HABITAT FOR HUMANITY NEWARK, INC. Financial Statements. For the years ended June 30, 2016 and (With Independent Auditor s Report Thereon)

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1 Financial Statements (With Independent Auditor s Report Thereon)

2 Table of Contents CONTENTS Page Independent Auditor s Report 1-2 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 3-4 Statements of Financial Position 5-6 Statement of Activities For the year ended June 30, Statement of Activities For the year ended June 30, Statement of Functional Expenses For the year ended June 30, Statement of Functional Expenses For the year ended June 30, Statements of Cash Flows 11 Notes to Financial Statements 12-22

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors Habitat For Humanity Newark, Inc. Newark, New Jersey We have audited the accompanying financial statements of Habitat for Humanity Newark, Inc. (a nonprofit organization) which comprise the statements of financial position as of June 30, 2016 and 2015, and the related statements of activities, functional expenses and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the 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. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Habitat for Humanity Newark, Inc. as of June 30, 2016 and 2015, 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 Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 14, 2016 on our consideration of the Habitat For Humanity Newark, Inc.'s 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 Habitat For Humanity Newark, Inc. s internal control over financial reporting and compliance. December 14, 2016 Toms River, New Jersey HOLMAN FRENIA ALLISON, P.C. Certified Public Accountants 2

5 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 To the Board of Directors Habitat For Humanity Newark, Inc. We have audited, in accordance with the 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, the financial statements of Habitat for Humanity Newark, Inc., which comprise the statements of financial position as of and for the year ended June 30, 2016, and the related statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements, which collectively comprise Habitat for Humanity Newark, Inc. s basic financial statements, and have issued our report thereon dated December 14, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Habitat for Humanity Newark, Inc.'s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Habitat for Humanity Newark, Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of Habitat for Humanity Newark, Inc. s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Habitat for Humanity Newark, Inc.'s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of 3

6 our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. December 14, 2016 Toms River, New Jersey HOLMAN FRENIA ALLISON, P.C. Certified Public Accountants 4

7 Statements of Financial Position June 30, 2016 and 2015 ASSETS Current assets: Cash and cash equivalents $ 660, ,423 Mortgage receivable - current portion net of accumulated amortization 74,848 79,683 Grant receivable 88, ,743 Other receivables 76,357 4,824 Prepaid expenses 10,315 10,664 Total current assets 910, ,337 Property and equipment: Buildings 156, ,764 Building improvements 46,000 46,000 Office equipment and furnishings 19,244 19,244 Construction equipment 7,423 7,423 Transportation equipment 2,100 2,100 Vehicles 25,046 25,046 Leasehold improvements 38,631 38, , ,208 Less: accumulated depreciation (255,562) (255,407) Property and equipment, net 39,646 39,801 Other assets: Construction in progress 1,678,206 1,405,111 Loan origination fee, net of accumulated amortization 4,050 4,800 Mortgage receivable net of accumulated amortization 1,069,563 1,328,908 Security deposit 2,750 2,750 Loan escrow 23,287 27,070 Total other assets 2,777,856 2,768,639 Total assets $ 3,728,174 $ 3,499,777 The accompanying notes to the financial statements are an integral part of this statement. 5

8 Statements of Financial Position (continued) June 30, 2016 and 2015 LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 60,378 $ 18,361 Tithe payable 22,891 38,219 Deferred revenue 108,351 17,753 Construction loan payable 225, ,000 Notes payable - current, net of discount 81,031 92,310 Total current liabilities 497, ,643 Long-term liabilities: Line of credit 25, ,000 Notes payable, net of discount 511, ,800 Total long-term liabilities 537, ,800 Total liabilities 1,034,773 1,055,443 NET ASSETS Unrestricted: Board designated for mortages and loans 297, ,348 Undesignated for program services 2,396,053 2,146,986 Total unrestricted net assets 2,693,401 2,444,334 Total net assets 2,693,401 2,444,334 Total liabilities and net assets $ 3,728,174 $ 3,499,777 The accompanying notes to the financial statements are an integral part of this statement. 6

