thereafter 13,253,000 $ 15,015,000 3

9 Presentation of Financial Statement Disclosures Commitments and Contingencies Capital Commitments Various affiliates have entered into construction contracts with unrelated parties, in the amount of $14,750,000 (including change orders), for the construction or rehabilitation of various real properties. At December 31, 2012, $11,375,000 of such contract commitments had not yet been incurred. Property Management Property management on certain properties is contracted with non-affiliated entities for annual amounts subject to yearly increases. The term of such non-cancelable contracts is generally for one-year. Contingencies: Guarantees ABC and affiliates issue a variety of guarantees in the course of developing properties. The guarantees are generally issued in favor of limited partner investors or lenders. Guarantees as of December 31, 2012 and 2011 consist of the following: Operating deficits inter-entity $ 11,717,000 $ 13,486,000 Construction loan repayment and completion 72,480,000 92,551,000 Tax benefits 159,130, ,099,000 Equity contribution 6,128,000 6,128,000 Total $ 249,455,000 $ 310,264,000 Operating Deficits Inter-entity Operating deficit guarantees are commitments to fund future operating deficits of affiliated partnerships. The guarantees are issued in favor of tax credit limited partnerships, and generally are for the fifteen-year period when the investor is expected to hold its limited partner interest, or for shorter periods (for example, until certain debt ratios are achieved). A payment under such a guarantee would result in the transfer of cash resources from the guarantor to a consolidated affiliate, resulting in an obligation to repay the advance, usually from future operating cash flow. To date, ABC and affiliates have not experienced any calls on these guarantees. 4

10 Presentation of Financial Statement Disclosures Commitments and Contingencies Construction Loan Repayment and Completion Guarantees ABC and affiliates provide repayment guarantees to construction loan lenders for amounts borrowed to develop properties. ABC and affiliates also provide unlimited construction completion guarantees to fund the development and lease-up of a project, should the project not receive expected permanent financing, or should the cost of the development exceed permanent financing received A payment under such a guarantee would result in the transfer of cash resources from the guarantor to a consolidated affiliate that is obligated to complete a development, resulting in an obligation to repay the advance, usually from future operating cash flow. There are no significant completion delays in ABC and affiliates current developments. To date, ABC and affiliates have not experienced non-completion of a project, nor has it been called on for any loan repayment guarantee. Tax Benefits Guarantees As the sponsor or the developer of certain properties financed in part by federal and/or state tax credit allocations, ABC, Inc. has made certain guarantees to investors as to the tax credits and other benefits to be derived from the properties. These guarantees generally cover the tax compliance periods of fifteen years after initial lease-up. A payment under such a guarantee could result in a cash distribution from an affiliate s operating cash flow to the investor limited partner. In the opinion of management, compliance with tax regulations and careful monitoring of the properties should preclude these contingent liabilities from materializing. To date, ABC, Inc. has not experienced any calls on these guarantees (or ABC and affiliates have paid $750,000 to date under outstanding tax benefit guarantees). Equity Contribution Guarantee ABC, Inc. and affiliates are the general partners, co-general partners, members, or co-managing members of various limited partnerships or limited liability companies as disclosed in Note 1. ABC and affiliates executed various performance guarantees in connection with those limited partnerships or limited liability companies. ABC, Inc. is obligated to fund various affiliated organizations with equity contributions in the event such guarantees are called upon. A payment under such a guarantee would result in the transfer of cash resources from the guarantor to a consolidated affiliate. To date, ABC and affiliates have not experienced any calls on these guarantees and considers the occurrence of such events remote. No liability has been recorded in connection with the operating deficit, construction loan repayment and completion, tax benefit, or equity contribution guarantees since these are guarantees to entities under common control. ABC, Inc. Guarantees of Subsidiary Debt ABC, Inc. occasionally guarantees repayment of obligations incurred by affiliated organizations. Such loans are included as liabilities in the consolidated financial statements. The balance of the outstanding affiliate loans guaranteed by ABC, Inc. was $7,500,000 and $7,600,000 as of December 31, 2012 and 2011, respectively. 5

