BURBANK HOUSING DEVELOPMENT CORPORATION AND AFFILIATES

Transcription

1 BURBANK HOUSING DEVELOPMENT CORPORATION COMBINED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT

2 COMBINED FINANCIAL STATEMENTS TABLE OF CONTENTS Page Independent Auditor s Report... 1 Combined Statements of Financial Position... 3 Combined Statements of Activities... 5 Combined Statements of Cash Flows... 7 Notes to Combined Financial Statements... 8 Supplementary Information Combining Schedules of Financial Position Combining Schedules of Activities * * * *

3 Board of Directors Burbank Housing Development Corporation and Affiliates Santa Rosa, California INDEPENDENT AUDITOR S REPORT Report on the Combined Financial Statements We have audited the accompanying combined financial statements of Burbank Housing Development Corporation, a California nonprofit public benefit corporation, and Affiliates (collectively called the Corporation ), which comprise the combined statements of financial position as of December 31, 2016 and 2015, and the related combined statements of activities and cash flows for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined 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 combined financial statements based on our audits. We conducted our audits 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 audits to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined 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 combined financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 18 to the financial statements, Burbank Housing Development Corporation adopted new accounting guidance required by accounting principles generally accepted in the United States of America and changed its method of accounting for debt issuance costs and related amortization of such costs. The change in accounting policy has been applied retrospectively to the prior period presented. Our opinion is not modified with respect to this matter. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The accompanying supplementary information on pages 37 through 42 is presented for the purpose of additional analysis rather than to present the financial position, results of operations and cash flows of the individual companies and is not a required part of the basic combined 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 combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined 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 combined financial statements as a whole. Report on Other Legal and Regulatory Requirements In accordance with Government Auditing Standards, we have also issued a report dated July 13, 2017 on our consideration of the Corporation 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 the Corporation s internal control over financial reporting and compliance. July 13,

5 COMBINED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2016 AND 2015 ASSETS Current assets: Cash undesignated $ 5,641,131 $ 5,814,870 Receivables current: Limited partnerships (Note 3) 24,000 40,365 Other (Note 3) 307, ,903 Prepaid expenses 470, ,853 Deposits and mortgage impounds 422, ,625 Restricted cash current (Note 5) 95, ,028 Total current assets 6,962,568 7,788,644 Restricted cash net of current portion (Note 5) 18,455,775 18,714,682 Receivables net of current portion and allowance for doubtful accounts: Limited partnerships (Note 3) 666, ,207 Development in progress general contracted projects (Note 4) 8,716,015 13,168,766 Development in progress (Note 4) 19,076,148 20,390,696 Notes and interest receivable from limited partnerships and others (Note 6) 1,159,105 1,124,038 Notes receivable from homeowners net (Note 7) 31,700 31,700 Property and equipment net (Note 8) 396,247, ,657,594 Investments in partnerships and other companies (Note 9) 94,296 74,237 Other assets 1,157,894 1,243,562 Total assets $ 452,567,148 $ 458,733,126 The accompanying notes are an integral part of these financial statements. 3

6 COMBINED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2016 AND 2015 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued expenses $ 3,766,134 $ 2,718,030 Current maturities of financing for development in progress (Note 10) 44, ,000 Current maturities of mortgages and notes payable (Note 11) 2,137,344 1,776,877 Accrued interest on financing for development in progress (Note 10) 3,156 6,517 Accrued interest on mortgages and notes payable (Note 11) 263, ,325 Total current liabilities 6,214,249 5,358,749 Liability for homeownership lending (Note 7) 71,629 70,399 Deferred revenue 316, ,520 Tenant security deposits 2,020,903 1,932,477 Financing for development in progress net of current portion (Note 10) 11,039,587 19,962,944 Accrued interest on financing for development in progress net of current portion (Note 10) 1,075,741 1,837,816 Mortgages and notes payable net (Note 11) 269,989, ,095,980 Other long-term payables (Note 11) 187, ,592 Line of credit (Note 12) 800,000 - Accrued interest on mortgages and notes payable net of current portion (Note 11) 47,762,944 43,289,453 Total liabilities 339,478, ,055,930 Net assets: Unrestricted controlling interests (Note 2) 22,838,694 23,225,817 Unrestricted non-controlling interests (Note 2) 72,345,603 80,957,025 Temporarily restricted (Note 13) 17,904,652 19,494,354 Total net assets 113,088, ,677,196 Total liabilities and net assets $ 452,567,148 $ 458,733,126 The accompanying notes are an integral part of these financial statements. 4