9 Statement of Activities For the year ended June 30, 2016 Unrestricted Total Public support and other revenue: Public support: Corporations $ 220,534 $ 220,534 Civic groups and schools Congregations 15,420 15,420 Foundations 215, ,368 Government grants 344, ,256 Sandy damage repair program grants 302, ,501 Other grants 25,000 25,000 Individuals 61,585 61,585 In-kind contributions 46,781 46,781 Total public support 1,231,980 1,231,980 Other revenues/(expenses): Sales to homeowners 270, ,983 Imputed interest income on mortgages 333, ,712 Interest income Vehicle sale income 21,128 21,128 Donated merchandise sales 1,172 1,172 Co-op office rental income 9,100 9,100 Other revenue 131, ,352 Total other revenue 767, ,507 Total public support and other revenue 1,999,487 1,999,487 Expenses: Program services 1,350,671 1,350,671 General and administrative 290, ,858 Fundraising 108, ,891 Total expenses 1,750,420 1,750,420 Change in unrestricted net assets 249, ,067 Unrestricted net assets, beginning of year 2,444,334 2,444,334 Unrestricted net assets, end of year $ 2,693,401 $ 2,693,401 The accompanying notes to the financial statements are an integral part of this statement. 7

10 Statement of Activities For the year ended June 30, 2015 Unrestricted Total Public support and other revenue: Public support: Corporations $ 292,243 $ 292,243 Congregations 8,328 8,328 Foundations 215, ,725 Government grants 340, ,538 Sandy damage repair program grants 126, ,991 Other grants 1,039 1,039 Individuals 50,602 50,602 In-kind contributions 117, ,597 Total public support 1,153,063 1,153,063 Other revenue: Sales to homeowners 116, ,714 Imputed interest income on mortgages 285, ,520 Interest income Vehicle sale income 10,465 10,465 Donated merchandise sales 1,025 1,025 Co-op office rental income 8,400 8,400 Other revenue 40,340 40,340 Total other revenue 462, ,605 Total public support and other revenue 1,615,668 1,615,668 Expenses: Direct housing costs 287, ,597 Sandy damage repair program 84,349 84,349 Program services 404, ,696 General and administrative 289, ,483 Fundraising 159, ,016 Total expenses 1,225,141 1,225,141 Change in unrestricted net assets 390, ,527 Unrestricted net assets, beginning of year 2,053,807 2,053,807 Unrestricted net assets, end of year $ 2,444,334 $ 2,444,334 The accompanying notes to the financial statements are an integral part of this statement. 8

11 Statement of Functional Expenses For the year ended June 30, 2016 Program Services Support Services Direct Sandy Damage Family Construction/ Total Housing Repair Services & Neighborhood Education & Program Program Management Costs Program Compliance Revitalization Advocacy Services Services and General Fundraising Total Salaries, taxes and employee benefits $ 492,776 $ 28,466 $ 20,653 $ 77,968 $ 21,407 $ - $ 641,270 $ 132,727 $ 6,354 $ 780,351 General construction costs 305, , , ,913 Transferred to construction in process (299,513) (299,513) - - (299,513) Interest expense and discount on mortgages 41, , , ,168 Professional fees - - 5,500 19,500 22,000 7,117 54,117 16,053 62, ,380 Insurance 16, ,395 40,607 4,512-45,119 Occupancy ,236-44,043 In-kind expense 34, ,155 41, ,513 Public relations ,247 40,247 Co-op maintenance ,708 12,708 20,493-33,201 Other 6, ,383 23,138-29,521 Office supplies ,038 14,133 9,359-23,492 Tithing ,630 17, ,630 Printing and postage ,672 2,672 10,690 13,362 Travel ,588-9,989 Depreciation ,503-8,503 Bank and payroll service charges ,488-5,488 Staff training/conferences/recruitment , ,891 Automobile and truck expense ,779 2, ,862 Dues and subscriptions ,260-2,260 Total expenses $ 598,079 $ 384,287 $ 26,153 $ 97,468 $ 43,407 $ 201,277 $ 1,350,671 $ 290,858 $ 108,891 $ 1,750,420 The accompanying notes to the financial statements are an integral part of this statement. 9

