Housing Partners I, Inc. and Affiliates Consolidated Financial Statements (With Supplementary Information) and Independent Auditor's Report

Transcription

1 Consolidated Financial Statements (With Supplementary Information) and Independent Auditor's Report

2 Index Page Independent Auditor's Report 2 Financial Statements Consolidated Statement of Financial Position 4 Consolidated Statement of Activities 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 8 Supplementary Information Schedule of Expenditures of Federal Awards 22 Consolidating Statement of Financial Position 24 Consolidating Statement of Activities 26 Consolidating Statement of Cash Flows 28 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 31 Independent Auditor's Report on Compliance for the Major Federal Program and on Internal Control over Compliance Required by the Uniform Guidance 33 Schedule of Findings and Questioned Costs 35 1

3 To the Board of Directors of Report on the Financial Statements Independent Auditor's Report We have audited the accompanying consolidated financial statements of Housing Partners I, Inc. and Affiliates, which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities 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 did not audit the financial statements of UHC Yucaipa, L.P. ("Yucaipa") in which Housing Partners I, Inc owns an interest. The assets, liabilities and net assets of Yucaipa of $17,299,941, $11,205,132 and $6,094,809 respectively are included in the consolidated financial statements. The financial statements of Yucaipa were audited by another auditor whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Yucaipa is based solely on the report of the other auditor. 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 2

4 Opinion In our opinion, based on our audit and the report of the other auditor, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Housing Partners I, Inc. and Affiliates as of, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary information including the Schedule of Expenditures of Federal Awards required by Title 2 U.S. Code of Federal Regulations ("CFR") Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 6, 2018, on our consideration of ' 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 solely 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 the effectiveness of 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 ' internal control over financial reporting and compliance. Sacramento, California September 6,

5 Consolidated Statement of Financial Position Assets Current assets Cash $ 6,429,215 Cash - restricted reserves 1,972,082 Subtotal 8,401,297 Accounts receivable, net 60,648 Other assets 66,009 Prepaid expenses 183,626 Supply inventories 86,291 Total current assets 8,797,871 Noncurrent assets Tax credit monitoring fees, net 91,658 Investments in partnerships 156,349 Fixed assets, net 71,303,596 Total noncurrent assets 71,551,603 Total assets $ 80,349,474 Liabilities and Net Assets Current liabilities Accounts payable $ 549,496 Deferred income 16,054 Accrued liabilities 2,625,277 Accrued payroll and related 40,418 Security deposits 318,104 Current portion of notes payable 497,009 Total current liabilities 4,046,358 Long-term liabilities Accrued liabilities 750,000 Accrued interest 1,421,639 Notes payable, net 41,865,514 Total long-term liabilities 44,037,153 Total liabilities 48,083,511 Net assets Unrestricted - controlling 16,937,386 Unrestricted - noncontrolling 15,328,577 Total net assets 32,265,963 Total liabilities and net assets $ 80,349,474 See Notes to Consolidated Financial Statements. 4

6 Consolidated Statement of Activities Year Ended Unrestricted Support and revenue Tenant revenue, net of vacancies and concessions $ 10,096,159 Interest income 2,357 Miscellaneous income 496,898 Total support and revenue 10,595,414 Expenses Program services 10,596,752 Management and general 1,177,417 Total expenses 11,774,169 Change in net assets (1,178,755) Net assets, beginning 20,055,318 Change in reporting entity - noncontrolling 235,917 Contributions - noncontrolling 13,153,483 Net assets, end $ 32,265,963 See Notes to Consolidated Financial Statements. 5

7 Consolidated Statement of Cash Flows Year Ended Cash flows from operating activities Change in net assets $ (1,178,755) Adjustments to reconcile change in net assets to net cash used in operating activities Depreciation and amortization 2,628,378 Amortization of debt issuance costs 16,449 Bad debt and costs written off 89,223 Loss from investments 31,871 Loss (gain) on transfer of property (235,916) Change in assets and liabilities Accounts receivable (77,230) Other receivables 651,356 Prepaid insurance (105,592) Inventories (75,335) Accounts payable 247,568 Deferred income (13,956) Accrued interest 351,429 Accrued liability (2,823,457) Accrued payroll and related 13,491 Security deposits 136 Net cash used in operating activities (480,340) Cash flows from investing activities Payments of accounts payable - construction (2,573,483) Payment of tax credit fees (52,387) Investment in affiliate (424,138) Net purchase of fixed assets (2,048,245) Net cash used in investing activities (5,098,253) Cash flows from financing activities Contributions 13,250,983 Payment of debt issuance costs (208,564) Payment of syndication costs (97,500) Proceeds from debt 1,686,430 Payments of debt principal (11,513,798) Net cash provided by financing activities 3,117,551 Net decrease in cash (2,461,042) Cash, beginning 10,862,339 Cash, end $ 8,401,297 6