11 Presentation of Financial Statement Disclosures Commitments and Contingencies ABC, Inc. also guarantees the debt of affiliated organizations that are accounted for as equity-method investments and not consolidated herein. Those guarantees amounted to $500,000 and $400,000 as of December 31, 2012 and 2011, respectively. Litigation ABC and affiliates are named in various claims and legal actions in the normal course of its activities. Based upon counsel and management s opinion, the outcome of such matters is not expected to have a material adverse effect on ABC and affiliates financial position or changes in net assets. An affiliate of ABC, Inc. is a plaintiff in a dispute regarding construction defects. The dispute is expected to be resolved in 2014 and the outcome is not expected to have a material impact on the combined financial statements. Letters of Credit As of December 31, 2012 and 2011, ABC and affiliates had not drawn upon any letters of credit, which have been issued in the maximum amount of $15,000,000 for repayment of bond obligations. Surety Bonds In connection with certain project developments, ABC and affiliates enter into surety bond agreements, which bind ABC and affiliates to repay the surety company if the contractor is unable to successfully perform on the contract. As of December 31, 2012 and 2011, ABC and affiliates have outstanding a maximum of $11,394,000 and $7,270,000, respectively, in surety bonds. Grants and Loans In connection with various federal, state and city grants and loan programs, ABC and affiliates are obligated to operate in accordance with those grant and loan requirements and is subject to audit by those agencies. In cases of noncompliance, the agencies involved may require that ABC and affiliates refund payment of program funds. The amount, if any, of expenses which may be disallowed by the agencies cannot be determined at this time, although ABC and affiliates expect such amounts, if any, to be immaterial. Contingent Loans Receivable ABC and affiliates provided deferred-repayment loans through subordinate deeds of trust in order to make single-family homes affordable to eligible families. Outstanding notes of $285,000 as of December 31, 2012 and 2011, and accrued interest of $74,841 and $66,291 as of December 31, 2012 and 2011, respectively, are not reflected in the accompanying combined statements of financial position since it is anticipated that the notes will be automatically forgiven on the 30th anniversary of the original sale. 6

12 Presentation of Financial Statement Disclosures Commitments and Contingencies Environmental Guarantee ABC and affiliates provided guarantees to certain lenders and investors against any environmental claims. The aggregate amount guaranteed is $17,000,000 and the guarantees expire in various years up to Loan Covenants Loan agreements contain various financial covenants. ABC and affiliates are in compliance with all such covenants. Other As general partners in various partnerships, ABC and affiliates may be subject to other liabilities, should the affected partnerships assets become insufficient to meet their obligations. In the opinion of management, future revenues and the value of the underlying assets of each of these partnerships will be sufficient to meet ongoing and future partnership obligations. Acknowledgements STRENGTH MATTERS gratefully acknowledges the work of S. Scott Seamands from Lindquist, von Husen & Joyce LLP and the following individuals that contributed to this paper: Denise DeMaio, Consultant, F. B. Heron Foundation, New York, NY Art Fatum, Chief Financial Officer, MidPen Housing Corporation, Foster City, CA Caroline Horton, Chief Financial Officer, Aeon, Minneapolis, MN David Keene, Director of Finance and Operations, The Neighborhood Developers, Chelsea, MA John Maneval, Director of Lending, NeighborWorks Capital Corporation, Silver Spring, MD Timothy Martin, Chief Credit Officer, Enterprise Community Loan Fund, Columbia, MD Mary White Vasys, Principal, Vasys Consulting Ltd, Chicago, IL Last Updated: December 2013 DISCLAIMER This paper contains certain recommended financial statement presentation best practices for nonprofit affordable housing organizations that develop and own affordable housing in the United States. This paper was developed by a working group comprised of chief financial officers from certain leading nonprofit affordable housing organizations active in the networks of NeighborWorks America, Housing Partnership Network and Stewards of Affordable Housing for the Future, as well as representatives of socially responsible lenders, working in conjunction with a representative from Lindquist, von Husen & Joyce LLP, an independent public accounting firm. This publication should not be construed as accounting or other advice on any specific facts or circumstances. The contents of this paper are intended for general informational purposes only, and you are urged to consult your accountants and other professional advisors concerning your specific situation and any financial reporting or accounting questions you may have. For further information, contact info@strengthmatters.net. 7