12 Statement of Functional Expenses For the year ended June 30, 2015 Program Services Support Services Direct Sandy Damage Other Housing Repair Program Management Costs Program Services and General Fundraising Total Construction costs $ 1,090,057 $ 127,181 $ - $ - $ - $ 1,217,238 Transferred to construction in process (802,460) (42,832) (845,292) Salaries, taxes and employee benefits , ,381 2, ,949 Professional fees - - 5,097 18,693 99, ,293 Interest ,792 3, ,911 Public relations ,697 45,697 Insurance ,227 17,174-39,401 Office supplies ,905 9,886 5,879 30,670 Travel ,140 2,032 4,819 22,991 Occupancy ,482-21,482 Tithing ,942-18,942 Co-op maintenance ,841-17,841 Depreciation ,612-16,612 Bad debt expense ,973-15,973 In-kind expense - - 9, ,980 U.S. stewardship and organization sustainability fee ,000-5,000 Bank and payroll service charges - - 2,492 1,050-3,542 Automobile and truck expense - - 2, ,041 Staff training/conferences/recruitment - - 1, ,870 Total expenses $ 287,597 $ 84,349 $ 404,696 $ 289,483 $ 159,016 $ 1,225,141 The accompanying notes to the financial statements are an integral part of this statement. 10

13 Statements of Cash Flows Cash flows from operating activities: Change in net assets $ 249,067 $ 390,527 Items which did not use (provide) cash: Depreciation 8,503 16,612 Capitalized interest discounts 141,667 67,532 Amortization of loan origination fee Amortization of interest income (333,712) (285,520) Adjustment to property and equipment (8,348) - Sales to homeowners (270,983) (116,714) Working capital changes which (used) provided cash: Grant receivable 23,146 (111,743) Other receivable (71,533) (782) Fire damage insurance recovery receivable - 81,437 Prepaid expenses 349 1,744 Security deposit - (500) Loan escrow 3,783 - Accounts payable and accrued expenses 42,017 (13,130) Tithe payable (15,328) - Deferred revenue 90,598 12,570 Net cash (used)/provided by operating activities (140,024) 42,783 Cash flows from investing activities: Collections of mortgage receivable 727, ,590 Purchases of property and equipment - (38,631) Payments for construction in progress, net (273,095) (587,158) Net cash provided/(used) by investing activities 454,113 (45,199) Cash flows from financing activities: Proceeds from line of credit - 275,000 Proceeds from construction loan 125, ,000 Repayment of notes payable (113,759) (88,649) Repayment of line of credit (149,198) (175,000) Net cash (used)/provided by financing activities (137,957) 111,351 Net increase in cash 176, ,935 Cash, beginning of year 484, ,488 Cash, end of year $ 660,555 $ 484,423 The accompanying notes to the financial statements are an integral part of this statement. 11

14 NOTE 1: NATURE OF ORGANIZATION HABITAT FOR HUMANITY NEWARK, INC. Notes to Financial Statements Habitat for Humanity Newark, Inc. (Habitat) was incorporated on May 19, 1986 under the laws of the State of New Jersey as a not-for-profit organization affiliated with Habitat for Humanity International, Inc. (HFHI), a Christian not-for-profit organization with affiliates worldwide that seeks to eliminate poverty housing and homelessness from the world, and to make decent shelter a matter of conscience and action. Through volunteer labor and donations of money and materials, Habitat builds simple, decent houses with the help of low-income homeowner families. The organization focuses its efforts in Essex County, New Jersey. The houses built by Habitat and its volunteers are sold to partner families, and are financed with affordable, no-interest mortgages. The homeowner s monthly mortgage payments go into a revolving fund that is used to build more houses. In addition to the monthly mortgage payment, each homeowner family invests hundreds of hours of their own labor into the building of their house as well as the houses of others. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Accounting Method The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. Net assets, revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. B. Basis of Presentation Habitat for Humanity Newark, Inc. is required to report information regarding its financial position and activities that resources be classified for accounting and reporting purposes into three net asset categories according to externally (donor) imposed restrictions, as follows: Unrestricted Net Assets Net assets that are not subject to externally imposed restrictions. Temporarily Restricted Net Assets Net assets subject to externally imposed restrictions that will be met by the passage of time. 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., the Organization had accounting transactions in the unrestricted net assets category., there were no temporarily restricted net assets or permanently restricted net assets. Habitat for Humanity Newark, Inc., reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. 12