8 Consolidated Statement of Cash Flows Year Ended Supplemental disclosure of cash flow information Cash paid for interest net of capitalized interest of $84,774 $ 1,727,931 Supplemental disclosure of noncash investing and financing activities Interest capitalized to fixed asset $ 84,774 Assumed debt $ 1,155,000 Decrease in debt due to transfer of property $ 3,124,000 Decrease in fixed assets due to transfer of property $ 2,680,700 Accounts payable/accrued liabilities included in fixed assets $ 387,946 See Notes to Consolidated Financial Statements. 7

9 Notes to Consolidated Financial Statements Note 1 - Organization and nature of operations Housing Partners I, Inc., a nonprofit organization that was founded in 1991 for the purpose of acquiring, developing, rehabilitating, owning and managing affordable housing in the County of San Bernardino. Housing Partners I, Inc. is also affiliated and under a common management team and/or common board control with other entities ("Affiliates") which have been formed either as supporting entities to Housing Partners I, Inc., or as instruments to further Housing Partners I, Inc. s organizational objectives. These entities, which are included in the consolidated financial statements of Housing Partners I, Inc. and Affiliates in accordance with accounting principles generally accepted in the United States of America ("GAAP"), are as follows: Housing Partners I, Inc. ("HPI Non-profit"): HPI Non-profit holds thirteen properties referred to as (460) Sepulveda, (461) Belle, (462) Lugo, (463) Garden Drive, (470) Bloomington, (710) Community Land Trust, (720) Vista Del Sol, (730) Region 1, (740) Region 2 (Pradera), (750) Region 3 (Kingsley I), (771) Bloomington II, (772) Loma Linda Veterans and (770) Loma Linda Prospect. HPI Property Acquisitions, LLC, ("LLC"): LLC is a wholly owned subsidiary of Housing Partners I, Inc., which was founded in 2010 for the sole purpose of purchasing and developing properties for HPI. The LLC holds six properties referred to as (411) Acacia Property, (413) Robert O. Townsend, (415) Kendall, (422) Chechalis, (424) Desert Village and (427) Kendall Park. Golden Apartments San Bernardino, L.P. ("Golden Apartments"): Golden Apartments, a California limited partnership, was formed to acquire, own, develop, rehabilitate, construct, own, lease, manage and operate a 21-unit housing project for low income and homeless housing. The partnership plans to acquire certain funds in order to convert the 21 twobedroom units into 38 single bedroom units. UHC Yucaipa, L.P. ("Yucaipa"): Yucaipa, a California limited partnership, was formed in 2009 to promote and facilitate affordable housing in the city of Yucaipa, California. Redlands Valencia Grove I Associates, L.P. ("RVG"): RVG, a California limited partnership, was formed to develop, rehabilitate, construct, own, maintain and operate an 85-unit housing project for low- and moderate-income residents located in Redlands, California. Collectively, the above organizations are referred to as "HPI&A" throughout. Note 2 - Summary of significant accounting policies Principles of consolidation The accompanying financial statements include the accounts and transactions of Housing Partners I, Inc. and its affiliates. HPI is a general partner in Yucaipa, RVG, and Golden Apartments and has determined that the presumption of control for each of these has not been overcome; therefore, the three limited partnerships have been consolidated. All significant inter-company transactions and balances have been eliminated in consolidation. 8

10 Notes to Consolidated Financial Statements Change in reporting entity - Loma Linda Prospect HPI had a 50% economic interest and was the manager of the Loma Linda Prospect project and such project was included in the consolidated financial statements of HPI through August 18, Effective August 18, 2017, the Loma Linda Prospect project was acquired by a partnership, HPI Loma Linda Prospect Partners, LP of which HPI is a non-managing partner and holds 33.33% interest through its wholly owned single member limited liability company, HPI Loma Linda Prospect LLC. Upon the sale of the property to the Partnership, HPI no longer consolidates the project and HPI recognized a change in reporting entity in the amount of $235,917 for the portion of the project net assets attributable to the noncontrolling interest prior to the sale of the Property. Financial statement presentation HPI&A presents its financial statements in accordance with the accounting guidance for nonprofit entities. Under this guidance, the organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. All the net assets of HPI&A are unrestricted. Furthermore, information is required to segregate program service expenses from management and general expenses. HPI&A has no temporarily or permanently restricted net assets as of. HPI&A conforms to accounting guidance on revenue recognition for nonprofit entities. Under this guidance, contributions received, if any, are recorded as unrestricted, temporarily restricted or permanently restricted support depending on the existence and/or nature of any donor restrictions. Accounting method The financial statements have been prepared on the accrual basis of accounting. Accordingly, income is recognized as earned and expenses as incurred, regardless of the timing of payments. Contributions received are recorded as unrestricted, temporarily restricted or permanently restricted support depending on the existence and/or nature of any donor restrictions. Use of estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Advertising Advertising costs are expensed as incurred. Revenue recognition Tenant revenue from resident fees, rents and services is recognized in the period the services are rendered. Rental income is shown at its maximum gross potential net of any vacancy loss and concessions. Rental units occupied by employees are included in rental income and as an expense of operations. Rental income is received under short-term residential leases. Tenants' accounts receivable Tenant receivables are reported net of an allowance for doubtful accounts. Management s estimate of the allowance is based on historical collection experience and a review of the current status of tenant accounts receivable. It is reasonably possible that management s estimate of the allowance will change. As of, the allowance for doubtful accounts was $67,223. 9

