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1 MM PROPERTY LLC Washington, DC FINANCIAL STATEMENTS Including Independent Auditors Report As of and for the Year Ended December 31, 2012

2 Financial Statements Contents Page Independent Auditors' Report 1 Balance Sheet 2 Statement of Operations 3 Statement of Changes in Members Equity 4 Statement of Cash Flows 5 Notes to the Financial Statements 6-11

3 Independent Auditors Report To the Members of MM Property LLC Washington, DC We have audited the accompanying financial statements of MM Property LLC (the Company ), which comprise the balance sheet as of December 31, 2012, and the related statements of operations, changes in members' equity and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' 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 Company 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 Company 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 MM Property LLC as of December 31, 2012 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter As part of our audit of the December 31, 2012 financial statements, we also audited the adjustment described in Note 10 that was applied to restate the 2011 financial statements. In our opinion, the adjustment is appropriate and has been properly applied. We were not engaged to audit, review, or apply any procedures to the 2011 financial statements of the entity other than with respect to the adjustment and, accordingly, we do not express an opinion or any other form of assurance on the 2011 financial statements as a whole. Tysons Corner, Virginia INSERT DATE

4 Balance Sheet As of December 31, 2012 Assets Investment in Real Estate, net $ 31,909,768 Other Assets Cash and cash equivalents 182,153 Rent differential reserve 73,188 Accounts receivable, net of allowance of $124, ,320 Prepaid expenses 2,267 Tenant security deposits 44,970 Total other assets 422,898 Total Assets $ 32,332,666 Liabilities and Members' Equity Loans Payable Short-term bond loan payable $ 3,745,280 Note payable - DHCD 8,250,000 Bond loan payable - DCHFA 10,094,874 Total loans payable 22,090,154 Other Liabilities Accounts payable and accrued expenses 293,971 Accounts payable and accrued expenses - construction 7,072,420 Tenant security deposits payable 45,296 Due to affiliate 394,508 Total other liabilities 7,806,195 Total Liabilities 29,896,349 Members' Equity 2,436,317 Total Liabilities and Members' Equity $ 32,332,666 The accompanying notes are an integral part of these financial statements. 2

5 Statement of Operations For the Year Ended December 31, 2012 Revenues Rental $ 705,301 Other 16,394 Total revenues 721,695 Operating Expenses Depreciation 359,373 General and administrative 474,173 Salaries and wages 191,907 Repairs and maintenance 91,837 Insurance 39,405 Utilities 28,981 Total operating expenses 1,185,676 Net Loss $ (463,981) The accompanying notes are an integral part of these financial statements. 3

6 Statement of Changes in Members Equity For the Year Ended December 31, 2012 Managing Member Investor Member Total Members' Equity Balance, January 1, 2012 $ (465,638) $ 2,078,877 $ 1,613,239 Prior Period Adjustment 106,060 31, ,660 Balance, January 1, 2012 (Restated) (359,578) 2,110,477 1,750,899 Capital Contributions - 1,149,399 1,149,399 Net Loss (46) (463,935) (463,981) Balance, December 31, 2012 $ (359,624) $ 2,795,941 $ 2,436,317 The accompanying notes are an integral part of these financial statements. 4

7 Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows from Operating Activities Net loss $ (463,981) Reconciliation adjustments Depreciation expense 359,373 Allowance for doubtful accounts 124,948 Changes in: Accounts receivable (120,138) Prepaid expenses 36,474 Tenant security deposits (12,810) Accounts payable and accrued expenses 187,643 Tenant security deposits payable 16,993 Net cash provided by operating activities 128,502 Cash Flows from Investing Activities Additions to investment in real estate (13,218,260) Cash Flows from Financing Activities Proceeds from bond loans payable 12,247,479 Net advances received from affiliate 9,421 Repayment of operating advances (182,571) Capital contributions 1,149,399 Net cash provided by financing activities 13,223,728 Net Increase in Cash and Cash Equivalents 133,970 Cash and Cash Equivalents, beginning of year 48,183 Cash and Cash Equivalents, end of year $ 182,153 Supplemental Disclosure of Cash Flow Information Cash paid for interest, net of amount capitalized $ - Supplemental Disclosure of Non-Cash Investing and Financing Activities Accrued additions to investment in real estate $ 7,072,420 The accompanying notes are an integral part of these financial statements. 5

