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) 10 Notes to Consolidated Financial Statements Supplementary Information: Exhibit I - Consolidating Statement of Financial Position Exhibit II - Consolidating Statement of Activities 48 Exhibit III Consolidating Statement of Changes in Net Assets 49 Exhibit IV - Consolidating Statement of Expenses 50 Wholly-Owned Operating Properties: Exhibit V - Consolidating Statement of Financial Position Exhibit VI - Consolidating Statement of Activities and Changes in Net Assets 53 Development Projects: Exhibit VII - Consolidating Statement of Financial Position 54 Exhibit VIII - Consolidating Statement of Activities and Changes in Net Assets 55 Limited Partnerships: Exhibit IX - Consolidating Statement of Financial Position Exhibit X - Consolidating Statement of Activities and Changes in Net Assets 58 Notes to Supplementary Information

3 Index Page Federal Reports: Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 67 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; Report on Internal Control over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by OMB Circular A Schedule of Findings and Questioned Costs Summary of Prior Audit Findings and Corrective Action Plan 74 State Reports: Schedule of Expenditures of State Financial Assistance 75 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; Report on Internal Control over Compliance; and Report on the Schedule of Expenditures of State Financial Assistance Required by the State Single Audit Act Schedule of Findings and Questioned Costs Summary of Prior Audit Findings and Corrective Action Plan 84 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 certain subsidiaries and affiliates 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 consolidated financial statements, and we expressed an unmodified opinion on those audited consolidated financial statements in our report dated June 28, In our opinion, the summarized comparative information presented herein as of and for the year ended December 31, 2012, 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 27, 2014, on our consolidation 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 Farmington, Connecticut June 27,

7 Consolidated Statement of Financial Position (With Comparative Totals for December 31, 2012) Assets Current assets: Cash and cash equivalents $ 734,180 $ 381,725 Grants and other receivables 586,668 1,893 Tenant receivable 93,215 70,796 Property management fee receivable 5,498 7,066 Notes receivable - current (Note 5) - 150,000 Prepaid expenses 86,313 57,083 Other assets 2,830 5,626 Total current assets 1,508, ,189 Property and equipment: Land 7,242,321 4,748,129 Land improvements 100, ,923 Building 62,759,884 56,036,619 Building improvements 2,515,342 1,783,115 Furniture and fixtures 508, ,873 Equipment 326, ,004 Construction in progress 8,267,414 10,883,195 81,721,547 74,366,858 Less accumulated depreciation 16,812,241 14,716,002 Net property and equipment 64,909,306 59,650,856 Other assets: Restricted cash 1,063,857 1,002,881 Resident security deposits 205, ,462 Other receivables 107, ,690 Notes receivable (Note 5) 860, ,500 Deferred costs (Note 2) 904, ,275 Accumulated amortization (Note 2) (249,698) (199,668) Investment in partnerships (Note 8) 1,953,295 1,903,191 Total other assets 4,844,865 4,588,331 Total assets $ 71,262,875 $ 64,913,376 6

8 Consolidated Statement of Financial Position (With Comparative Totals for December 31, 2012) Liabilities and Net Assets Current liabilities: Accounts payable - operating $ 744,634 $ 410,473 Accounts payable - construction 909,586 1,736,385 Accrued expenses 336, ,705 Accrued interest payable - amortizing 34,499 14,189 Prepaid rent - 1 Capital lease payable, current portion (Note 17) 2,361 - Mortgages payable, current portion (Note 10) 1,581,741 2,130,574 Mortgages payable, non-amortizing, current portion (Note 10) 6,125,071 5,875,205 Total current liabilities 9,734,634 10,447,532 Long-term liabilities: Other liabilities 489,428 27,158 Security deposits 212, ,919 Accrued interest payable - amortizing 92, ,660 Accrued interest payable - non-amortizing 4,215,336 3,099,567 Interest rate swap (Note 11) 19,458 35,441 Membership fees (Note 7) 142, ,044 Deferred revenue (Note 12) 410, ,446 Tax credit exchange loan (Note 12) 4,339,558 4,673,575 Capital lease payable, net of current portion (Note 17) 5,479 - Mortgages payable, net of current portion (Note 10) 3,268,737 3,655,966 Mortgages payable, non-amortizing, net of current portion (Note 10) 27,697,647 25,547,522 Total long-term liabilities 40,893,220 38,186,298 Total liabilities 50,627,854 48,633,830 Commitments and contingencies Net assets: Mutual Housing Association of South Central Connecticut, Inc. net assets: Unrestricted net assets 16,175,936 11,078,020 Temporarily restricted net assets (Note 15) 31,305 39,437 Permanently restricted net assets (Note 15) 2,867,637 2,867,637 19,074,878 13,985,094 Noncontrolling interest 1,560,143 2,294,452 Total net assets 20,635,021 16,279,546 Total liabilities and net assets $ 71,262,875 $ 64,913,376 See Notes to Consolidated Financial Statements. 7