11 Notes to Consolidated Financial Statements Investment in partnerships Investment in partnerships include the equity interest of HPI&A in certain limited partnerships which are not controlled by HPI&A. HPI&A accounts for its investment in such partnerships ("investees") in accordance with the equity method of accounting, under which the initial investment is recorded at cost and is subsequently increased by HPI&A's share of the Investees earnings and contributions and decreased by HPI&A's share of the Investees losses and distributions. The Investees are consolidated with the business activities of their controlling owners. Notes receivable Notes receivable are reported net of an allowance for uncollectible amounts. Management's estimate of the allowance is based on historical collection experience and a review of the current status of notes receivable. It is reasonably possible that management's estimate of the allowance will change. As of, there is no allowance for doubtful accounts. All notes receivable have been eliminated in consolidation. Project development costs HPI&A incurs costs in connection with properties it is considering for development as well as costs associated with projects in the initial stages of development. These costs include such items as market studies, purchase options, environmental study costs, legal and accounting costs. Project development costs are capitalized until such time as the project is no longer considered desirable or feasible, at which time the costs are expensed. Project development costs related to projects that are ultimately developed are subsequently recorded as receivables to be repaid by the applicable projects. Fixed assets Fixed assets are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred, while major renewals and betterments are capitalized. Costs of properties constructed or rehabilitated include all direct costs of construction, as well as carrying costs during the construction period and indirect costs of construction, supervision and management. Upon disposal of depreciable property, the appropriate property accounts are reduced by the related costs and accumulated depreciation. The resulting gains and losses are reflected in the statement of activities. Depreciation is computed using the straight-line method over the estimated useful lives ranging from 15 to 30 years. It is HPI&A s policy to capitalize expenditures for improvements, furniture, and fixtures and equipment exceeding $3,000. Impairment of long-lived assets HPI&A reviews its property and equipment and investments for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When recovery is reviewed, if the undiscounted cash flows estimated to be generated by the property are less than its carrying amount, management compares the carrying amount of the property to its fair value in order to determine whether an impairment loss has occurred. The amount of the impairment loss is equal to the excess of the asset's carrying value over its estimated fair value. No impairment loss has been recognized during the year ended. Debt issuance costs Debt issuance costs, net of accumulated amortization, are reported as a direct deduction from the face amount of the mortgage loan payable to which such costs relate. Amortization of debt issuance costs is reported as a component of interest expense and is computed using an imputed interest rate on the related loan. 10

12 Notes to Consolidated Financial Statements Deferred tax credit monitoring fees Costs related to obtaining low-income housing tax credits in the amount of $100,798 are being amortized over the mandatory 15-year compliance period. Amortization expense for the year ended was $6,720. As of, accumulated amortization is $9,140. Amortization expense for each of the next five years following is $6,719 per year. Functional allocation of expenses The costs of providing the various programs and other activities have been summarized on a functional basis in the consolidated statement of activities. Directly identifiable expenses are charged to program and supporting services. Expenses related to more than one function are charged to program and supporting services based on systematic methods. Non-controlling interests Non-controlling interests included in the consolidated statement of financial position represent the financial interest of the other partners of Yucaipa, RVG and Golden Apartments and is made up mainly of the equity interest of the tax credit investor limited partners of these entities. Syndication costs are recorded as a reduction to non-controlling interest when incurred. Income taxes Housing Partners I, Inc. is exempt from state and federal income taxes under Section 23701d of the State of California Code and Section 201(c)(3) of the Internal Revenue Code. Housing Partners I, Inc. did not conduct unrelated business activities. Therefore, Housing Partners I, Inc. has made no provision for federal income taxes in the accompanying financial statements. In addition, Housing Partners I, Inc. has been determined by the Internal Revenue Service ("IRS") not to be a "private foundation" within the meaning of Section 509(a) of the Internal Revenue Code. Housing Partners I, Inc. is also the sole member of HPI Property Acquisition, LLC, a for-profit limited liability company organized in the State of California. As a single member LLC, the LLC is a disregarded entity for federal tax purposes. As such, all revenue and expenses of the LLC are included on the returns of Housing Partners I, Inc. The LLC does file a limited return in the State of California and is subject to a franchise fee of $800, which is prepaid annually and does not require further accrual. The LLC is also potentially liable for a state LLC fee based on gross revenues, but the current revenue activity does not exceed the minimum threshold for this fee and therefore no provision for this fee has been made. In accordance with accounting standards, which provides accounting and disclosure guidance about uncertain tax positions taken by an organization, management believes that all of the positions taken by HPI&A in its federal and state income tax returns are more likely than not to be sustained upon examination. Accordingly, these financial statements do not reflect a provision for income taxes and HPI&A has no other tax positions which must be considered for disclosure. Income tax returns filed by HPI&A are subject to examination by the IRS for a period of three years. While no income tax returns are currently being examined by the IRS, tax years since 2014 remain open. HPI&A's California income tax returns for the prior four periods remain subject to examination by the Franchise Tax Board. Note 3 - Housing investment partnership program agreement On December 16, 2005, Housing Partners I, Inc. and the Housing Authority of the County of San Bernardino ("HACSB") entered into a joint HOME Loan Agreement with the County of San Bernardino Department of Community Development and Housing ("CDH"). The loan provided for 11

