Mutual Housing Association of South Central Connecticut, Inc. and Affiliates (d/b/a NeighborWorks New Horizons)

Transcription

1 Mutual Housing Association of South Central Connecticut, Inc. Consolidated Financial Statements (With Supplementary Information) and Independent Auditor's Reports

2 Index Independent Auditor's Report 3-5 Page Consolidated Statement of Financial Position (With Comparative Totals) 6-7 Consolidated Statement of Activities (With Comparative Totals) 8 Consolidated Statement of Changes in Net Assets 9 Consolidated Statement of Cash Flows (With Comparative Totals) Notes to Consolidated Financial Statements Supplementary Information: Exhibit I - Consolidating Statement of Financial Position Exhibit II - Consolidating Statement of Activities 49 Exhibit III - Consolidating Statement of Changes in Net Assets 50 Exhibit IV - Consolidating Statement of Expenses 51 Development Projects: Exhibit V - Consolidating Statement of Financial Position Exhibit VI - Consolidating Statement of Activities and Changes in Net Assets 54 Wholly-Owned Operating Properties: Exhibit VII - Consolidating Statement of Financial Position Exhibit VIII - Consolidating Statement of Activities and Changes in Net Assets (Deficit) 57 Limited Partnerships: Exhibit IX - Consolidating Statement of Financial Position Exhibit X - Consolidating Statement of Activities and Changes in Partners' Capital (Deficit) 60 Notes to Supplementary Information

3 Index Page Federal Reports: Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 69 Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report on Compliance for Each Major Federal Program and Report on Internal Control over Compliance Required by OMB Circular A Schedule of Findings and Questioned Costs Summary of Prior Audit Findings and Corrective Action Plan 76 State Reports: Schedule of Expenditures of State Financial Assistance 77 Notes to Schedule of Expenditures of State Finance Assistance Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report on Compliance for Each Major State Program and Report on Internal Control over Compliance Required by the State Single Audit Act Schedule of Findings and Questioned Costs Summary of Prior Audit Findings and Corrective Action Plan 86 2

4 Independent Auditor's Report To the Board of Directors Mutual Housing Association of South Central Connecticut, Inc. Report on the Financial Statements We have audited the accompanying consolidated financial statements of Mutual Housing Association of South Central Connecticut, Inc. (a not-for-profit organization), which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities, changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of 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 consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. The financial statements of the limited partnerships, limited liability companies and corporations of Mutual Housing Association of South Central Connecticut, Inc. were not audited in accordance with Government Auditing Standards as discussed in Note 1 in the Notes to Schedule of Expenditures of Federal Awards and the Notes to Schedule of Expenditures of State Financial Assistance. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 3

5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mutual Housing Association of South Central Connecticut, Inc. as of, and the changes in their net assets and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Report on Summarized Comparative Information We have previously audited the Mutual Housing Association of South Central Connecticut, Inc. ' 2013 consolidated financial statements, and we expressed an unmodified opinion on those audited consolidated financial statements in our report dated June 27, In our opinion, the summarized comparative information presented herein as of and for the year ended December 31, 2013, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information contained in Exhibits I, II, III and V through X is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and changes in net assets of the individual organizations and is not a required part of the consolidated financial statements. The supplementary information contained in Exhibit IV is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. The accompanying schedule of expenditures of Federal awards and the schedule of expenditures of state financial assistance are presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and the State Single Audit Act and are also not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures 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 consolidated financial statements as a whole. 4

6 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 29, 2015, on our consideration of Mutual Housing Association of South Central Connecticut, Inc. ' internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Mutual Housing Association of South Central Connecticut, Inc. ' internal control over financial reporting and compliance. C Hartford, Connecticut June 29,