9 Consolidated Statement of Activities Year Ended (With Comparative Totals for December 31, 2012) Unrestricted net assets: Public support: Foundation grants and corporate contributions $ 466,559 $ 307,150 Federal and state grants 6,963,743 1,099,234 Revenues: Investment income 122, ,428 Rental income 3,022,770 2,878,249 Other income 501, ,037 Management fees and reimbursements 127,679 55,649 Developer fees (Note 6) 165,638 43,087 Sale of units - 258,900 Less cost of properties sold - (619,439) Net assets released from restrictions 48, ,051 Total revenues 11,418,353 4,939,346 Expenses: General and administrative expenses 292, ,946 Program expenses 4,409,592 3,539,667 Fundraising expenses 130,850 96,360 Total expenses 4,833,095 3,944,973 Change in unrestricted operations 6,585, ,373 Non-operating income (expense): Depreciation and amortization (2,146,269) (2,086,778) Financing costs (25,973) (32,758) Interest expense (1,030,429) (952,775) Total non-operating expense (3,202,671) (3,072,311) Change in unrestricted net assets 3,382,587 (2,077,938) Temporarily restricted net assets: Foundation grants and corporate contributions 40,000 - Net assets released from restrictions (48,132) (285,051) Change in temporarily restricted net assets (8,132) (285,051) Permanently restricted net assets: Federal and state grants - 90,000 Consolidated change in net assets 3,374,455 (2,272,989) Less amounts attributed to noncontrolling interest (1,878,708) (2,060,920) Change in net assets, Mutual Housing Association of South Central Connecticut, Inc. $ 5,253,163 $ (212,069) See Notes to Consolidated Financial Statements. 8

10 Consolidated Statement of Changes in Net Assets Year Ended Controlling Noncontrolling Total Interest Interest Net assets, beginning of year $ 16,279,546 $ 13,985,094 $ 2,294,452 Capital contributions 1,044, , ,992 Capital distributions (63,939) (63,939) - Transfers to wholly owned properties - (1,034,407) 1,034,407 Change in net assets/net loss 3,374,455 5,253,163 (1,878,708) Net assets, end of year $ 20,635,021 $ 19,074,878 $ 1,560,143 The change in net assets is as follows: Temporarily Permanently Total Unrestricted Restricted Restricted 9 Net assets, beginning of year $ 16,279,546 $ 13,372,472 $ 39,437 $ 2,867,637 Capital contributions 1,044,959 1,044, Capital distributions (63,939) (63,939) - - Change in net assets 3,374,455 3,382,587 (8,132) - Net assets, end of year $ 20,635,021 $ 17,736,079 $ 31,305 $ 2,867,637 See Notes to Consolidated Financial Statements.

11 Consolidated Statement of Cash Flows Year Ended (With Comparative Totals for December 31, 2012) Operating activities: Consolidated change in net assets $ 3,374,455 $ (2,272,989) Adjustments to reconcile consolidated change in net assets to to net cash provided by operating activities: Depreciation and amortization 2,146,269 2,086,778 Bad debts 117, ,722 Tax credit exchange loan (334,017) (334,183) Loss on sale of properties - 397,340 Change in value of interest rate swap (15,983) 4,067 Accrued interest payable - nonamortizing 1,115,769 (281,144) Contributions received for long-term purposes (30,000) (90,000) Changes in operating assets and liabilities: Grants and other receivables (584,775) 161,171 Tenant receivable (139,676) (99,996) Property management fee receivable 1,568 (7,066) Prepaid expenses (29,230) 694 Other assets 2,796 (5,089) Resident security deposits (24,652) 1,378 Other receivables 110,000 (217,690) Accounts payable 334, ,062 Accrued expenses 56, ,278 Accrued interest payable - amortizing (491,336) 423,276 Prepaid rent (1) (1,279) Other liabilities 462,270 27,158 Security deposits 23,388 3,037 Membership fees (6,680) 8,612 Deferred revenue 205, ,572 Net cash provided by operating activities 6,293, ,709 Investing activities: Restricted cash and other reserves (60,976) 7,213 Investment in limited partnerships (50,104) - Cash received on notes receivable 17,500 17,500 Capital expenditures (8,173,163) (6,573,057) Proceeds from sale of properties - 258,900 Net cash used in investing activities (8,266,743) (6,289,444) Financing activities: Cash received on mortgages 4,555,415 6,620,941 Cash paid on mortgages (3,091,486) (1,447,853) Cash paid on capital lease (485) - Cash paid on deferred costs (148,332) (89,711) Capital contributions 1,044, ,460 Capital distributions (63,939) (400,000) Contributions received for long-term purposes 30,000 90,000 Cash paid on syndication costs - (45,000) Cash paid on line of credit - (110,000) Net cash provided by financing activities 2,326,132 4,980,837 Net increase (decrease) in cash and cash equivalents 352,455 (502,898) Cash and cash equivalents, beginning of year 381, ,623 Cash and cash equivalents, end of year $ 734,180 $ 381,725 Interest paid $ 598,257 $ 241,106 Income taxes paid $ 17,617 $ 32,171 Noncash investing and financing transactions: Forgiveness of debt on properties sold $ - $ 392,672 Purchase of equipment with capital lease $ 8,325 $ - See Notes to Consolidated Financial Statements. 10