13 Presentation of Financial Statement Disclosures Investments Sample Financial Statement Disclosures NOTE 5 INVESTMENTS ABC and Affiliates investments are summarized below: Investments stated at fair value current $ 10,079,887 $ 9,259,692 Equity-method investments non-current 163, ,025 Cost-method investments non-current 375, ,000 Total $ 10,618,811 $ 9,814,717 Investments stated at fair value Investments in marketable securities are summarized as follows: Cost Fair Value Cost Fair Value Marketable securities $ 8,965,005 $ 9,705,445 $ 8,762,994 $ 8,925,957 Real estate investment trust 513, , , ,735 $ 9,478,483 $ 10,079,887 $ 9,276,472 $ 9,259,692 These investments recorded at fair value have been categorized based upon a fair value hierarchy of inputs in accordance with generally accepted accounting principles. The following table presents information about the fair value hierarchy inputs used in determining fair value of investments as of December 31, 2013 and 2012: Quoted Prices in Active Markets for Identical Assets (Level 1) 2013 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance as of December 31, 2013 Marketable securities $ 9,705,445 $ - $ - $ 9,705,445 Real estate investment trust (1) , ,442 Total $ 9,705,445 $ - $ 374,442 $ 10,079,887 4

14 Presentation of Financial Statement Disclosures Investments Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) 2012 Significant Unobservable Inputs (Level 3) Balance as of December 31, 2012 Marketable securities $ 8,925,957 $ - $ - $ 8,925,957 Real estate investment trust (1) , ,735 Total $ 8,925,957 $ - $ 333,735 $ 9,259,692 (1) The investment fair value is based on amounts reported by the trust since it is not publicly traded. Redemption requests are considered on a quarterly basis and are at the sole discretion of the fund manager. There are no unfunded commitments as of December 31, 2013 and The following table for the years ended December 31, 2013 and 2012 sets forth the detailed changes in fair value for Level 3 investments: Beginning balance $ 333,735 $ 314,582 Realized and unrealized gains for the period 40,707 19,153 Ending balance $ 374,442 $ 333,735 Change in unrealized gains included in the change in unrestricted net assets relating to investments still held at December 31, 2013 and 2012 $ 40,707 $ 15,500 5

15 Presentation of Financial Statement Disclosures Investments Equity-method investments ABC and affiliates use the equity method to account for their financial interests in the following companies: ABC House LLC (1) $ 57,250 $ 62,500 DEF Partnership (2) 106, ,525 Total $ 163,924 $ 180,025 (1) ABC, Inc. is a 50% co-member of this LLC which is the general partner of ABC Housing, L.P. and which owns a 0.01% interest in the partnership. (2) DEF Corporation, which is controlled by ABC, Inc. s board of directors, owns a one-third interest in this general partnership which owns and operates a 100-unit multi-family affordable housing property in San Ramon, California. Summarized financial information for entities accounted for under the equity method, as of December 31, 2013 and 2012, consists of the following: Total assets $ 3,214,000 $ 1,054,000 Total liabilities 175, ,000 Partners equity 3,039, ,000 Income 3,794, ,000 Expenses before depreciation, interest and entity expense (3,662,000) (27,000) Net operating income 132, ,000 Depreciation, interest and entity expense (203,000) (30,000) Net income (loss) (71,000) 70,000 6