13 Notes to Consolidated Financial Statements disbursement of HOME CDH New Construction Program funds in the amount of $1,702,591 for the development of a 71-unit affordable senior rental housing project known as Vista Del Sol. Housing Partners I, Inc. is the borrower and general manager for the project. Housing Partners I, Inc. is the designated owner of the project. See Note 7. On July 25, 2011, Housing Partners I, Inc. entered into a HOME Loan Agreement with the County of San Bernardino Redevelopment and Housing Department. The loan provided for a disbursement of HOME Program funds in the maximum amount of $1,080,000 for the purchase and rehabilitation of 72-unit affordable family rental units at scattered sites in Adelanto, Loma Linda, Montclair and Yucca Valley California. Of the $1,080,000 maximum amount, $1,076,986 is due as of December 31, See Note 7. Note 4 - Investments in partnerships Investment in HPI Loma Linda Prospect, LP HPI&A holds a 33.33% interest in HPI Loma Linda Prospect LP. HPI&A investment activity during the year ended is as follows: HPI investment balance - beginning $ (235,918) Contributions by HPI 424,138 HPI's share of partnership losses (31,871) Invesment balance - end $ 156,349 The total assets, liabilities and partners equity of the Partnership as of are $3,482,014, $2,211,370, and $1,270,644, respectively. Investment in other tax credit partnerships HPI&A is a co-general partner in the following partnerships that are at different stages of development: Bloomington I Housing Partners, LP Bloomington II Housing Partners, LP Val 9 Housing Partners, LP Loma Linda Vets, LP Fontana Sierra Housing Partners, LP HPI&A ownership interest is.01% in each of the partnerships and the other general partners are responsible for the partnerships and their management. The majority interest of each of these partnerships is owned (or to be owned) by a tax credit investor limited partner. HPI&A has no investment balance with respect to these entities at. 12

14 Notes to Consolidated Financial Statements Note 5 - Fixed assets Property and equipment included in fixed assets on the statement of financial position is comprised of the following at : Beginning balance Additions Deletions / eliminations Transfers Ending balance Land $ 7,732,642 $ 199,072 $ (490,000) $ - $ 7,441,714 Construction in process 13,998, ,726 - (13,983,341) 315,404 Buildings and improvements 56,995,984 3,245,474 (2,757,150) 13,983,341 71,467,649 Accumulated depreciation (5,470,046) (2,621,658) 170,533 - (7,921,171) Total $ 73,256,599 $ 1,123,614 $ (3,076,617) $ - $ 71,303,596 Depreciation expense for the year ended was $2,621,658. Note 6 - Restricted reserve Pursuant to the terms of regulatory agreements, HPI&A is required to set aside specified amounts for the replacement of property and the other project expenditures. Restricted reserve funds also include security deposits and construction and development funds held by Yucaipa and RVG. As of, $1,972,082 is held in separate accounts and generally not available for operating purposes. Note 7 - Notes receivable Redlands Valencia Grove I, LP note: On February 1, 2013, Housing Partners I, Inc. and RVG entered into a loan agreement in the original amount of $4,600,000. The note bears interest at 3% and was used for the Valencia Grove affordable rental housing project on property located at the corner of Orange and Delaware in the City of Redlands. This loan also required that RVG obtained a separate loan from HACSB. Commencing on May 1 of the year following the repayment of the HACSB loan, RVG is required to make annual payments of the outstanding principal and accrued interest on the loan in the amount equal to 100% of residual receipts. As of, the balance was $7,710,080. See the Notes payable section below for the debt terms. The note payable and receivable eliminate in the consolidated financial statements. Ikaika Ohana - Yucaipa note: In September 2015, Housing Partners I, Inc. and Ikaika Ohana ("Ohana"), a Hawaii non-profit corporation, entered into a funding loan agreement so that Ohana could in turn lend the funds to Yucaipa for development purposes. The note bears interest at 3% per annum and is to be repaid to Housing Partners I, Inc. under the same terms and conditions as the debt is repaid to Ohana by Yucaipa within 2 days of Ohana s receipt of repayment. As of, the balance was $913,100. See the notes payable section below for the debt terms. This note eliminates in the consolidated financial statements. 13