7 Consolidated Statement of Financial Position (With Comparative Totals for December 31, 2013) Assets Current assets: Cash and cash equivalents $ 342,309 $ 734,180 Grants and other receivables, net 1,391, ,668 Tenant receivables, net 90,232 93,215 Property management fee receivable 5,540 5,498 Other receivables 2,205 - Prepaid expenses 89,325 86,313 Inventory 3,757,030 - Other assets 45,911 2,830 Total current assets 5,724,006 1,508,704 Property and equipment: Land 7,526,879 7,242,321 Land improvements 100, ,923 Building 63,873,648 62,759,884 Building improvements 2,592,199 2,515,342 Furniture and fixtures 585, ,841 Equipment 326, ,822 Construction in progress 13,989,186 8,267,414 88,995,400 81,721,547 Less accumulated depreciation 19,266,186 16,812,241 Net property and equipment 69,729,214 64,909,306 Other assets: Restricted cash 1,336,688 1,063,857 Resident security deposits 274, ,114 Other receivables - 107,690 Notes receivable (Note 6) 90, ,000 Other assets 12,177 - Deferred costs (Note 2) 935, ,607 Accumulated amortization (Note 2) (239,958) (249,698) Investment in partnerships (Note 9) - 1,953,295 Total other assets 2,409,087 4,844,865 Total assets $ 77,862,307 $ 71,262,875 6

8 Consolidated Statement of Financial Position (With Comparative Totals for December 31, 2013) Liabilities and Net Assets Current liabilities: Accounts payable - operating $ 429,612 $ 744,634 Accounts payable - construction (Note 2) 2,667, ,586 Accrued expenses 300, ,742 Accrued interest payable - amortizing 23,084 34,499 Accrued interest payable - non-amortizing Prepaid rent 6,058 - Line of credit (Note 10) 350,000 - Capital lease payable, current portion (Note 19) 2,361 2,361 Mortgages payable, current portion (Note 11) 1,549,079 1,581,741 Mortgages payable, non-amortizing, current portion (Note 11) 2,508,234 6,125,071 Total current liabilities 7,836,981 9,734,634 Long-term liabilities: Other liabilities 8, ,428 Security deposits 284, ,307 Accrued interest payable - amortizing 98,753 92,014 Accrued interest payable - non-amortizing 4,685,226 4,215,336 Interest rate swap (Note 12) 17,375 19,458 Membership fees (Note 8) 103, ,364 Deferred revenue (Note 13) 619, ,892 Tax credit exchange loan (Note 13) 4,005,707 4,339,558 Capital lease payable, net of current portion (Note 19) 4,185 5,479 Mortgages payable, net of current portion (Note 11) 4,304,861 3,268,737 Mortgages payable, non-amortizing, net of current portion (Note 11) 31,080,476 27,697,647 Total long-term liabilities 45,212,151 40,893,220 Total liabilities 53,049,132 50,627,854 Commitments and contingencies Net assets: Mutual Housing Association of South Central Connecticut, Inc. net assets: Unrestricted net assets 17,530,226 16,175,936 Temporarily restricted net assets (Note 16) - 31,305 Permanently restricted net assets (Note 16) 2,863,350 2,867,637 20,393,576 19,074,878 Noncontrolling interest - unrestricted net assets 4,419,599 1,560,143 Total net assets 24,813,175 20,635,021 Total liabilities and net assets $ 77,862,307 $ 71,262,875 See Notes to Consolidated Financial Statements. 7

9 Consolidated Statement of Activities Year Ended (With Comparative Totals for December 31, 2013) Unrestricted net assets: Public support: Foundation grants and corporate contributions $ 333,205 $ 466,559 Federal and state grants 7,613,337 6,963,743 Revenues: Investment income 5, ,544 Rental income 3,343,415 3,022,770 Other income 337, ,288 Management fees and reimbursements 67, ,679 Developer fees (Note 7) 28, ,638 Donated services 30,000 - Sale of units (Note 24) 286,000 - Less cost of properties sold (Note 24) (555,547) - Net assets released from restrictions 59,905 48,132 Total revenues 11,548,930 11,418,353 Expenses: General and administrative expenses 305, ,653 Program expenses 4,687,937 4,409,592 Fundraising expenses 108, ,850 Total expenses 5,102,485 4,833,095 Change in unrestricted operations 6,446,445 6,585,258 Non-operating income (expense): Forgivable loans 104,936 - Loss on investment in partnership (Note 23) (2,001,641) - Depreciation and amortization (2,466,429) (2,146,269) Financing costs (28,293) (25,973) Interest expense (942,871) (1,030,429) Total non-operating expense (5,334,298) (3,202,671) Change in unrestricted net assets 1,112,147 3,382,587 Temporarily restricted net assets: Foundation grants and corporate contributions - 40,000 Net assets released from restrictions (31,305) (48,132) Change in temporarily restricted net assets (31,305) (8,132) Permanently restricted net assets: Federal and state grants 24,313 - Net assets released from restrictions (28,600) - Change in permanently restricted net assets (4,287) - Consolidated change in net assets 1,076,555 3,374,455 Unrestricted net assets: Less amounts attributed to noncontrolling interest (1,696,435) (1,878,708) Changes in net assets - controlling interest $ 2,772,990 $ 5,253,163 See Notes to Consolidated Financial Statements. 8