16 Presentation of Financial Statement Disclosures Investments Cost-method investments ABC and Affiliates cost-method investments consist of the following: XYZ Insurance Exchange (1) $ 375,000 $ 375,000 Total $ 375,000 $ 375,000 (1) ABC, Inc. invested in XYZ Insurance Exchange for the purposes of gaining access to property and liability insurance for its various development properties from a captive insurance company. The investment represents 11% of the capital of the exchange and is stated at cost. Acknowledgements STRENGTH MATTERS gratefully acknowledges the work of S. Scott Seamands from Lindquist, von Husen & Joyce LLP and the following individuals that contributed to this paper: Allison Adduci, Vice President of Finance and Accounting, Preservation of Affordable Housing, Boston, MA Diane Borradaile, Director of Asset Management and Underwriting Low Income Investment Fund, New York, NY Art Fatum, Chief Financial Officer, MidPen Housing Corporation, Foster City, CA David Keene, Director of Finance and Operations, The Neighborhood Developers, Chelsea, MA John Maneval, Director of Lending, NeighborWorks Capital Corporation, Silver Spring, MD Mary White Vasys, Principal, Vasys Consulting Ltd, Chicago, IL Last Updated: October 2014 DISCLAIMER This paper contains certain recommended financial statement presentation best practices for nonprofit affordable housing organizations that develop and own affordable housing in the United States. This paper was developed by a working group comprised of chief financial officers from certain leading nonprofit affordable housing organizations active in the networks of NeighborWorks America, Housing Partnership Network and Stewards of Affordable Housing for the Future, as well as representatives of socially responsible lenders, working in conjunction with a representative from Lindquist, von Husen & Joyce LLP, an independent public accounting firm. This publication should not be construed as accounting or other advice on any specific facts or circumstances. The contents of this paper are intended for general informational purposes only, and you are urged to consult your accountants and other professional advisors concerning your specific situation and any financial reporting or accounting questions you may have. For further information, contact info@strengthmatters.net. 7

17 Presentation of Financial Statement Disclosures Property and Equipment Sample Financial Statement Disclosures NOTE XX - PROPERTY AND EQUIPMENT Property and equipment consists primarily of the properties that are listed in Note 1 and are summarized as follows: Land $117,386,721 $113,261,686 Land improvements 54,695,785 44,063,904 Buildings and improvements 878,621, ,842,107 Furnishings and equipment 1,455,663 1,299,118 1,052,159, ,466,815 Total accumulated depreciation (228,424,503) (203,214,348) Net property and equipment $823,734,744 $757,252,467 NOTE XX - DEVELOPMENT IN PROGRESS Development in progress is summarized as follows: New Units Rehabilitation Units ABC Associates, L.P $ (1) - $ 1,134,536 DEF Associates, L.P (1) - 11,905,531 GHI Associates, L.P (1) - 247,692 JKL Associates, L.P (1) - 15,023,695 MNO Associates, L.P (1) - 19,920,376 PQR Associates. L.P (3) 138, ,781 STU Village, L.P (1) - 1,705,655 VWX Associates, L.P (4) 19,126,648 6,997,776 YZ Park.(2) , ,750 Other (5) , ,774 Total $ 20,036,194 $ 57,647,566 (1) Construction was completed in (2) Project under pre-development; owned by ABC, Inc. as of December 31, 2013 and expected to be completed in (3) Construction schedule and completion date are not yet determined. (4) Construction is expected to be completed in (5) Includes various projects under pre-development that are owned by ABC, Inc. 4