15 Notes to Consolidated Financial Statements Note 8 - Notes payable HPI&A had the following notes payable secured by the underlying property with the following terms at : Purchase of Acacia Property (411) - Note payable entered into May 12, 2010 for $1,226,000 over a 10-year term with PNC Multifamily Mortgage, LLC; bearing interest at a rate of 5.8%; and monthly payments of principal and interest in the amount of $7,194. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $1,023,000 due on June 1, Interest of $64,952 was incurred and paid during the year ended. $ 1,092,890 Purchase of Robert O Townsend Property (413) - Note payable entered into May 12, 2010 for $2,828,000 over a 10-year term with PNC Multifamily Mortgage, LLC; bearing interest at a rate of 5.83%; and monthly payments of principal and interest in the amount of $16,647. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $2,391,000 due on June 1, Interest of $150,688 was incurred and paid during the year ended. 2,522,580 Purchase of Kendall Property (415) - Note payable entered into May 12, 2010 for $1,661,000 over a 10-year term with PNC Multifamily Mortgage, LLC; bearing interest at a rate of 5.78%; and monthly payments of principal and interest in the amount of $9,734. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $1,402,000 due on June 1, Interest of $87,659 was incurred and paid during the year ended. 1,480,022 Purchase of Chechalis Property (422) - Note payable entered into May 12, 2010 for $655,000 over a 10-year term with PNC Multifamily Mortgage, LLC; bearing interest at a rate of 5.64%; and monthly payments of principal and interest in the amount of $3,777. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $551,000 due on June 1, Interest of $33,636 was incurred and paid during the year ended. 581,858 Purchase of Desert Village Property (424) - Note payable entered into May 12, 2010 for $1,659,000 over a 10-year term with PNC Multifamily Mortgage, LLC; bearing interest at a rate of 5.8%; and monthly payments of principal and interest in the amount of $9,725. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $1,409,000 due on June 1, Interest of $87,892 was incurred and paid during the year ended. 1,478,877 14

16 Notes to Consolidated Financial Statements Purchase of Kendall Park Property (427) - Note payable entered into May 12, 2010 for $1,981,000 over a 10-year term with PNC Multifamily Mortgage, LLC; bearing interest at a rate of 5.8%; and monthly payments of principal and interest in the amount of $11,624. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $1,674,000 due on June 1, Interest of $104,951 was incurred and paid during the year ended. 1,765,916 Purchase of Vista Del Sol Senior Apartments (720) - Note payable entered into on May 4, 2012 for $4,756,000 over a 10-year term with PNC Bank NA; bearing interest at a rate of 4.31%; and monthly payments of principal and interest in the amount of $23,564. The payments are amortized on a 30-year schedule with a lump sum balloon payment of approximately $3,786,000 due on the June 1, Interest of $189,760 was incurred and paid during the year ended. 4,291,940 On December 16, 2005, Housing Partners I, Inc. and the County of San Bernardino entered into a loan agreement for $1,702,591 under the HOME loan program for the development of seventy-one affordable senior rental units. The note bears simple interest at 3% per annum which began accruing on January 1, The maturity date is January 10, Repayment of the loan began January 1, 2011 as net profit (residual receipts) exceed 15% as defined in the agreement. The amount and terms of the repayment are determined by the County of San Bernardino on an annual basis upon review of Housing Partners I, Inc. s annual financial statements. Interest of $51,078 was incurred during the year ended and accrued interest of $357,404 remains payable. 1,702,591 Purchase and rehabilitation of 72 units at scattered sites within San Bernardino County under the HOME Investment Partnership Program - Note payable entered into on July 25, 2011 for $1,080,000 over a 55-year term with the County of San Bernardino and bearing interest at a rate of 3%. Annual payments are based on Residual Receipts as defined in the agreement. Interest of $32,310 was incurred during the year ended and $148,468 remains payable. 1,076,986 On July 31, 2015 HPI Loma Linda Prospect, LLC (770) entered into a loan agreement with Supportive Housing Solutions Fund, LLC in the amount of $3,124,000 at 6% per annum interest for the acquisition of Prospect Place, a multi-unit housing property located in Loma Linda, California. The loan has an original maturity date of the earlier of closing of construction financing or 18 months from the date of acquisition closing (January 31, 2017) unless extended in accordance with the terms of the agreement. Lender has held back $257,200 as an interest holdback to establish a reserve for interest payments. Interest of $124,960 was incurred on the loan. Effective August 18, 2017, the loan was assumed by the Partnership that acquired the Loma Linda Prospect project (see Note 2). - 15