10 Controlling Noncontrolling Total Interest Interest Net assets, beginning of year $ 20,635,021 $ 19,074,878 $ 1,560,143 Capital contributions 3,234,457 (707,794) 3,942,251 Capital distributions (132,858) (132,858) - Transfers to wholly owned properties - (613,640) 613,640 Change in net assets/net loss 1,076,555 2,772,990 (1,696,435) Net assets, end of year $ 24,813,175 $ 20,393,576 $ 4,419,599 The change in net assets is as follows: Mutual Housing Association of South Central Connecticut, Inc. Consolidated Statement of Changes in Net Assets Year Ended Temporarily Permanently Total Unrestricted Restricted Restricted 9 Net assets, beginning of year $ 20,635,021 $ 17,736,079 $ 31,305 $ 2,867,637 Capital contributions 3,234,457 3,234, Capital distributions (132,858) (132,858) - - Change in net assets 1,076,555 1,112,147 (31,305) (4,287) Net assets, end of year $ 24,813,175 $ 21,949,825 $ - $ 2,863,350 See Notes to Consolidated Financial Statements.

11 Consolidated Statement of Cash Flows Year Ended (With Comparative Totals for December 31, 2013) Operating activities: Consolidated change in net assets $ 1,076,555 $ 3,374,455 Adjustments to reconcile consolidated change in net assets to to net cash provided by operating activities: Depreciation and amortization 2,466,429 2,146,269 Bad debts 184, ,257 Forgiveness of debt (104,936) - Tax credit exchange loan (333,851) (334,017) Loss on sale of properties 269,547 - Change in value of interest rate swap (2,083) (15,983) Accrued interest payable - nonamortizing 470,577 1,115,769 Contribution of donated property (31,600) - Contributions received for long-term purposes - (30,000) Investment in limited partnerships 1,953,295 (50,104) Changes in operating assets and liabilities: Grants and other receivables (804,786) (584,775) Tenant receivables (181,338) (139,676) Property management fee receivable (42) 1,568 Other receivables 105, ,000 Prepaid expenses (3,012) (29,230) Inventory (3,757,030) - Other assets (55,258) 2,796 Resident security deposits (69,168) (24,652) Accounts payable 1,443, ,161 Accrued expenses (36,671) 56,037 Accrued interest payable - amortizing (4,676) (491,336) Prepaid rent 6,058 (1) Other liabilities (481,233) 462,270 Security deposits 72,331 23,388 Membership fees (39,292) (6,680) Deferred revenue 208, ,446 Net cash provided by operating activities 2,351,580 6,242,962 Investing activities: Restricted cash and other reserves (272,831) (60,976) Cash received on notes receivable 770,000 17,500 Capital expenditures (7,797,800) (8,173,163) Proceeds from sale of properties 286,000 - Net cash used in investing activities (7,014,631) (8,216,639) 10

12 Consolidated Statement of Cash Flows Year Ended (With Comparative Totals for December 31, 2013) Financing activities: Cash received from line of credit $ 350,000 $ - Cash received on mortgages 5,728,115 4,555,415 Cash paid on mortgages (4,853,725) (3,091,486) Cash paid on capital lease (1,294) (485) Cash paid on deferred costs (53,515) (148,332) Capital contributions 3,234,457 1,044,959 Capital distributions (132,858) (63,939) Contributions received for long-term purposes - 30,000 Net cash provided by financing activities 4,271,180 2,326,132 Net increase (decrease) in cash and cash equivalents (391,871) 352,455 Cash and cash equivalents, beginning of year 734, ,725 Cash and cash equivalents, end of year $ 342,309 $ 734,180 Supplemental disclosure of cash flow information: Interest paid $ 553,913 $ 598,257 Income taxes paid $ 7,663 $ 17,617 Noncash investing and financing transactions: Donation of property $ 31,600 $ - Purchase of equipment with capital lease $ - $ 8,325 See Notes to Consolidated Financial Statements. 11