18 Presentation of Financial Statement Disclosures Property and Equipment NOTE XX PROPERTY HELD FOR INVESTMENT ABC, Inc. owns 40 acres of vacant land in Visalia, California which is not currently undergoing development activity. The land is recorded at $250,000 which was its cost in Management believes that the fair value exceeds the cost. NOTE XX PROPERTY HELD FOR SALE During 2007, ABC, Inc. developed 40 townhomes for sale in Modesto, California. Five have not been sold as of December 31, The cost basis of the five townhomes was $950,000. During 2009, management recognized an impairment loss of $450,000 to reduce the carrying value to the estimated fair value based on comparable sales in the Modesto area. The $500,000 balance is categorized as a long-term asset since sale of the townhomes may not occur until local economic conditions improve. Acknowledgements STRENGTH MATTERS gratefully acknowledges the work of S. Scott Seamands from Lindquist, von Husen & Joyce LLP and the following individuals that contributed to this paper: Allison Adduci, Vice President of Finance and Accounting, Preservation of Affordable Housing, Boston, MA Diane Borradaile, Director of Asset Management and Underwriting Low Income Investment Fund, New York, NY Art Fatum, Chief Financial Officer, MidPen Housing Corporation, Foster City, CA David Keene, Director of Finance and Operations, The Neighborhood Developers, Chelsea, MA John Maneval, Director of Lending, NeighborWorks Capital Corporation, Silver Spring, MD Mary White Vasys, Principal, Vasys Consulting Ltd, Chicago, IL Last Updated: October 2014 DISCLAIMER This paper contains certain recommended financial statement presentation best practices for nonprofit affordable housing organizations that develop and own affordable housing in the United States. This paper was developed by a working group comprised of chief financial officers from certain leading nonprofit affordable housing organizations active in the networks of NeighborWorks America, Housing Partnership Network and Stewards of Affordable Housing for the Future, as well as representatives of socially responsible lenders, working in conjunction with a representative from Lindquist, von Husen & Joyce LLP, an independent public accounting firm. This publication should not be construed as accounting or other advice on any specific facts or circumstances. The contents of this paper are intended for general informational purposes only, and you are urged to consult your accountants and other professional advisors concerning your specific situation and any financial reporting or accounting questions you may have. 5

19 Financial Reporting Best Practices Paper Topic 16G: Presentation of Financial Statement Disclosures Related Party Transactions Sample Financial Statement Disclosures The first sample disclosure illustrates the situation when all related party transactions are not eliminated and includes disclosure of the eliminated transactions. NOTE X RELATED PARTY TRANSACTIONS Significant related party transactions for ABC, Inc. and ABC Management Company are summarized below: ABC, Inc. Receivables Reimbursable advances to affiliates receivable $ 111,504 $ 18,173 Development fees receivable (1) 2, ,308 Development fees receivable (2) 439, ,898 Partnership management fees receivable (3) 86,411 96,442 Total fees and advances receivable (5) 640,678 1,236,821 Less current portion (52,865) (689,474) Long-term 587, ,347 Notes receivable current portion 108,071 50,906 Notes receivable long-term portion 2,582,460 2,368,487 Total 2,690,531 2,419,393 Less receivables eliminated in consolidation (2,640,531) (2,369,393) Net long-term portion 50,000 50,000 ABC, Inc. Revenue Development fee revenue earned (1) 450, ,218 Development fee revenue earned (2) - 439,898 Partnership management fees earned (3) 57,680 71,966 Total (5) 508,285 1,378,082 ABC Management Company Receivables Property management and bookkeeping fees (4) 167, ,500 Less fees eliminated in consolidation (161,000) (132,500) Net 6,000 5,000 ABC Management Company Revenue Property management fees earned (4) 1,467,500 1,237,500 Bookkeeping fees earned (4) 272, ,500 Total 1,740,000 1,485,000 Less fees eliminated in consolidation (1,670,000) (1,425,000) Net 70,000 60,000 4