17 Notes to Consolidated Financial Statements On April 29, 2016, the County of San Bernardino assigned its rights and interest in 7207 Garden Drive to Housing Partners I, Inc. (463). This assignment included the assumption of debt due to the County of San Bernardino Community Development & Housing Agency in the amount of $666,678 at 3% interest per annum. The maturity date is August 3, The loan is repaid in monthly principal and interest payments of $1,628. Interest of $19,540 was incurred and paid during the year ended 666,678 On July 28, 2015 Yucaipa entered into a construction loan agreement with the County of San Bernardino in the maximum amount of $3,868,760 at 3% simple interest per annum for 55 years. Repayment of this loan is from residual receipts as defined in the agreement with all unpaid principal and interest due at the 55th anniversary of the completion date as defined therein. Interest incurred during the year ended was $80,273, of which $18,928 was capitalized into fixed assets. Accrued interest as of December 31, 2017 is $182,557. Debt issuance costs, net of accumulated amortization, totaled $27,497 as of. Debt issuance costs are being amortized using the imputed interest of 3.1%. Amortization of debt issuance costs is $533 for the year ended, of which $164 was capitalized to fixed assets. 3,394,024 On September 1, 2015 Yucaipa entered into a bond agreement with Housing Authority of the County of San Bernardino Multifamily Revenue Bonds (Horizons at Yucaipa Apartments) Series 2015 A-1 ("Bonds") in the maximum principal sum of $6,429,447 at prime plus LIBOR interest per annum (1.97% at ) for 55 years. The Bonds were assigned to JPMorgan Chase Bank, N.A. as Holder of the Bonds. Interest incurred and paid during the year ended was $184,368, of which $47,705 was capitalized into fixed assets. Debt issuance costs, net of accumulated amortization, totaled $67,993 as of. Debt issuance costs are being amortized using the imputed interest of 4.07%. Amortization of debt issuance costs is $129,233 for the year ended, of which $127,390 was capitalized to fixed assets. 2,759,729 On June 12, 2015 Yucaipa entered into a construction loan agreement with the California Housing Finance Agency for the Mental Health Service Act Housing Program Financing ("MHSA") in the maximum amount of $1,716,650 at 3% simple interest per annum for 55 years. Repayment of this loan is from residual receipts as defined in the agreement with all unpaid principal and interest due at the 55th anniversary of the completion date as defined therein. Interest incurred and paid during the year ended was $51,323, of which $12,699 was capitalized into fixed assets. Accrued interest as of is $91,629. Debt issuance costs, net of accumulated amortization, totaled $37,392 as of. Debt issuance costs are being amortized using the imputed interest of 3.03%. Amortization of debt issuance costs is $689 for the year ended, of which $172 was capitalized to fixed assets. 1,716,650 16

18 Notes to Consolidated Financial Statements On April 13, 2015 Yucaipa entered into a loan agreement with the City of Yucaipa in the amount of $727,619 at 3% simple interest per annum for 55 years. Repayment of this loan is from residual receipts as defined in the agreement with all unpaid principal and interest due at the 55th anniversary of the completion date as defined therein. Interest incurred during the year ended was $21,813, of which $5,442 was capitalized into fixed assets. Accrued interest as of is $59,425. Debt issuance costs, net of accumulated amortization, totaled $8,231 as of December 31, Debt issuance costs are being amortized using the imputed interest of 3.02%. Amortization of debt issuance costs is $157 for the year ended, of which $37 was capitalized to fixed assets. 727,619 On September 29, 2008 Housing Partners I, Inc. and HACSB entered into a related party loan of $48,000 for one parcel of land located at Welsh Court, Hesperia, California. This loan accrues at 1% per annum with no payments until maturing on September 29, The loan is secured by a first deed of trust on the land. Interest in the amount of $360 was incurred during the year ended. The loan was paid in full on October 18, On February 1, 2013, RVG entered into a bond loan agreement for the amount of $7,380,500. This construction term loan bears a variable interest rate determined by the adjusted LIBOR rate multiplied by the 70.88% plus 1.42% (1.73% at ). The bonds are payable to JP Morgan Chase Bank, N.A. and are secured by a deed of trust on the Project. The loan is also guaranteed by HACSB. Interest incurred during the year ended December 31, 2017 was $100,096. The loan was paid in full on August 18, 2017 using proceeds from the investor limited partner s capital contributions. - On February 1, 2013, RVG entered into a bond loan agreement in the amount of $10,619,500. The loan bears interest at 4.80% per annum. The bonds are payable to JP Morgan Chase Bank, N.A. and are secured by a deed of trust on the project. The loan is guaranteed by HACSB. During the construction term, the Partnership shall make monthly payments of interest only until conversion to permanent loan. At conversion, the Partnership shall make monthly payments of interest and principal over the term of the loan. The permanent loan matures on August 15, Interest incurred during the year ended was $509,969 and $43,003 remains payable. Debt issuance costs, net of accumulated amortization, totaled $376,945 as of. Debt issuance costs are being amortized using the imputed interest of 5.10%. Amortization of debt issuance costs is $13,325 for the year ended. 10,403,934 On February 1, 2013, RVG entered into a loan agreement in the amount of $2,000,000, subsequently increased to $5,202,790, with HACSB, a related party. The loan bears 3% simple interest, is secured by a leasehold deed of trust, and matures in Annual payments of principal and interest are due out of residual receipts, as defined. Interest incurred during the year ended was $156,000. Accrued interest as of is $519,065. 5,202,790 17