8 Notes to the Financial Statements NOTE 1-ORGANIZATION MM Property LLC (the Company ) was formed on October 1, 2011 under the laws of the District of Columbia to acquire, rehabilitate, develop and operate the low-income housing project called Mayfair Mansions III Apartments (the Property ) located in Washington, DC. The Property consists of 160 housing units, being developed under the low-income housing tax credit and historic tax credit programs. The Company shall continue until December 31, 2080 or until dissolved as provided in the Company s Second Amended and Restated Operating Agreement (the Operating Agreement ). The Company is owned 0.01 percent by MM Assets LLC (the "Managing Member") and percent by Wells Fargo Affordable Housing Community Development Corporation (the "Investor Member"). Profits and losses are generally allocated 0.01 percent and percent to the Managing and Investor Members, respectively, pursuant to the Operating Agreement. Under the terms of the Operating Agreement, the Investor Member has agreed to provide capital contributions totaling $13,517,874 and the Managing Member has agreed to provide capital contributions totaling $10. As of December 31, 2012, the Investor Member has provided cumulative capital contributions or otherwise received credit for capital contributions totaling $3,425,778, and the Managing Member has provided cumulative capital contributions totaling $10. The total capital contributions required pursuant to the Operating Agreement are subject to adjustment based on the amount of low-income housing tax credits ("LIHTC") and historic rehabilitation tax credits ( HTC") allocated to the Company. Pursuant to the Operating Agreement, net cash flow, as defined, will be distributed as follows: First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, to the Investor Member to make any unpaid credit adjuster payments and any unpaid HTC adjuster payments, as defined. to pay the asset management fee to the Investor Member until the total amount of payments (including payments in all prior years) equals $7,500 per year. to replenish the operating reserve until the balance in the operating reserve is $450,833, and then to replenish the debt service reserve until the balance in the debt service reserve is $315,087. to pay the amounts owed with respect to any developer loan. to pay required debt service on the District of Columbia Department of Housing and Community Development ( DHCD ) Loan. to repay any operating deficit loans, with any such payments to be applied first to accrued but unpaid interest and then to principal, and to pay deferred management fees to the management agent, and for any taxable year that ends during the initial HTC period, defined as 5 years following the date the rehabilitated Property is placed in-service, percent to the Investor Member and 0.01 percent to the Managing Member; for any taxable year beginning after the initial HTC period, percent as distributions to the Members in the percentages of 10 percent to the Investor Member and 0.01 percent to the Managing Member and up to percent to the Managing Member to pay the incentive management fee due, provided, however, that any amounts otherwise payable as an incentive management fee and that exceed the limitation set forth in the Operating Agreement shall be paid 100 percent to the Managing Member as an additional distribution. Distributions of net cash flow from a sale or refinancing will be in accordance with the Operating Agreement. NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents - Cash and cash equivalents consist of currency on hand, demand deposits with financial institutions and short-term, highly liquid investments purchased with a maturity of 90 days or less. The Company maintains its cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits. As of December 31, 2012, interest bearing accounts are guaranteed by the Federal Deposit Insurance Corporation (the FDIC ) up to $250,000 and noninterest bearing accounts are guaranteed by the FDIC up to the total account balance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. 6

9 Notes to the Financial Statements NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED Rent Differential Reserve - A Rent Differential Reserve was funded in the amount of $73,188 from the Investor Member s initial capital contribution. The reserve is to be maintained until the second anniversary of the last existing tenant s re-occupancy at the Property. Any withdrawal from the reserve requires the approval of both the Managing Member and Investor Member and shall be used to fund operating deficits that occur as the result of the timing of any rent increases, either during lease-up or through the second anniversary of the last existing tenant s re-occupancy. Funds remaining in the reserve on this second anniversary shall be released and used to fund capital expenditures, or treated as cash flow, as defined in the Operating Agreement (see Note 1). As of December 31, 2012, the balance in the rent differential reserve account totaled $73,188. Accounts Receivable - Accounts receivable are stated at realizable value as determined by management. Management determines the collectability of accounts receivable and the need for an allowance for doubtful accounts based on the Company s historical experience, the existing economic conditions and the financial stability of its tenants. Past due balances over 30 days and other high risk accounts are reviewed individually for collectability. Receivables are written off after collection attempts have failed. Management has determined that an allowance for doubtful accounts of $124,948 is appropriate at December 31, Investment in Real Estate - The Company records rental real estate investments at the cost of acquisition or construction. At December 31, 2012, the Company s investment in real estate, net of accumulated depreciation, consists of the following: Land $ 3,028,037 Buildings and improvements 29,560,314 32,588,351 Less accumulated depreciation (678,583) $ 31,909,768 Upon acquisition of the property, the Company estimated the fair value of acquired tangible assets based upon the evaluation of information and estimates available at that date. Acquired tangible assets consisted of land and buildings and improvements. During 2012, the Company reviewed the estimate of the original allocation of purchase price to land and buildings and improvements and revised the allocation of purchase price to land and buildings and improvements to $3,028,037 and $5,026,674, respectively. The revisions were accounted for prospectively as a change in accounting estimates and resulted in a decrease in depreciation expense of $88,211 for the year ended December 31, Depreciation on the buildings and improvements is computed using the straight-line method over 27.5 years. Depreciation expense for the year ended December 31, 2012 was $359,373. Expenditures for maintenance and repairs are charged to expense when incurred. Expenditures for renewals and betterments which add to the value of the related assets or materially extend the life of the assets are capitalized. When assets are sold, retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income. Impairment of Long Lived Assets - The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the future net undiscounted cash flow expected to be generated and any estimated proceeds from the eventual disposition. If the long-lived asset is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount exceeds the fair value as determined from an appraisal, discounted cash flow analysis, or other valuation technique. There was no impairment loss recognized for the year ended December 31,