20 Financial Reporting Best Practices Paper Topic 16G: Presentation of Financial Statement Disclosures Related Party Transactions (1) Represents portion of fee to be collected during properties development phase (2) Represents portion of fee to be collected from properties net operating cash flow over the next fifteen years, based on a distribution formula (3) Fees are collected from partnerships net operating cash flow over the next fifteen years, based on a distribution formula (4) Fees are received monthly from properties managed (5) These amounts are entirely eliminated in consolidation See Note XX and Note YY for related party notes receivable and investments. The second sample illustrates a disclosure of only the non-eliminated significant related party transactions. NOTE X RELATED PARTY TRANSACTIONS Significant related party transactions for ABC, Inc. and ABC Management Company are summarized below: ABC, Inc. Receivables Notes receivable from affiliates $ 50,000 $ 50,000 Less current portion - - Net long-term portion 50,000 50,000 ABC Management Company Receivables Property management and bookkeeping fees current (1) 6,000 5,000 ABC Management Company Revenue Property management fees earned (1) 63,000 54,000 Bookkeeping fees earned (1) 7,000 6,000 Total 70,000 60,000 (1) Fees are received monthly from properties managed See Note XX and Note YY for additional details regarding related party notes receivable and investments. 5

21 Topic 16H: Presentation of Financial Statement Disclosures Notes Receivable Disclosures (This is an example containing a large quantity of loans which are not individually identified) ABC Developer, Inc. Notes Receivable: Eliminated Notes Receivable: Interest Receivable Principal Interest Receivable Principal Notes receivable (8 notes in 2014) from affiliates, bearing interest at 1% to 5%, secured by real property, nonrecourse, with interest and principal received annually from a portion of the properties excess cash, maturing between 2025 and ,000 14,550,000 (1) 370,000 1,050,000 (1) Mortgage notes receivable (6 notes in 2014) from affiliates, bearing interest at 3% to 7%, secured by real property, nonrecourse, with interest and principal received monthly, maturing between 2018 and ,000 1,200, , ,000 Subtotal eliminated notes receivable 750,000 15,750, ,000 1,250,000 Less amounts eliminated in consolidation (750,000) (15,750,000) (725,000) (1,250,000) Uneliminated notes receivable: Notes receivable (14 notes in 2014) from third parties, bearing interest at 0% to 7%, unsecured, nonrecourse, with interest and principal due at maturity between 2015 and ,000 5,250, ,000 4,350,000 Subtotal uneliminated parentcompany notes receivable 250,000 5,250, ,000 4,350,000 4

22 Topic 16H: Presentation of Financial Statement Disclosures Notes Receivable Disclosures Interest Receivable Principal Interest Receivable Principal Affiliate Notes Receivable: Homebuyer mortgage loans receivable (37 notes in 2014), secured by real property, nonrecourse, with monthly payments of principal and interest due based on 30% of the qualified homebuyers monthly income until maturity, bearing interest at 3%, maturing between 2040 and ,000 7,300,000 19,000 6,800,000 Subtotal affiliate notes receivable 20,000 7,300,000 19,000 6,800,000 Total notes receivable 270,000 12,550, ,000 11,150,000 Less: current portion (20,000) (250,000) (19,000) (125,000) Long-term portion $ 250,000 $12,300,000 $ 224,000 $ 11,025,000 (1) Principal shown is net of an allowance for uncollectible notes in the amount of $11,000,000 and $10,000,000 as of December 31, 2014 and 2013, respectively. Minimum required payments are estimated as follows: Thereafter Total (In thousands with $000 omitted) ABC Developer, Inc.: Affiliate notes (1) $ - $ - $ - $ - $ - $ 14,550 $ 14,550 Affiliate mortgages ,200 Third party notes ,700 5,250 Affiliates: Third party mortgages ,160 7,300 Eliminations (105) (60) (65) (500) (80) (14,940) (15,750) $ 250 $ 330 $ 350 $ 370 $ 390 $ 10,860 $ 12,550 (1) Principal collections of affiliate notes receivable for the next five years are subject to changes in net cash flow, which is a contingency that cannot be reasonably estimated. 5