15 Notes to Financial Statements (continued) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. D. Cash and Cash Equivalents The Organization considers all highly liquid investments purchased with an initial maturity of three months or less to be cash and cash equivalents. At times, amounts may exceed FDIC insured limits. Financial instruments, which potentially subject the Organization to concentration of credit risk, consist principally of cash and cash equivalents. The Organization s cash balances are maintained in bank deposit accounts. The balances of these accounts may be in excess of federally insured limits. E. Contributions The Organization accounts for contributions in accordance with accounting standards. Contributions received are recorded as unrestricted or temporarily restricted support, depending on the existence and/ or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily restricted net assets. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. F. Donated Materials and Services Donated materials and services are recognized as contributions in accordance with accounting standards at their estimated fair value if the services (a) create or enhance the Organization s nonfinancial assets or (b) require specialized skills, are performed by people with those skills, and would otherwise be purchased. Donated materials consist primarily of construction materials and donations of the Organization s ReStore. No amounts have been reflected in the financial statements for certain donated volunteer services because they do not qualify for recording under the guidelines of accounting standards. G. Federal Grants The Organization receives funding from a federal financial assistance program that supplements its traditional funding sources. The Organization recognizes the award as revenue as the expenses stipulated in the grant agreement have been incurred. Funding sources may, at their discretion, request reimbursement for expenses or return of funds or both, as a result of noncompliance by the Organization with the terms of the grants or contracts. 13

16 Notes to Financial Statements (continued) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) H. Accounts Receivable Receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivables. At June 30, 2016 and 2015, no allowance for doubtful accounts was deemed necessary by management. I. Cost Recognition and Construction in Progress All direct material, labor, and equipment costs and those indirect costs related to home construction such as indirect labor, supplies and tool costs are recorded as construction in process on the statement of financial position as they are incurred. Land costs included in construction in process are stated at the lower of cost or the fair value at the date of contribution. Included in land costs are any costs incurred in development. When revenue from the sale of a home is recognized, the corresponding costs are then expensed in the statement of activities as direct housing costs. Real estate assets are evaluated for impairment if impairment indicators are present. An impairment write-down to fair value less costs to sell occurs when management believes that events or changes in circumstances indicate that its carrying amount may not be recoverable. No impairment losses were recorded during 2016 and 2015 and management does not believe impairment indicators are present based on appraised value. J. Property and Equipment Purchased property and equipment is valued at cost. Donated property and equipment is recorded at the fair value at the date of the gift to the Organization. Maintenance and repairs are charged to operations when incurred. Betterments and renewals in excess of $1,000 are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Depreciation of property and equipment is computed on a straight-line basis over the following estimated useful lives: Building and Improvements Furniture and Equipment Years 5 10 Years Donations of property and equipment are recorded as contributions at their estimated fair value at the date of donation. Such donations are reported as increases in unrestricted net assets unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted contributions absent donor stipulations regarding how long those donated assets must be maintained. The Organization reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. The Organization reclassifies temporarily restricted net assets to unrestricted net assets at that time. 14

17 Notes to Financial Statements (continued) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) K. Revenue Recognition and Sales Homes are sold to qualified buyers at approximately the cost to build the home limited by the lesser of the market value or direct construction costs. Non-interest bearing mortgages are accepted as payment for the homes sold. Home sales are recorded at the discounted value of payments to be received over the lives of the mortgages. Non-interest bearing mortgages have been discounted ranging from 7% to 9% based upon the prevailing market rates for low income housing at the inception of the mortgages. Discounts are amortized using the effective interest method over the lives of the mortgages. During the year ended June 30, 2016, two homes were sold by the Organization. During the year ended June 30, 2015, one home was sold by the Organization. L. Mortgage Loans Receivable The Organization s non-interest bearing mortgages consist of amounts due from homeowners. The Organization performs extensive credit and work history evaluations before the sale of a home. The Organization also has a perfected security interest in all homes they sell. The value of each home is generally greater than the respective carrying value of the mortgage due. Mortgage loans receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to mortgages receivable. At June 30, 2016 and 2015, management believes mortgage loans receivable to be fully collectible, therefore no allowance has been recorded. M. Income Taxes The Organization is a non profit entity as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal and state income taxes. Accordingly, there is no provision for income taxes. The Organization is required to file Form 990, Return of Organization Exempt from Income Tax, with the Internal Revenue Service and the New Jersey Charities Registration & Investigation Form (CRI). The Organization follows the income tax standards for uncertain tax positions. This standard had no impact on the Organization s financial statements. The Organization s income tax returns are subject to review and examination by federal and state authorities. The Organization is not aware of any activities that would jeopardize its tax-exempt status or any activities that are subject to tax on unrelated business income taxes. N. Fair Value Measurements The Organization categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level I) and the lowest priority to unobservable inputs (Level III). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair 15