19 Notes to Consolidated Financial Statements On August 8, 2017, Golden Apartments entered into a loan agreement in the amount of $1,155,000 with HACSB, a related party. The loan bears 3% simple interest, is secured by a deed of trust, and matures in Annual payments of principal and interest are due out of residual receipts, as defined. Interest incurred during the year ended was $11,550 and $11,550 remains payable. 1,155,000 On August 8, 2017, Golden Apartments entered into a loan agreement in the amount of $880,000 with the City of San Bernardino. The loan bears 3% simple interest, is secured by a deed of trust, and matures in Annual payments of principal and interest are due out of residual receipts, as defined. Interest incurred during the year ended was $8,800 and $8,800 remains payable. 880,000 Debt issuance costs, net of accumulated amortization, associated with the eliminating related party debt noted below totaled $19,503 as of December 31, Debt issuance costs are being amortized using the imputed interest of 3.04%. Amortization of debt issuance costs is $370 for the year ended, of which $95 was capitalized to fixed assets. Subtotal 42,900,084 Less unamortized debt issuance costs (537,561) Total notes payable, net $ 42,362,523 Eliminating related party debt: On February 1, 2013, RVG entered into a loan agreement in the amount of $4,600,000, subsequently increased to $7,710,080, with Housing Partners I, Inc., a related party. The loan bears 3% simple interest, is secured by a leasehold deed of trust, and matures in Annual payments of principal and interest are due out of residual receipts, as defined. Interest incurred during the year ended was $231,303. Accrued interest as of is $995,859. $ 7,710,080 In September 2015 Yucaipa entered into a loan agreement with Ikaika Ohana in the amount of $913,100 at 3% simple interest per annum. Payments on this loan commencing July 1 of the year following completion of the improvements as defined in the agreement. The first annual payment will be 30% of the owner s share of the residual receipts, as defined. The term of the loan is 55 years maturing in 2070, upon expiration of the term all unpaid principal and accrued interest becomes due and payable. Interest incurred during the year ended was $27,375, of which $6,829 was capitalized to fixed assets. Accrued interest as of is $62, ,100 Total eliminating notes payable $ 8,623,180 18

20 Notes to Consolidated Financial Statements Annual principal payments required over each of the next five years and thereafter subsequent to are as follows: Note 9 - Related party transactions 2018 $ 497, , ,866, , ,154,365 Thereafter 29,460,593 Subtotal 42,900,084 Less unamortized debt issuance costs (537,561) Total $ 42,362,523 Due to HACSB Certain HPI&A properties incur residual receipts expenses based on net income generated from the properties. The residual receipts incurred and payable as of are as follows and included in accrued liabilities on the consolidated statement of financial position: 2014 Residual receipts payable $ 695, Residual receipts payable 1,697, Residual receipts payable - Due to HACSB $ 2,392,925 Intercompany due to/from HPI advanced funds in the amount of $476,976 and $55,580 to Yucaipa and Golden Apartments, respectively. Such advances are non-interest bearing and to be reimbursed once the partnerships receive anticipated HOME loan funds. The amounts are included in other assets and accrued liabilities on the consolidating statement of financial position for HPI and the two partnerships, respectively. These amounts eliminate in the consolidated financial statements. RVG and Yucaipa have incurred and capitalized development fees of which $950,000 and $900,000 are payable as of, respectively. As of, the RVG and Yucaipa development fees payable due to HPI are $475,000 and $625,000, respectively, and have been eliminated in the consolidated financial statements. The remaining $750,000 of development fees payable is included in accrued liabilities on the consolidated statement of financial position. Related party debt See Note 8. 19

21 Notes to Consolidated Financial Statements Note 10 - Concentration of credit risk HPI&A maintains its cash balances at various banks. At times, these balances may exceed the federal insurance limits; however, HPI&A has not experienced any losses with respect to its cash balances in excess of government provided insurance. Management believes that no significant concentration of credit risk exists with respect to these cash balances at. Note 11 - Subsequent events Events that occur after the statement of financial position date but before the consolidated financial statements were available to be issued, must be evaluated for recognition or disclosure. The effects of subsequent events that provide evidence about conditions that existed at the statement of financial position date are recognized in the accompanying consolidated financial statements. Subsequent events which provide evidence about conditions that existed after the statement of financial position date require disclosure in the accompanying notes. Management evaluated the activity of HPI&A through September 6, 2018, the date the consolidated financial statements were available to be issued, and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to consolidated financial statements. 20

22 Supplementary Information

23 Schedule of Expenditures of Federal Awards Federal Grantor/ (Pass-through Grantor) Program Title Federal CFDA Number Total Federal Expenditures U.S. Department of Housing and Urban Development / (Passed through The County of San Bernardino) HOME Investment Partnership Program $ 2,779,577 Total $ 2,779,577 See Notes to Schedule of Expenditures of Federal Awards. 22