13 Notes to Consolidated Financial Statements Note 1 - Principles of consolidation The consolidated financial statements of Mutual Housing Association of South Central Connecticut, Inc. (the "Organization") were prepared for the purpose of presenting, in a consolidated format, the financial position and results of operations of the following entities, which are controlled by the same board. Certain companies included in the consolidation are organized as limited liability companies and, as such, the members' liability is limited to their capital contributions. Mutual Housing Association of South Central Connecticut, Inc. ("NWNH") is a nonprofit agency organized to encourage community and resident involvement in the development of housing and the prevention and elimination of neighborhood deterioration through the construction, rehabilitation, ownership or operation of housing for low and moderate-income families in South Central Connecticut. NWNH is supported mainly through grants, contributions and rental income. NWNH has been designated a Community Housing Development Organization ("CHDO"). NWNH's major programs consist of the following: Housing Development represents all activity related to the identification and acquisition of properties, and the oversight of construction of low-income and affordable housing. The programs are primarily funded by grants from NeighborWorks America and various cities and towns in Connecticut, developer fees and contributions. Asset Management represents activities related to the management of low-income and affordable housing. This program is funded primarily through property and partnership management fees, tenant rental income and contributions. Community Service represents activities related to administration and the establishment of programs to benefit the residents of NWNH's developments. These activities are primarily funded through organizer fees and contributions. 12

14 Notes to Consolidated Financial Statements Development Projects consist of the following: Waterbury Community Investments consists of the Gaffney Place Revitalization Project which comprises 5-2 family homes intended for sale to qualified homeowners and the Waterbury Phase II Scattered Sties Project of affordable rental opportunities. These properties are located in Waterbury, Connecticut. Winter Grove is a 40 unit HUD 202 project that is under construction for affordable elderly housing. This property is located in Southington, Connecticut. West River consists of 3 lots. A two family home will be constructed on each lot and is intended to be sold to qualified homebuyers. This property is located in New Haven, Connecticut. Spruce Meadows/Spruce Ridge is a new construction development with 4 three-story buildings and 1 community building offering 86 residential rental units. This property is located in Stonington, Connecticut. It received a 9% Low Income Housing Tax Credit ( LIHTC ) allocation in 2014 through Connecticut Housing Finance Authority ("CHFA") and capital funding from the Department of Housing. St. Paul's Commons is a scattered site LIHTC project consisting of 56 newly constructed affordable housing units, including 16 units for elderly and 12 units for supportive housing. The properties are located in Bridgeport, Connecticut. Pre-Development activities are funds that have not been earmarked for a specific project. Redevelopment Wholly Owned Properties NWNH is currently in the process of redeveloping 65 units in Hill Associates Limited Partnership located in New Haven, Connecticut. Funding came from the State of Connecticut Department of Housing and the City of New Haven. NWNH is also redeveloping 13 units of Hubbard Woods Mutual Housing Limited Partnership located in Guilford, Connecticut being funded with an innovation grant from the State of Connecticut Department of Housing. Fair Haven Homeownership to Rental has two remaining units that are in development. Wholly-Owned Operating Properties consist of the following: Gilbert/Derby Avenue is a development consisting of 14 units in multiple buildings located in New Haven, Connecticut. 13

15 Notes to Consolidated Financial Statements Valley Mutual Housing is a development consisting of 9 residential units in Ansonia, Connecticut. Canterbury Gardens is a development consisting of 34 residential units, including 9 supportive housing units, located in New Haven, Connecticut. Beth-El Milford is a development consisting of 5 units of supportive housing, which are located in Milford, Connecticut. Richard Street II is a development consisting of 6 low-income rental units which are located in New Haven, Connecticut. Norwich Scattered Sites is a development consisting of 8 residential units in Norwich, Connecticut. Hubbard Woods Mutual Housing Limited Partnership is a residential housing complex of 13 units in Guilford, Connecticut. George Street Mutual Housing Limited Partnership is a residential housing complex of 58 units in New Haven, Connecticut. Hill Associates Limited Partnership is a residential housing complex of 65 units in New Haven, Connecticut. Fair Haven Home Ownership To Rental consists of 4 homes (7 rental units) located in New Haven, Connecticut. Limited Partnerships are residential housing complexes restricted to providing affordable housing to low and moderate income households and consist of the following: Guilford Interfaith Mutual Housing Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 1998, to acquire an interest in real property located in Guilford, Connecticut, and to rehabilitate and operate thereon a residential housing project complex of 21 units, under Section 42 of Internal Revenue Code, as a "qualified low-income housing project". The.01% general partner of the partnership, Guilford Mutual Housing Association, Inc., is a corporation wholly-owned by NWNH. Richard Street Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 1996, to acquire an interest in real property located in New Haven, Connecticut, and to construct and operate thereon a residential housing project complex of 20 units, under Section 42 of Internal Revenue Code, as a "qualified low-income housing project". The.01% general partner of the partnership, Fair Haven Housing Corporation, is a corporation wholly-owned by NWNH. 14