18 Notes to Financial Statements (continued) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) N. Fair Value Measurements (continued) value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows: Level I Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Organization has the ability to access. Fair values for these instruments are estimated using pricing models or quoted prices of securities with similar characteristics. Level II Inputs that include quoted market prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level III Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity s assumptions, as there is little, if any, related market activity. Fair values for these instruments are estimated using appraised values. Subsequent to initial recognition, the Organization may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value. The following methods and assumptions were used by Habitat in estimating the fair value of its financial instruments: Mortgage receivables The carrying amount is at net present value of the loan. Notes payable The carrying amount of one note is at net present value of the loan. For the remaining notes, the carrying values and interest rates are considered to approximate the net realizable value. Accounts payable The carrying amount reported in the statement of financial position approximates fair value because of the short maturity of those instruments. O. Subsequent Events The Organization has evaluated subsequent events occurring after the Statement of Financial Position date through the date of December 14, 2016, which is the date the financial statements were available to be issued. See Note 16 for information regarding a subsequent event. NOTE 3: CASH The deposits and investments held by the Organization at June 30, 2016 and 2015, and reported at fair value, are as follows: Deposits: Demand Deposits $ 660,555 $ 484,423 Total deposits $ 660,555 $ 484,423 16

19 NOTE 3: CASH (continued) HABITAT FOR HUMANITY NEWARK, INC. Notes to Financial Statements (continued) Reconciliation of Statement of Financial Position Current assets: Cash and cash equivalents $ 660,555 $ 484,423 Total reconciliation $ 660,555 $ 484,423 NOTE 3: CASH (continued) Custodial Credit Risk - Deposits in financial institutions, reported as components of cash had a bank balance of $712,587 and $510,190 at June 30, 2016 and 2015, respectively. Of the bank balance, $712,587 and $510,190 were fully insured by depository insurance at June 30, 2016 and Concentration of Credit Risk - Financial instruments that potentially subject the Organization to concentrations of credit risk consist principally of cash investments. The Organization limits the amount of credit exposure to any one financial institution and invests cash in accounts with high credit quality. NOTE 4: MORTGAGE LOANS RECEIVABLE The Organization imputed interest on its mortgage loans receivable using prevailing interest rates, which ranged from 7% to 9% (for mortgages with similar terms). The mortgage loans receivable balance approximates the estimated net present value of future cash flows for mortgage notes. At June 30, 2016, the Organization held forty-five non-interest bearing mortgages with remaining terms varying from one to thirty years. At June 30, 2015, the Organization held fifty-three noninterest bearing mortgages with remaining terms varying from thirteen to thirty-one years. The following is a summary of mortgages receivable at June 30, 2016 and 2015: Mortgages receivable $ 1,868,670 $ 2,363,149 Less: Unamortized imputed interest (724,259) (954,558) Total mortgages receivable, net 1,144,411 1,408,591 Less: current portion 74,848 79,683 Long-term portion $ 1,069,563 1,328,908 The mortgages receivable are subject to credit risk as the imputed interest rates are fixed while prevailing mortgage rates vary over time. Certain mortgages were pledged as collateral for notes payable (see Note 7). The accompanying financials reflect no provision for uncollectible mortgages as management estimates they will collect the loans in full. The following is a schedule of estimated future collections of mortgages receivable as of June 30: 17

20 Notes to Financial Statements (continued) NOTE 4: MORTGAGE LOANS RECEIVABLE (continued) 2017 $ 74, , , , , , , , , ,903 Total $ 1,144,411 NOTE 5: CONSTRUCTION IN PROGRESS Costs incurred in conjunction with home construction are recorded using the lower of cost or estimated market value. Following is a summary of construction in process at June 30, 2016: # of Homes Amount Construction in progress June 30, $ 1,405,111 Additions to construction in progress ,071 Sales and construction in progress adjustments, net (26) (103,976) Construction in progress June 30, $ 1,678,206 During the year ended June 30, 2016, two home sales closed with revenue of $270,983. Costs incurred in conjunction with home construction are recorded using the lower of cost or estimated market value. Following is a summary of construction in process at June 30, 2015: # of Homes Amount Construction in progress June 30, $ 817,953 Additions to construction in progress ,292 Sales and construction in progress adjustments, net (1) (258,134) Construction in progress June 30, $1,405,111 During the year ended June 30, 2015, one home sale closed with revenue of $116,