24 Notes to Schedule of Expenditures of Federal Awards Note 1 - Basis of presentation The accompanying schedule of expenditures of federal awards (the "Schedule") includes the federal award activity of Housing Partners I, Inc. under programs of the federal government for the year ended. The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ("Uniform Guidance"). Note 2 - Summary of significant accounting policies Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Housing Partners I, Inc. has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. 23

25 Consolidating Statement of Financial Position HPI Property Acquisition, LLC HPI Non-Profit Golden Apartments L.P. UHC Yucaipa, L.P. Redlands Valencia Grove I Associates, LP Elimination of Intercompany Transactions Total Housing Partners I, Inc. and Affiliates Assets Current assets Cash $ 281,027 $ 3,963,565 $ - $ 135,143 $ 2,049,480 $ - $ 6,429,215 Cash - restricted reserves 1,109, , , ,421-1,972,082 Subtotal 1,390,440 4,165, ,184 2,417,901-8,401,297 Tenants accounts receivable, net 42,828-10,141 5,698 1,981-60,648 Other receivables - 602, (536,197) 66,009 Prepaid expenses 60,942 88,834 3,940 8,442 21, ,626 Supply inventories 78,929 7, ,291 Total current assets 1,573,139 4,864,174 14, ,324 2,441,350 (536,197) 8,797,871 Noncurrent assets Tax credit monitoring fees, net ,895 42,763-91,658 Investments in partnerships - 1,202, (1,045,767) 156,349 Notes receivable - 8,623, (8,623,180) - Interest receivable - 1,058, (1,058,876) - Fixed assets, net 7,794,513 12,160,615 2,371,605 16,809,722 33,318,933 (1,151,792) 71,303,596 Total noncurrent assets 7,794,513 23,044,787 2,371,605 16,858,617 33,361,696 (11,879,615) 71,551,603 Total assets $ 9,367,652 $ 27,908,961 $ 2,385,686 $ 17,299,941 $ 35,803,046 $ (12,415,812) $ 80,349,474 24

26 Consolidating Statement of Financial Position HPI Property Acquisition, LLC HPI Non-Profit Golden Apartments L.P. UHC Yucaipa, L.P. Redlands Valencia Grove I Associates, LP Elimination of Intercompany Transactions Total Housing Partners I, Inc. and Affiliates Liabilities and Net Assets Current liabilities Accounts payable $ 107,444 $ 237,755 $ 134,054 $ 58,847 $ 11,396 $ - $ 549,496 Deferred income 9,042 6, ,054 Accrued liabilities 1,032,918 1,370, , ,701 16,587 (536,197) 2,625,277 Accrued payroll and related 13,704 25,654 1, ,418 Security deposits 111, ,312 2,150 14,700 15, ,104 Current portion of notes 186, ,521-38, , ,009 Total current liabilities 1,460,957 1,915, , , ,367 (536,197) 4,046,358 Long-term liabilities Accrued liabilities , ,000 (1,100,000) 750,000 Accrued interest - 505,872 20, ,366 1,557,927 (1,058,876) 1,421,639 Notes payable, net 8,735,636 7,637,674 2,035,000 9,311,993 22,768,391 (8,623,180) 41,865,514 Total long-term liabilities 8,735,636 8,143,546 2,055,350 10,608,359 25,276,318 (10,782,056) 44,037,153 Total liabilities 10,196,593 10,059,017 2,449,337 11,205,132 25,491,685 (11,318,253) 48,083,511 Net assets Unrestricted - controlling (828,941) 17,849,944 (63,651) 6,094,809 10,311,361 (16,426,136) 16,937,386 Unrestricted - noncontrolling ,328,577 15,328,577 Total net assets (828,941) 17,849,944 (63,651) 6,094,809 10,311,361 (1,097,559) 32,265,963 Total liabilities and net assets $ 9,367,652 $ 27,908,961 $ 2,385,686 $ 17,299,941 $ 35,803,046 $ (12,415,812) $ 80,349,474 See Independent Auditor's Report. 25

27 Consolidating Statement of Activities Year Ended HPI Property Acquisition, LLC HPI Non-Profit Golden Apartments L.P. HPI Loma Linda Prospect LLC UHC Yucaipa, L.P. Redlands Valencia Grove I Associates, LP Elimination of Intercompany Transactions Total Housing Partners I, Inc. and Affiliates Support and revenue Tenant revenue, net of vacancies and concessions $ 2,622,880 $ 5,229,483 $ 26,831 $ 188,651 $ 443,280 $ 1,585,034 $ - $ 10,096,159 Management fee income - 183, (183,883) - Interest income , ,954 (258,678) 2,357 Miscellaneous income 102, , ,955 2,792 35, ,898 Total support and revenue 2,725,384 6,025,800 27, , ,072 1,622,886 (442,561) 10,595,414 26