10 Notes to the Financial Statements NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Revenue Recognition - The Company leases apartment units to tenants for terms of one year or less and require security deposits to be obtained. Rental revenue attributable to residential leases is recorded when due from residents, generally upon the first day of each month. Rental revenue is recognized on the straight-line method over the term of the lease. Other revenue results from fees for late payments, cleaning, damages, and laundry facilities and is recorded when earned. Rental and other revenue received in advance are deferred until earned. All leases between the Company and its tenants are operating leases. Income Taxes - For federal income tax purposes, the Company s income, losses and credits are reported in the income tax returns of its members, and accordingly, no federal tax provision is recognized in the accompanying financial statements. While the Company is not taxed for federal income tax purposes, the Company s policy is to evaluate and review its tax positions on an ongoing basis to ensure compliance with the applicable portions of the Internal Revenue Code ( IRC ). The District of Columbia ( DC ) does not recognize pass-through entities and accordingly, taxable income is subject to income taxes. Accordingly, a provision for DC income taxes currently due has been recorded, which is included in operating expenses on the accompanying statement of operations. The Company calculates deferred taxes for the temporary differences between the financial reporting basis and the tax basis of the Company s assets and liabilities and assesses the certainty of tax positions when recognizing and measuring tax benefits based upon the criteria of more likely than not. The Company has determined that the deferred taxes associated with DC are not material to the financial statements as of and for the year ended December 31, Uncertainty in Income Taxes - The tax effects of uncertain tax positions can be recognized only if the position is more likely than not to be sustained upon audit, based on the technical merits of the position. The Company has not identified any material uncertain tax positions, recognizes interest and penalties in income tax expense, if applicable, and is generally no longer subject to income tax examinations by tax authorities for years before The Company is not currently under examination by any income tax jurisdiction. Concentrations - The Company operates one property located in Washington, DC and its operations are concentrated in the low-income housing real estate market. In addition, the Company operates in a heavily regulated environment. The operations of the Company are subject to the administrative directives, rules and regulations of federal, state and local regulatory agencies. Such administrative directives, rules and regulations are subject to change by any of these authorities. Such changes may occur with little notice or inadequate funding to pay for the related cost, including the additional administrative burden, to comply with a change. Future operations and financial performance could be affected by changes in economic or other conditions in the geographical area, residential real estate markets or demand for low-income housing, among others. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates. Subsequent Events - In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through DATE, the date the accompanying financial statements were available to be issued. 8