16 Notes to Consolidated Financial Statements Ferry Mutual Housing Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 2004, to acquire an interest in real property located in New Haven, Connecticut, and to rehabilitate and operate thereon a residential housing project complex of 24 units, under Section 42 of Internal Revenue Code, as a "qualified low-income housing project". The.01% general partner of the partnership, Ferry Mutual Housing Development Corporation, is a limited liability company wholly-owned by NWNH. Willow Mutual Housing Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed 2003, to acquire an interest in real property located in Waterbury, Connecticut, and to rehabilitate and operate 33 multifamily units of low-income housing, under Section 42 of Internal Revenue Code, as a "qualified lowincome housing project". The.01% general partner of the partnership, Willow Mutual Housing Development, LLC, is a limited liability company wholly-owned by NWNH. Kirkham Mutual Housing Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 2006, to acquire an interest in real property located in Branford, Connecticut, and to rehabilitate and operate thereon a residential housing project complex of 17 units, under Section 42 of Internal Revenue Code, as a "qualified low-income housing project". The.01% general partner of the partnership, Kirkham Mutual Housing Development, LLC, is a limited liability company wholly-owned by NWNH. Highwood Square Mutual Housing Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 2009, to acquire an interest in real property located in Hamden, Connecticut, and to rehabilitate and operate thereon a residential housing project complex of 27 residential units plus commercial space, under Section 42 of Internal Revenue Code, as a "qualified low-income housing project". The.01% general partner of the partnership, Dixwell Columbus Development Corporation, is a corporation wholly-owned by NWNH. Fair Haven Mutual Housing Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 2012, to acquire interest in real property located in the Fair Haven section of New Haven, Connecticut and to rehabilitate and operate thereon a residential housing complex consisting of 44 residential units within 3 properties under Section 42 of Internal Revenue Code, as a "qualified low-income housing project." The.01% general partner of the Partnership, Fair Haven Mutual Housing Development Corporation, is a Corporation wholly-owned by NWNH. All significant intercompany accounts and transactions are eliminated in the consolidation. 15

17 Notes to Consolidated Financial Statements Note 2 - Summary of significant accounting policies Financial statement presentation Net assets, revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as follows: Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met, either by actions of the Organization and/or the passage of time. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained permanently by the Organization. Generally, the donors of these assets permit the Organization to use all or part of the income earned on any related investments for general or specific purposes. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities, if any, are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets. Donor-restricted contributions whose restrictions are met in the same reporting period have been reported as unrestricted support in the consolidated statement of activities. Revenue recognition Rental income - NWNH recognizes monthly rental revenue earned from leasing housing units on the due date. Rental payments received in advance of the due dates are deferred until earned. 16

18 Notes to Consolidated Financial Statements Sale of units - NWNH recognizes revenue earned from the construction or rehabilitation and sale of housing units when units are sold and any rescission period, if applicable, has expired. Cash contributions - NWNH reports contributions received or pledged as unrestricted, temporarily restricted, or permanently restricted support depending on the existence and/or nature of any donor restrictions. Restricted net assets are reclassified to unrestricted net assets upon satisfaction of the time or purpose restrictions. Non-cash contributions - NWNH records the estimated fair value of the donated materials, equipment and usage of assets (i.e., rent) as both revenues and expenses in the period in which the donation is received. Donated services - NWNH recognizes donated services if they create or enhance nonfinancial assets or require specialized skills and would typically be purchased if not provided by donation. The Organization values volunteer services based upon an hourly rate determined by an estimated standard market rate multiplied by the number of volunteer hours. During the year ended, $30,000 of donated architectural services met the requirements for recognition in the consolidated financial statements. Grants - NWNH was the recipient of various grants and contracts from Federal, state and local agencies and other institutions. Such amounts were reflected as support and expenses in the accompanying consolidated financial statements when conditions for usage were met. Under the terms and conditions of these grants, expenditures and compliance with their provisions are subject to audit by the governmental agency. Management does not anticipate that there would be material changes as a result of any grant audits. Use of estimates The preparation of consolidated 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 liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income taxes The following entities are classified by the Internal Revenue Service as public charitable organizations exempt from income tax under Section 501(c)(3) of the Internal Revenue Code: Mutual Housing Association of South Central Connecticut, Inc. Winter Grove, Inc. 17