23 Topic 16H: Presentation of Financial Statement Disclosures Notes Receivable Disclosures (This is an example containing a smaller quantity of loans which are identified in greater detail) Entity Principal Balance at December 31, 2014 Interest Receivable at December 31, 2014 Allowance Carrying Value at December 31, 2014 Maturity Year Stated Interest Rate Carrying Value at December 31, 2013 Interest Receivable at December 31, 2013 ABC Partners (1) $1,300,000 $300,000 $(100,000) $1,200, % $1,450,000 $300,000 DEF Partners (1) 600, ,000 (50,000) 550, % 630, ,000 XYZ Corporation (2) 750,000 50,000 (750,000) % - 50,000 Various homebuyers (3) 3,750,000 20,000-3,750, % 3,250,000 21,000 Subtotals 6,400, ,000 (900,000) 5,500,000 5,330, ,000 Less amounts (2,650,000) (450,000) 900,000 (1,750,000) (2,080,000) (450,000) eliminated in consolidation Totals 3,750,000 20,000-3,750,000 3,250,000 21,000 Less current portion (400,000) (20,000) (400,000) (300,000) (21,000) Noncurrent portion 3,350,000-3,350,000 2,950,000 - (1) Both notes are held by ABC Developer, Inc. (2) Note is held by an affiliate of ABC Developer, Inc. (3) 18 notes are held by ABC Lender, LLC and secured by homes 6

24 Topic 16I: Presentation of Financial Statement Disclosures Accounts Receivable Disclosures A table that begins with the opening balance, adds the provision for uncollectible accounts and subtracts accounts written off (net of recoveries) will identify the aggregate transactions flowing through the allowance account during the year. If the allowance or the activity flowing through the allowance during the year is material, such a table is helpful. Sample Financial Statement Disclosures The sample below illustrates accounts receivable disclosures, including contributions, government contracts and rents receivable for an affordable housing developer s consolidated financial statement. As is the case with most financial statement disclosures, materiality of the account balance should be considered when determining the amount of detail to provide in the disclosure. It is important to use consistent terminology for transactions that appear in balance sheet accounts as well as on the statement of activities. For example, contributions receivable identified as such in the sample below should also be included in the contributions line on the statement of activities. Revenues attributable to separately classified receivables should also be separately classified, if material. NOTE 3 ACCOUNTS RECEIVABLE CONTRIBUTIONS RECEIVABLE ABC, Inc. s contributions receivable are summarized as follows: Unrestricted contributions $ 133,846 $ 78,872 Temporarily restricted contributions: Restricted for 2015 operating activity 5,000 - Restricted for housing development - 25,000 Restricted for earthquake/disaster preparedness 25,000 25,000 Total contributions receivable $ 163,846 $ 128,872 Amounts expected to be received in: Less than one year $ 138,846 $ 103,872 One to five years $ 25,000 $ 25,000 3

25 Topic 16I: Presentation of Financial Statement Disclosures Accounts Receivable Disclosures GOVERNMENT CONTRACTS RECEIVABLE Government contracts receivable are generally collected quarterly and consist of the following: 2014 ABC, Inc. Affiliates Total After school programs $ 300,000 $ - $ 300,000 Resident healthcare programs 450,000 50, ,000 Job training programs 75,000 25, ,000 Other resident services 25,000-25,000 Total government contracts receivable $ 850,000 $ 75,000 $ 925,000 Amounts expected to be received in: Less than one year $ 850,000 $ 75,000 $ 925, ABC, Inc. Affiliates Total After school programs $ 275,000 $ - $ 275,000 Resident healthcare programs 425,000 50, ,000 Job training programs 50,000 20,000 70,000 Other resident services 20,000-20,000 Total government contracts receivable $ 770,000 $ 70,000 $ 840,000 Amounts expected to be received in: Less than one year $ 770,000 $ 70,000 $ 840,000 4