11 Notes to the Financial Statements NOTE 3-LONG-TERM DEBT Tax Exempt Bond Financing - Construction financing is being provided in the form of an $11,000,000 loan (the Senior Loan ) from the District of Columbia Housing Finance Agency ( DCHFA ), through the issuance of tax-exempt Multi-Family Housing Revenue Bonds, Series 2009A-10 in the aggregate principal amount of $8,390,000 and DCHFA Multi-Family Housing Revenue Bonds, Series 2011A, in the aggregate principal amount of $2,610,000. Interest only payments are due at the beginning of each month through the Conversion to Permanent Phase Date ( Conversion ), as defined in the financing agreement. Interest accrues at a blended rate equal to percent, including an Issuer s fee equal to greater of $5,000 or 0.60 percent per annum of the bonds outstanding. At Conversion, interest will accrue at a rate of percent per annum through maturity, January 1, Conversion is expected to occur in 2013, at which time the Senior Loan is expected to be converted into permanent financing in the amount of $10,640,000. The additional proceeds shall be used in conjunction with the third capital contribution to fund the Operating Reserve, Debt Service Reserve and Replacement Reserve Funds. This note is secured by the Multifamily Deed of Trust Assignment of Rents and Security Agreement. As of December 31, 2012, the principal balance outstanding on this loan was $10,094,874. As of December 31, 2012, total interest incurred was $571,153, all of which has been capitalized, including $180,888 capitalized in Additional construction financing is being provided in the form of a $5,730,000 loan (the Subordinate Loan ) from the DCHFA, through the issuance of tax-exempt Multi-Family Housing Revenue Bonds, Series 2011 (the Bonds ). Interest only payments are due at the beginning of each month through the earlier of Conversion or May 1, Interest accrues at a variable rate equal to the one-week Securities Industry and Financial Markets Association ( SIFMA ) rate plus 2 percent plus of Issuer s fee equal to the greater of $5,000 or 0.50 percent per annum of the bonds outstanding. The Subordinate Loan is expected to be retired from capital contributions made by the Investor Member and is secured by the Construction Deed of Trust with Absolute Assignments of Leases and Rents, Security Agreement and Fixture Filing. As of December 31, 2012, the principal balance outstanding on this loan was $3,745,280. For the year ended December 31, 2012, interest incurred totaled $13,585, all of which has been capitalized. At or prior to Conversion, the Company is required to fund an Operating Reserve Fund, a Debt Reserve Fund and a Replacement Reserve Fund, in the amounts of $450,833, $315,087 and $160,000, respectively. Funds held in the Operating Reserve Fund may be released to pay operating expenses upon approval of DCHFA and the Investor Member and shall be maintained until the Company has achieved three consecutive years of minimum debt service coverage of 1.15 to 1. Funds held in the Debt Reserve Fund shall be used solely to pay the principal and interest on the Senior Loan to the extent that the Company s net cash flow is insufficient to pay such amounts. After Conversion, the Company is required to deposit a portion of its surplus cash, as defined in the Replacement Reserve Agreement, into the Replacement Reserve Fund semi-annually in January and July. Funds in the Replacement Reserve Fund are distributed to the Company upon satisfaction of certain conditions as defined in the Replacement Reserve Agreement. In connection with the Construction Phase Financing Agreement dated October 1, 2011, Wells Fargo Bank, N.A. ( Wells Fargo ) agreed to establish, in favor of Freddie Mac, an irrevocable letter of credit in the amount of $2,682,142 to the Company, expecting to expire on July 1, Wells Fargo agreed to establish a second letter of credit, in favor of Freddie Mac, in the amount of $8,523,308 to the Company, which is also set to expire on July 1, An affiliate of the Managing Member has guaranteed the repayment of any amounts drawn on the letters of credit. DHCD Loan - On July 7, 2010 the Company entered into a loan agreement with the DHCD in the amount of $7,300,000 for the acquisition of the land and building. During 2011, the loan amount was increased to $8,250,000. The loan does not accrue interest until Permanent Loan Closing, defined as the earlier of Conversion or November 1, From Permanent Loan Closing through the loan term, defined as 40 years from the date of Permanent Loan Closing, interest will accrue at a rate of 1 percent per annum. As of December 31, 2012, the principal balance outstanding on this loan was $8,250,000. 9