19 Notes to Consolidated Financial Statements Income from certain activities not directly related to NWNH's tax-exempt purpose is subject to taxation as unrelated business income. There were no income taxes for such unrelated business income for the year ended. The following entity is considered a disregarded entity for income tax purposes. All income or loss of the company is recorded on the tax return of Mutual Housing Association of South Central Connecticut, Inc. Waterbury Community Investments, LLC The following entities have been organized as limited liability companies. Accordingly, the members are taxed individually on their pro-rata share of the entity's earnings, and no provision for income taxes has been made. Hubbard Woods, LLC Willow Mutual Housing Development, LLC Kirkham Mutual Housing Development, LLC Hill-Mutual Housing Association, LLC Elias Howe Mutual Housing, LLC Spruce Meadows, LLC Saint Paul's Mutual Housing Association, LLC The following corporations account for Federal income taxes in accordance with the guidance on accounting for income taxes. The guidance requires the use of an asset and liability approach that provides for the recognition of deferred tax assets and liabilities for the expected future consequences or events that have been recognized in the corporations' consolidated financial statements or tax returns. In estimating future tax consequences, the standard generally considers all expected future events other than enactment of changes in the law or rate. Income taxes are provided for the tax effect of transactions reported in the financial statements and consist of taxes currently due. The corporations have net operating loss carryforwards of approximately $126,000, which expire at various dates between 2023 and The corporations' total deferred tax asset arising from net operating loss carryforwards is approximately $37,800, which has been fully reserved. The valuation allowance increased by $6,000 during the year. 730 George Street of New Haven Corporation Hubbard Woods Mutual Housing Association, Inc. Guilford Mutual Housing Association, Inc. Fair Haven Housing Corporation Ferry Mutual Housing Development Corporation Dixwell Columbus Development Corporation Fair Haven Mutual Housing Development Corporation ArLoW Mutual Housing, LLC 18

20 Notes to Consolidated Financial Statements The following entities have been organized as limited partnerships. Accordingly, the partners are taxed individually on their pro-rata share of the entity's earnings, and no provision for income taxes has been made. George Street Mutual Housing Limited Partnership Hubbard Woods Mutual Housing Limited Partnership Guilford Interfaith Mutual Housing Limited Partnership Richard Street Limited Partnership Ferry Mutual Housing Limited Partnership Willow Mutual Housing Limited Partnership Kirkham Mutual Housing Limited Partnership Highwood Square Limited Partnership Hill Associates Limited Partnership Fair Haven Mutual Housing Limited Partnership Saint Paul s Limited Partnership NWNH has no unrecognized tax benefits at. NWNH's Federal information returns prior to fiscal year 2011 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. If applicable, NWNH would recognize interest and penalties associated with tax matters as part of interest expense in the consolidated statement of activities and include accrued interest and penalties in accrued interest in the consolidated statement of financial position. NWNH did not recognize any interest or penalties associated with tax matters for the year ended. Functional expenses Direct expenses are charged to each program benefited. Any expenditure not directly chargeable is allocated among the programs. Consolidated statement of cash flows Cash and cash equivalents as used in the consolidated statement of cash flows are shortterm, highly liquid investments with maturities of three months or less when acquired. Restricted cash Reserves - In accordance with the mortgage agreements, certain projects are required to make deposits into mortgage escrows (restricted for tax and insurance payments) and replacement reserves (restricted to repairs and maintenance), working capital reserves (restricted for interest, tax, property insurance, ground rents and assessment during construction, to defray the cost of initial marketing and rent-up and to establish accruals for items due during the first operating year that project income is not expected to cover), interest reserves and other reserves. 19