21 NOTE 6: TITHE PAYABLE HABITAT FOR HUMANITY NEWARK, INC. Notes to Financial Statements (continued) The Organization is affiliated with Habitat for Humanity International, Inc. (HHI). It periodically receives a portion of its cash flow through individual contributions collected by Habitat International, Inc. These funds are designated for Habitat for Humanity Newark, Inc. to utilize in their operations and collected by Habitat for Humanity International, Inc. The Organization contributes a portion of the Organization s unrestricted annual cash contributions to Habitat for Humanity International for their international housing programs. During the fiscal year ended June 30, 2016 and 2015, tithing expense to HHI amounted to $17,630 and $18,942, respectively. The Organization has recorded a tithe payable of $22,891 and $38,219 at June 30, 2016 and 2015, respectively. NOTE 7: NOTES PAYABLE The Organization had the following notes outstanding at June 30, 2016 and 2015: Promissory note payable to Habitat for Humanity International, Inc. for the purpose of building future homes. The loan is payable in 180 monthly installments of $1,271 including interest with a final payment due December The note bears interest at 1% per annum. However, generally accepted accounting principles requires interest on below market loans imputed at the incremental borrowing rate of the borrower, estimated at 8% per annum. The loan also requires Habitat to raise 50% of its annual income from local sources, and to maintain minimum net assets of $250,000. The Organization paid the loan in full during the year ended June 30, $ - $ 36,408 Promissory note payable to Habitat for Humanity International, Inc. for the purpose of building future homes. This loan was refinanced with Habitat for Humanity International, Inc. on June 20, The loan is payable in 40 quarterly installments of $17,162, including interest of 4.75% per annum; final payment due June 30, The note is secured by fourteen mortgage receivables representing approximately $327,225 of the mortgage loan receivable (at net present value) at June 30, The loan also requires the Organization to (a) preserve and maintain its taxexempt status, (b) conduct its activities in accordance with its signed Affiliation Agreement, (c) maintain net assets of $250,000 at all times, (d) have at least ten mortgage loans in its Performing Mortgage Pool, and (e) own free and clear all liens and encumbrances at least 40% of the total number of mortgage loans in the Performing Mortgage Pool. 361, ,507 19

22 NOTE 7: NOTES PAYABLE (continued) HABITAT FOR HUMANITY NEWARK, INC. Notes to Financial Statements (continued) Promissory note payable to Habitat for Humanity International, Inc. for the purpose of building future homes. This loan was refinanced with Habitat for Humanity International, Inc. on June 20, The loan is payable in 40 quarterly installments of $5,176, including interest of 4.55% per annum; final payment due June 30, The note is secured by four mortgage receivables representing approximately $204,969 of the mortgage loan receivable (at net present value) at June 30, The loan also requires the Organization to (a) preserve and maintain its taxexempt status, (b) conduct its activities in accordance with its signed Affiliation Agreement, (c) maintain net assets of $250,000 at all times, (d) have at least ten mortgage loans in its Performing Mortgage Pool, and (e) own free and clear all liens and encumbrances at least 40% of the total number of mortgage loans in the Performing Mortgage Pool. 123, ,188 Promissory note payable to Habitat for Humanity International, Inc. for the purpose of building future homes. The loan is payable in 40 quarterly installments of $4,232, including interest of 4.50% per annum; final payment due December 31, The note is secured by two mortgage receivables representing approximately $103,018 of the mortgage loan receivable (at net present value) at June 30, The loan also requires the Organization to (a) preserve and maintain its tax-exempt status, (b) conduct its activities in accordance with its signed Affiliation Agreement, (c) maintain net assets of $250,000 at all times, (d) have at least ten mortgage loans in its Performing Mortgage Pool, and (e) own free and clear all liens and encumbrances at least 40% of the total number of mortgage loans in the Performing Mortgage Pool. 107, ,007 Total notes payable 592, ,110 Less: current portion (81,031) (92,310) Long-term portion $ 511,320 $613,800 The following is a schedule of estimated future maturities of the principal portion of the notes payable at the fiscal year ended June 30: 2017 $ 81, , , , , ,775 Total $ 592,351 20