12 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. 11

13 Notes to Consolidated Financial Statements Wholly-Owned Operating Properties consist of the following: Gilbert/Derby Avenue is a development consisting of ten residential units and 1 house (4 unit) development which are located in New Haven, Connecticut. Valley Mutual Housing is a development consisting of 9 residential units in Ansonia, Connecticut. Canterbury Gardens is a development consisting of 34 residential 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. 500 Boswell is a development consisting of 4 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. Development Projects consist of the following: Gaffney Place is a 10 unit housing rehabilitation project, 5 of which are intended for qualified homebuyers and includes a streetscape improvement plan. These properties are located in Waterbury, Connecticut. Fair Haven HTR consists of 4 houses (7 units) including 1 single family home and 3 two family homes. Previously intended for home ownership, they are now available for rental. These homes are being renovated and are located in New Haven, 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, one of which has an existing building that will be torn down. 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. 12

14 Notes to Consolidated Financial Statements Spruce Meadows is a new construction development, which will have 2 three-story buildings and one community building offering 43 residential rental units. This property is located in Stonington, Connecticut. The Villages is a mixed-income development of 120 rental units in Montville, Connecticut. Presently, this project is going through a Section 106 Environmental review. NSP III is comprised of 7 units in New London and Norwich, Connecticut. The New London development will result in a two-family home intended for a first-time homebuyer. The Norwich development consists of 4 rental units at 418 Norwich Ave and 1 homebuyer unit at 37 Prospect St. St. Paul's Commons is a scattered site Low Income Housing Tax Credit ("LIHTC") project consisting of 56 newly constructed affordable housing, including 16 units for elderly and 12 units for supportive housing. The properties are located in Bridgeport, Connecticut. Hill Development is comprised of a redevelopment project of 65 units located in New Haven, Connecticut. Funding came from the State of Connecticut Department of Housing. Pre-Development is funds that have been received for pre-development activities that have not been earmarked for a specific project. Limited Partnerships consist of residential housing complexes restricted to providing affordable housing to low and moderate income households. Limited Partnerships 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. 13

15 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. Hill Associates Limited Partnership was organized under the laws of the State of Connecticut as a limited partnership formed in 1997, to acquire an interest in real property located in 17 scattered sites in New Haven, Connecticut, and to rehabilitate and operate thereon a residential housing project complex of 65 multifamily rental units, under Section 42 of Internal Revenue Code, as a "qualified low-income housing project". The 1% general partner of the partnership, Hill-Mutual Housing Association, LLC, is a limited liability company wholly-owned by NWNH. 14

16 Notes to Consolidated Financial Statements 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. 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. 15

17 Notes to Consolidated Financial Statements 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. 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, the value of contributed services meeting the requirements for recognition in the consolidated financial statements was not material and has not been recorded. 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. 16

18 Notes to Consolidated Financial Statements 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. 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 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 $106,000, which expire at various dates between 2023 and The corporations' total deferred tax asset arising from net operating loss carryforwards is approximately $31,800, which has been fully reserved. The valuation allowance increased by $10,200 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 17

19 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 NWNH has no unrecognized tax benefits at. NWNH's Federal information returns prior to fiscal year 2010 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 Other 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) and other reserves. 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. 18