12 Notes to the Financial Statements NOTE 4-RELATED PARTY TRANSACTIONS The Company has entered into a lump sum contract for the rehabilitation of the Property with an affiliate of the Managing Member (the Contractor ). As of December 31, 2012, the total contract price, including approved change orders, was $15,008,803. Change orders, as they may arise, are subject to agreement between the Company and the Contractor. Any material change orders must be approved by the Investor Member. As of December 31, 2012, the total value of the contract had been earned in full by the Contractor, of which $3,056,321 remains due to the Contractor and is included in accounts payable and accrued expenses - construction on the accompanying balance sheet. For services rendered in connection with the development of the Property and the supervision of the construction, the Company has agreed to pay an affiliate of the Managing Member a development fee in the amount of $3,165,736. The affiliated entity shall be paid its developer fee from debt and equity proceeds as provided for in the Operating Agreement. Any portion which is unpaid after the final capital contribution shall constitute a loan bearing interest at 5 percent and payable annually from net cash flow, in accordance with the Operating Agreement (see Note 1) but, in no event, later than December 31, As of December 31, 2012, the development fee has been earned in full, of which $2,915,736 remains due to the affiliated entity and is included in accounts payable and accrued expenses - construction on the accompanying balance sheet. Pursuant to the Asset Management Fee Agreement, the Investor Member earns a cumulative asset management fee of $7,500 per year, commencing in 2012 and increasing 3 percent annually, thereafter. Any unpaid fees shall accrue and be paid in subsequent years to the extent there exists sufficient net cash flow, as defined in the Operating Agreement (see Note 1). The Company received advances from an affiliate of the Managing Member to assist with paying operating expenses of the Company. The advances are short-term and non-interest bearing and are expected to be repaid in As of December 31, 2012, $394,508 is due to the affiliated entity, which is included in due to affiliate on the accompanying balance sheet. NOTE 5-GUARANTEES The Managing Member has guaranteed unlimited operating deficits of the Property until all conditions of the capital contributions have been satisfied. Thereafter, the guarantee will be reduced to $765,920 for at least 60 months. At the end of the 60 month period, the guarantee will be released, provided the operating reserves are fully funded and the Property achieves a debt service coverage of 1.15 to 1. Any advances under this guarantee will be treated as operating deficit loans, and will be paid from available net cash flow in accordance with the Operating Agreement (see Note 1). As of December 31, 2012, no advances have been made under this guaranty. The Managing Member and certain affiliates have guaranteed the lien free completion of the Property. The Managing Member and affiliates are obligated to pay all excess development costs pursuant to the Guaranty Agreement. As of December 31, 2012, there have been no advances under this guaranty. NOTE6-MANAGEMENT FEE On August 1, 2010, the Company entered into a property management agreement with Edgewood Management Company, which requires a fee of $5,920 per month with an annual escalation not to exceed 3 percent. For the year ended December 31, 2012, management fees totaled $71,395, of which $6,038 were unpaid as of December 31, 2012 and are included in accounts payable and accrued expenses on the accompanying balance sheet. 10

13 Notes to the Financial Statements NOTE7-PURCHASE OPTION Pursuant to the Purchase Option Agreement dated October 1, 2011, the Managing Member has the right to purchase the entire interest of the Investor Member at the end of the low-income housing tax credit compliance period at a purchase option price, as defined in the Purchase Option Agreement. As a condition to exercise the purchase option, the Managing Member shall agree to pay the Investor Member, in addition to the purchase option price, the sum of all unpaid amounts owed to the Investor Member under any provision of the Operating Agreement. NOTE 8-LOW-INCOME HOUSING TAX CREDITS The Company expects to generate federal LIHTCs from the Property. Generally, such LIHTCs become available for use by its members pro-rata over a ten year period that begins with the placed in service date for each building. To qualify for the LIHTCs, the Company must meet certain requirements, including attaining a qualified eligible basis sufficient to support the allocation, renting the Property pursuant to IRC Section 42 which regulates the use of the Property as to occupant eligibility and unit gross rent, among other requirements. As a result of these requirements that the Company must meet, there can be no assurance that the aggregate amount of the LIHTCs will be realized. Failure to meet all such requirements may result in generating a lesser amount of LIHTCs than expected. NOTE 9-HISTORIC TAX CREDITS The Company expects to generate HTCs from the Property. Generally, such credits are available for use by the members on the date the Qualified Rehabilitation Expenditures ( QREs ), as defined, are placed in service and are equal to 20 percent of the QREs with respect to any Certified Historic Structure. In order to qualify for these HTCs, the Company must comply with various federal requirements. These requirements include, but are not limited to, the Property being listed as a Certified Historic Structure in the National Register, located in a Registered Historic District, certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district, and the rehabilitation being preferred in a manner consistent with standards established by the Secretary of the Interior. In addition, the Property cannot be sold or transferred for a five year period commencing on the date the QREs are placed in service. The HTCs are subject to complying with certain requirements, and therefore, there can be no assurance that the aggregate amount of the HTCs will be realized. Failure to meet all such requirements may result in generating a lesser amount of HTCs than expected. NOTE 10 - PRIOR PERIOD ADJUSTMENT During 2011, the Company recorded duplicate accruals for certain operating expenses, resulting in an understatement of members equity and net income, net of income taxes, as of and for the year ended December 31, 2011 in the amount of $137,660. Members equity as of January 1, 2012 has been restated to correct this error. 11