21 Notes to Consolidated Financial Statements Resident security deposits - Resident security deposits are held in a separate account in the name of the project. These accounts are restricted to refunding security deposits due to the residents. Tenant and grants and other receivables The face amount of accounts receivable is reduced by an allowance for doubtful accounts. The allowance for doubtful accounts of $321,544 at reflects the best estimate of probable losses determined principally on the basis of historical experience and specific allowances for known troubled accounts and is related to tenant receivables. All accounts or portions thereof that are deemed to be uncollectible or that require an excessive collection cost are written off to the allowance for doubtful accounts. Inventory Inventory represents the cost of residential properties developed by NWNH and available for sale. Property and equipment NWNH follows the practice of capitalizing all expenditures for property and equipment in excess of $5,000; the fair value of donated assets is similarly capitalized. Depreciation is provided on a straight-line and accelerated basis over the estimated useful lives as follows: Land improvements Building Building improvements Furniture and fixtures Equipment 15 years years years 5-10 years 5-10 years Depreciation expense for the year ended was $2,453,945. Interest expense of $77,676 was capitalized during the year. Expenditures for renewals and betterments, which extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation on construction in progress will begin when the asset is placed in service. Pre-development costs Pre-development costs are costs incurred relating to the acquisition of property, expenditures specific to the development of a project and an allocation of allowable project management time. If a project is abandoned, the costs are charged to expense in the year of abandonment. Interest costs are capitalized while development is in progress. 20

22 Notes to Consolidated Financial Statements Impairment of long-lived assets The Organization 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 techniques. There were no impairment losses recognized in Deferred costs Certain costs associated with the financing of the mortgages have been capitalized and will be amortized on a straight-line basis over the life of the related loans. Amortization expense for the year ended was $12,484. Accounts payable - construction These payables are the result of construction projects. Outstanding construction payables are expected to be funded with long-term debt financing. Below market loans NWNH's activities include the development of low-income housing. Various government agencies, foundations and other not-for-profit organizations having a similar mission to foster low-income housing have lent money to NWNH at advantageous terms. NWNH has not discounted these below market loans. Noncontrolling interest Noncontrolling interest is the Limited Partners' equity from the limited partnerships that NWNH does not control. NWNH's equity ownership in the limited partnerships is listed as partners' capital on the consolidated statement of financial position. Summarized prior year information The amounts shown for the year ended December 31, 2013 in the accompanying financial statements are included to provide a basis for comparison with 2014 and present summarized totals only. Accordingly, the 2013 totals are not intended to present all information necessary for a fair presentation in conformity with accounting principles generally accepted in the United States of America. Such information should be read in conjunction with the Organization's financial statements for the year ended December 31, 2013, from which the summarized information was derived. Reclassifications Certain amounts in the 2013 financial statements have been reclassified to conform to the 2014 presentation. 21

23 Notes to Consolidated Financial Statements Subsequent events Management has reviewed subsequent events through June 29, 2015 which is the date the consolidated financial statements were approved and available for issuance. Note 3 - Liquidity and management's plans For the year ended, NWNH had consolidated net income of $1,076,555 (NWNH's net income, excluding the noncontrolling interest for the year was $2,772,990). The Organization has net assets of $24,813,175 as of. The Organization has a working capital deficit of $2,112,975 as of. Management anticipates paying down construction payables ($2,667,795) with permanent financing to be received for development projects. In addition, the non-amortizing current portion of debt obligations ($2,508,234) will also be forgiven upon completion or satisfaction of project requirements or refinanced. Note 4 - Concentrations Current vulnerability due to certain concentrations The government-subsidized properties' sole assets are the residential apartment complex owned by each entity. The operations of the entities are concentrated in the multifamily real estate market. In addition, the entities operate in a heavily regulated environment. The operations of the entities 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 an Act of Congress or these regulatory agencies. 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. Concentrations of credit risk The Organization maintains its cash balances in several accounts in one bank. The cash balances are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, these balances may exceed the Federal insurance limits; however, the Organization has not experienced any losses with respect to its bank balances in excess of government provided insurance. At, no cash balances exceeded Federal insurance limits. Note 5 - Fair value measurements Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820, Fair Value Measurement, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below: 22