26 Topic 16I: Presentation of Financial Statement Disclosures Accounts Receivable Disclosures RENTS RECEIVABLE Rents receivable from non-related parties are summarized as follows, with an indication of which entities recorded the receivable: 2014 ABC, Inc. Affiliates Total Residential tenants $ 6,532 $ 170,396 $ 176,928 Residential rent subsidies 4, , ,169 Commercial tenants 57, , ,083 Less: allowance for doubtful accounts (33,668) (199,538) (233,206) Total rent receivable net $ 34,074 $ 397,900 $ 431,974 Amounts expected to be received in: Less than one year $ 34,074 $ 397,900 $ 431, ABC, Inc. Affiliates Total Residential tenants $ 17,024 $ 176,311 $ 193,335 Residential rent subsidies 20, , ,760 Commercial tenants 18, , ,001 Less: allowance for doubtful accounts (512) (195,375) (195,887) Total rent receivable net $ 55,525 $ 373,684 $ 429,209 Amounts expected to be received in: Less than one year $ 55,525 $ 373,684 $ 429,209 The activity in the allowance for doubtful accounts related to rents receivable follows: Balance, beginning of year $ 195,887 $ 55,002 Receivables written off during year (145,000) (125,587) Recoveries of receivables written off in prior years 1, Bad debt expense 181, ,847 Balance, end of year $ 233,206 $ 195,887 5

27 Topic 16J: Presentation of Financial Statement Disclosures Special Transactions Disclosure Sample Financial Statement Disclosures As is the case with most financial statement disclosures, materiality of the account balance should be considered when determining the amount of detail to provide in the disclosure. Disclosures need not repeat information that is included in the basic financial statements, however disclosures required by GAAP will not be satisfied by including the information in the supplementary information section of the financial statements. NOTE X REAL PROPERTY ACQUISITION On August 5, 2015 XYZ Partnership, one of ABC Developer s affiliates, acquired real property located in San Jose, California from an unrelated owner. The property will be used for affordable residential housing following renovations that are expected to be completed during Details of the acquisition follow: Description Cost Land $1,000,000 Building 5,250,000 Total assets acquired 6,250,000 Note Payable (6,000,000) Net cash paid $ 250,000 See additional samples on following pages. 6

28 Topic 16J: Presentation of Financial Statement Disclosures Special Transactions Disclosure NOTE Y DECONSOLIDATION DEF Partnership was previously one of ABC Developer (ABC) s consolidated affiliates because the sole general partner, which was deemed to control DEF Partnership, was commonly-controlled by ABC s board of directors. On January 1, 2015, a co-general partner (QRS Homes, Inc., an unrelated party) was admitted to the partnership by obtaining a general partner share (and level of control) that is equal to that of ABC s affiliate. Because of this transaction, DEF Partnership was deconsolidated in 2015 since ABC s affiliate no longer controls it. DEF Partnership will be a related party following deconsolidation since ABC will continue to have the ability to significantly influence (but not control) the management and operating policies of DEF Partnership. Therefore, ABC s consolidated financial statements will reflect the affiliate s investment in DEF Partnership using the equity method of accounting. A deconsolidation loss represents the difference between consolidated net assets immediately prior to losing control of the partnership and net assets immediately thereafter, with the remaining equity investment in the partnership measured at fair value on the date of the change in control. The equity balance of ABC affiliate s investment in DEF Partnership is estimated to be materially the same as its fair value on the date of deconsolidation. The loss of $4,325,000, which represents the noncontrolling limited partner s interest in DEF Partnership, appears on the 2015 Statement of Activities as a loss from deconsolidation. A summary of DEF Partnership s financial position and activities, as reflected on ABC s consolidated financial statements follows: Account December 31, 2014 balances prior to deconsolidation 2015 balances following deconsolidation Property and equipment, net $ 7,250,000 $ - Other assets 525,000 75,000 (1) Liabilities 3,375,000 - Net assets controlling interest 75,000 75,000 Net assets noncontrolling interest 4,325, and 2015 total revenue 840, and 2015 total expense (990,000) (750) (2) 2014 and 2015 change in net assets (150,000) (750) (1) Represents ABC affiliate s remaining equity investment in DEF Partnership (2) Represents ABC affiliate s.5% share of DEF Partnership s annual net loss 7