23 NOTE 8: LINE OF CREDIT HABITAT FOR HUMANITY NEWARK, INC. Notes to Financial Statements (continued) On August 8, 2013, the Organization opened an Evergreen line of credit with a maximum withdrawal of $250,000 and is secured by all business assets. The line of credit is to be used for working capital and general corporate purposes. As of June 30, 2016, monthly payments of accrued interest or $100, whichever is greater, are required. As of June 30, 2016, a maturity date had not yet been declared. The principal balance will not be required to be paid until a final maturity date is declared. The line of credit has a variable interest rate, which is subject to change based on the prime rate declared by the lender and an additional one percent. As of June 30, 2016, the interest rate was at 4.50% and the line of credit had an outstanding balance of $25,802. As of June 30, 2015, the interest rate was at 4.25% and the line of credit had an outstanding balance of $175,000. NOTE 9: CONSTRUCTION LOAN PAYABLE In order to finance the construction of selected housing units, the Organization was granted a $300,000 construction loan on April 1, 2015 to be utilized as work progresses through the completion of such construction. As of June 30, 2016 and 2015, the amount borrowed and outstanding under such loan was $225,000 and $100,000, respectively. The loan bears a variable interest rate based on the LIBOR rate. The loan calls for the monthly payment of interest through the draw period, which is October 1, Beginning November 1, 2016, monthly payments of principal and interest will be required. As of June 30, 2016, the entire amount is reflected as a current liability, however, once payment terms are identified, a portion will be reflected as long-term debt. NOTE 10: OPERATING LEASES The Organization leases a piece of equipment under an operating lease agreement expiring in September The organization also leases office space under an operating lease expiring in December Minimum future rental payments under the operating leases at June 30 are as follows: 2017 $ 33, ,500 $ 50,394 NOTE 11: BOARD DESIGNATED FUNDS The Board of Trustees established a designated fund in which collections from mortgages and loans are deposited for future construction expenses of the Organization. The Organization s board designated net assets had the following balance for the years ended June 30, 2016 and 2015: $ 297,348 $ 297,348 Board designated funds are comprised entirely of cash and cash equivalents. The Organization has adopted investment and spending policies for board designated assets that attempt to provide a relatively predictable and growing stream of annual distributions in support of the organization while preserving the long-term, real purchasing power of the assets. An additional purpose of the fund is to provide a source of funds for a time when the Organization may face a financial emergency. 21

24 Notes to Financial Statements (continued) NOTE 12: CONCENTRATIONS OF SUPPORT AND REVENUE The Organization received approximately fourteen (14%) of their total support and revenue from home sales, fourteen (14%) from businesses and individuals, seventeen (17%) from imputed interest, eleven (11%) from foundations and thirty-four (34%) from grants for the year ended June 30, The Organization received approximately seven (7%) of their total support and revenue from home sales, twenty-one (21%) from businesses and individuals, eighteen (18%) from imputed interest, thirteen (13%) from foundations and twenty-nine (29%) from grants for the year ended June 30, NOTE 13: COMMITMENTS AND CONTINGENCIES Habitat commits to building homes for individuals and obtains corporate or other sponsors who underwrite approximately half of the construction costs associated with building the homes. The Organization is dependent upon its staff and board members ability to secure funding sources to fulfill future commitments. Habitat serves as a builder while building homes for low to moderate income families. Habitat uses volunteers for constructing the homes and indemnifies its sponsors from liability arising from home construction. Generally, construction companies are subject to uninsured risks resulting from their homebuilding activities. In the normal course of operations, Habitat is involved with claims against the corporation for issues associated with homes it constructed and former volunteer and employee claims. Asserted claims are contested vigorously by management. However, the ultimate outcome of these uncertainties is not quantifiable and, accordingly, management does not accrue any estimate of losses it may incur in the future arising from these ongoing issues. NOTE 15: SALE OF MORTGAGES On September 15, 2015, the Organization sold three mortgages with a balance of $333,778 to Columbia Bank without recourse. On December 14, 2015, the Organization sold an additional three mortgages with a balance of $141,117 to Columbia Bank without recourse. The Organization received a total of $474,895 in cash for the sale of the mortgages. NOTE 16: SUBSEQUENT EVENT As of the report date, the Organization is performing due diligence on a possible merger with the Hudson County Habitat for Humanity and the outcome of this merger cannot yet be determined. The Organization has also expanded its geographical service area into the Greater Elizabeth location. 22