24 Notes to Consolidated Financial Statements Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Organization has the ability to access. Level 2: Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; and Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Organization believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The obligation under interest rate swap is valued based on mathematical approximations of market values derived from models using certain assumptions regarding past, present and future market conditions. There were no changes in valuation techniques for the interest rate swap agreement during the year ended (see Note 11). There were no transfers between Level 1 and Level 2 during the year. The carrying amount of cash, prepaid expenses, receivables, accrued liabilities and bond and notes payable approximate fair value. 23

25 Notes to Consolidated Financial Statements The following table sets forth by level, within the fair value hierarchy, the Organization's liability's fair value as of : Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Liabilities Inputs Inputs Description Total (Level 1) (Level 2) (Level 3) Liability: Swap contract liability $ 17,375 $ - $ - $ 17,375 The following sets forth a reconciliation of the beginning and ending liabilities within the Level 3 fair value hierarchy: Beginning Ending Balance Gains Purchases Sales Balance Swap contract liability $ 19,458 $ (2,083) $ - $ - $ 17,375 See Note 11 for additional information on the Organization's purpose for entering into derivatives designated as hedging instruments and its overall risk management strategies. There were no transfers in or out of Level 3 during the year ended. Transfers are recognized at the end of the reporting period. Note 6 - Notes receivable NWNH has a $90,000 note receivable with ArLoW, LLC. The note is non-interest bearing and will be paid from ArLoW, LLC cash flow as defined in the agreement. Note 7 - Developer fees receivable The Organization entered into an agreement to provide consulting and developing services to the entities listed below. The amounts due have no specific repayment terms and are noninterest bearing. The total amount earned and due to NWNH is as follows: Kirkham Mutual Housing Limited Partnership $ 45,059 Willow Mutual Housing Limited Partnership 108,710 Highwood Square Limited Partnership 285,926 Richard Street Limited Partnership 41,538 Fair Haven Mutual Housing Limited Partnership 843,170 Saint Paul s Commons Limited Partnership 58,750 Spruce Meadows, LLC 45,000 Fair Haven Home Ownership to Rental 100,520 These receivables are eliminated in consolidation. 24 $ 1,528,673 Development fees earned for the year ended, were $877,423, all except for $28,432 were eliminated in consolidation.

26 Notes to Consolidated Financial Statements Note 8 - Membership fees In addition to a security deposit, residents of some properties must pay a $500-$1,250 refundable membership fee based on income. The balance of the refundable membership fee was $103,072 at. When the fee is fully paid by the resident, it earns interest at 3% for the resident. Accrued interest totaling $3,092 is included on the consolidated statement of financial position as a part of accrued expenses. Note 9 - Investment in partnership NWNH's wholly-owned subsidiary, Elias Howe Mutual Housing, LLC has a 10% interest in Elias Howe Realty, LLC. There have been no funds invested as of. The investment is accounted for under the cost method. Note 10 - Line of credit NWNH has a business line of credit with Webster Bank, which allows borrowings up to $350,000. The line bears interest at Webster's Prime Rate (3.25% at ), is due on demand, and is secured by all business assets and a junior lien on the property at 80 Derby Avenue. The outstanding balance at is $350,000. The line expired on February 15, 2015 and was extended for an additional two years. Note 11 - Mortgages payable Third party mortgages payable consist of the following: Amortizing Non- Amortizing NWNH has an unsecured predevelopment loan from Connecticut Housing Investment Fund ("CHIF") with interest at 3% per year, amortized over twenty five years. Monthly payments of principal and interest are $200. The loan is due in full on October 1, $ 42,080 $ - NWNH has a permanent 6.5% mortgage loan from Greater New Haven Community Loan Fund ("GNHCLF") in the amount of $48,500. Principal and interest is due in monthly installments. The mortgage is due January 1, 2019 and is secured by the property on 235 Grand Avenue. 24,130 - NWNH has a loan in the amount of $376,000 with Citizens Bank. The loan bears interest at the adjusted LIBOR rate (2.169% at ). Principal and interest are due in monthly installments. The principal is paid on a 20- year amortization and the total principal due each year is averaged into equal monthly payments. The loan is due and payable on December 31, The loan is secured by the property on 235 Grand Avenue and a lien on all business assets and a junior lien on the property at 80 Derby Avenue. 301,280-25