20 Notes to Consolidated Financial Statements 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 $291,648 at, reflects the best estimate of probable losses determined principally on the basis of historical experience and specific allowances for known troubled accounts. The portion of the allowance related to tenant receivables is $157,485, and the portion related to property management fee receivables is $134,163 at. 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. 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 $2,096,239. Interest expense of $145,763 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. 19

21 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 written off on a straight-line basis over the life of the related loans. 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. Reclassifications Certain amounts in the 2012 financial statements have been reclassified to conform to the 2013 presentation. Subsequent events Management has reviewed subsequent events through June 27, 2014 which is the date the consolidated financial statements were approved and available for issuance. Note 3 - 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. 20

22 Notes to Consolidated Financial Statements 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, $209,832 exceeded Federal insurance limits. Note 4 - 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: 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. 21

23 Notes to Consolidated Financial Statements 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. 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 $ 19,458 $ - $ - $ 19,458 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 $ 35,441 $ (15,983) $ - $ - $ 19,458 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. 22

24 Notes to Consolidated Financial Statements Note 5 - Notes receivable Third party notes receivable consist of the following NWNH has a note receivable with ArLoW, LLC. The note is noninterest bearing and due on July 1, The note is secured by a mortgage on 838 Whalley Avenue, New Haven, Connecticut as well as a conditional assignment of rentals. $ 100,000 NWNH has a note receivable with ArLoW, LLC. The note bears interest at 4.5% per year due monthly and maturing July 1, The note is secured by a mortgage on 838 Whalley Avenue, New Haven, Connecticut. 150,000 NWNH has a note receivable with ArLoW, LLC. The note is noninterest bearing and due in May The note is secured by ½, Whalley Avenue and Fountain Street, New Haven, Connecticut. NWNH forgives $17,500 of the balance each year. 210,000 NWNH has a $400,000 note receivable with ArLoW, LLC. The note is non-interest bearing and due in May The note is secured by ½, 844 and 838 Whalley Avenue, Fountain Street, and West Rock Avenue, New Haven, Connecticut. 400,000 Total third party notes receivable $ 860,000 All of the loans are collateralized by real estate located in Connecticut. Accordingly, the ability to collect on the loan portfolio is susceptible to changes in real estate market conditions in the area. Annual principal payments are as follows: 2014 $ , Thereafter 250,000 23

25 Notes to Consolidated Financial Statements Note 6 - 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: Willow Mutual Housing Limited Partnership $ 108,710 Kirkham Mutual Housing Limited Partnership 45,059 Highwood Square Limited Partnership 285,926 Richard Street Limited Partnership 41,538 Fair Haven Mutual Housing Limited Partnership 578,246 These receivables are eliminated in consolidation. $ 1,059,479 Development fees earned for the year ended, were $1,569,107, all except for $165,638 were eliminated in consolidation. Note 7 - 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 $142,364 at. When the fee is fully paid by the resident, it earns interest at 3% for the resident. Accrued interest totaling $564 is included on the consolidated statement of financial position as a part of accrued expenses. Note 8 - Investment in limited partnership NWNH's wholly-owned subsidiary, ArLoW Mutual Housing, LLC, has a 1% interest in ArLoW, LLC, of which $1,953,295 has been contributed. The investment is accounted for under the cost method. 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 9 - Line of credit NWNH had a 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. The line expires in February 15, The outstanding balance at is $

26 Notes to Consolidated Financial Statements Note 10 - Mortgages payable Third party mortgages payable consist of the following: Amortizing Non- Amortizing NWNH has a predevelopment loan from Connecticut Housing Investment Fund ("CHIF"). The loan accrues interest at 1%. The loan is unsecured. This loan has been extended through March 31, $ - $ 40,000 NWNH has a predevelopment loan from Greater New Haven Community Loan Fund ("GNHCLF"). The loan accrues interest at 1%. The loan is unsecured. This loan has been extended through March 31, ,000 NWNH has an unsecured promissory note with Branford Interfaith Housing Corp. The note is non-interest bearing and matures on December 31, ,000 NWNH has a promissory note with New Alliance Bank Community Development Corp. in the amount of $250,000. The note bears interest at 3.5% per year and matures on April 30, The note is unsecured ,909 NWNH has a loan with RBS Citizens N.A in the amount of $200,000. The note bears interest at 3% per year payable annually. NWNH was required to set up an account with Citizen's bank to be used as a revolving loan fund. The note matures on March 18, ,000 NWNH has a $300,000 program related investment loan from the Melville Charitable Trust for acquisition and predevelopment activities. The loan is unsecured, bears interest at 0% with principal due July 1, The loan is unsecured ,000 25