7 COMBINED STATEMENTS OF ACTIVITIES Change in unrestricted net assets: Support and revenue: Support: Capital grants for sale of single family homes (Note 14) $ 496,000 $ - Donations and other grants 95,388 14,528 Total unrestricted support 591,388 14,528 Revenue: Rental income 26,038,478 25,410,490 Sale proceeds sale of single family homes (Note 14) 10,884,565 - Cost of sales sale of single family homes (Note 14) (12,635,326) - Developer fees 2,282,651 1,569,332 Property management and accounting fees 172, ,381 Partnership, incentive and asset management fees 37,721 34,188 Recovery of homeownership notes (Note 7) 119,774 18,376 Interest income 71,667 64,129 Miscellaneous income 1,230,637 1,691,022 Total unrestricted revenue 28,202,184 29,001,918 Net assets released from restrictions (Note 13) 1,589,702 1,601,919 Total unrestricted support and revenue 30,383,274 30,618,365 Expenses: Program services for affordable rental properties: Rental expenses 18,755,269 17,789,557 Depreciation and amortization expense 14,412,960 14,578,909 Interest amortization of permanent loan costs (Note 18) 88,060 88,060 Deferred interest expense 5,364,351 5,221,472 Loss on retirement of fixed assets 337,395 58,415 Property management costs 2,775,140 2,604,064 Program services for project development: Development costs for affordable rental projects 745, ,008 Development costs relating to ownership projects 148, ,091 Capital donations 12,714 8,375 General and administrative 1,550, ,988 Total expenses 44,189,343 41,895,939 Change in unrestricted net assets before other (income) expenses (13,806,069) (11,277,574) The accompanying notes are an integral part of these financial statements. 5

8 COMBINED STATEMENTS OF ACTIVITIES Other (income) expenses: HUD property and partnership activity 1,153 6 Miscellaneous gain/loss activity 1,651 - Loss provision sale of single family homes (Note 14) - 1,000,000 Change in unrestricted net assets (13,808,873) (12,277,580) Change in temporarily restricted net assets: Release of temporarily restricted net assets (Note 13) (1,589,702) (1,601,919) TOTAL CHANGE IN NET ASSETS (15,398,575) (13,879,499) Net assets beginning of year 123,677, ,054,616 Capital contributions net 4,810,328 4,502,079 Net assets end of year $ 113,088,949 $ 123,677,196 Reconciliation of net assets: Controlling interest: Beginning of year $ 42,720,171 $ 39,315,109 Transfers from non-controlling interests due to buyouts 1,295,919 4,958,661 Change in net assets (3,272,744) (1,553,599) End of year 40,743,346 42,720,171 Non-controlling interest: Beginning of year 80,957,025 93,739,507 Transfers to controlling interests due to buyouts (1,295,919) (4,958,661) Capital contributions net 4,810,328 4,502,079 Change in net assets (12,125,831) (12,325,900) End of year 72,345,603 80,957,025 Net assets end of year $ 113,088,949 $ 123,677,196 The accompanying notes are an integral part of these financial statements. 6

9 COMBINED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Change in net assets $ (15,398,575) $ (13,879,499) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 14,318,380 14,461,466 Amortization 94, ,443 Interest amortization of permanent loan costs (Note 18) 88,060 88,060 Loss on retirement of fixed assets 337,395 58,415 Loss provision sale of single family homes - 1,000,000 (Increase) decrease in partnership activity (20,059) 6 (Increase) decrease in assets: Limited partnership receivables (110,651) (317,560) Property and other receivables 221,014 (36,107) Prepaid expenses 25,151 (33,234) Deposits and mortgage impounds 5,770 39,058 Notes and interest receivable from limited partnerships (35,067) (23,202) Increase (decrease) in liabilities: Accounts payable and accrued expenses 1,048,104 1,564,670 Deferred revenue (26,904) 343,520 Accrued interest on mortgages and notes payable 3,713,933 3,748,418 Tenant security deposits net 32,577 12,477 Total adjustments 19,692,283 21,023,430 Net cash provided by operating activities 4,293,708 7,143,931 Cash flows from investing activities: Net decrease (increase) in replacement, operating and other reserves 698,793 (1,789,929) Reduction (purchase) of development in progress 5,767,299 (9,537,497) Purchase of property and equipment (15,245,605) (4,257,547) Reduction (purchase) of deferred costs 9,755 (146,276) Net cash used in investing activities (8,769,758) (15,731,249) Cash flows from financing activities: Net increase (decrease) in financing for development in progress (9,477,715) 2,710,828 Net increase in mortgages and notes payable 8,947,241 2,401,897 Net increase (decrease) in other long-term payables 22,457 (65,902) Proceeds from capital contributions, net of distributions and syndication costs 4,810,328 4,072,552 Net cash provided by financing activities 4,302,311 9,119,375 Increase (decrease) in cash (173,739) 532,057 Cash, beginning of year 5,814,870 5,282,813 Cash, end of year $ 5,641,131 $ 5,814,870 Supplementary information: Cash paid for interest net of capitalized portion $ 5,254,795 $ 4,669,589 Noncash investing and financing activities: Capital contributions receivable $ 21,201,438 $ 14,063,281 Transfer of development in progress to property and equipment $ 6,760,067 $ 602,300 Assets acquired by assuming liabilities or with proceeds from capital contributions $ 174,163 $ 14,537,408 The accompanying notes are an integral part of these financial statements. 7

10 NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND NATURE OF ACTIVITIES Burbank Housing Development Corporation (BHDC) is a nonprofit public benefit corporation dedicated to increasing the supply of housing in Sonoma County, so that low-income people of all ages, backgrounds, and special needs will have a better opportunity to live in decent and affordable housing. Organized in 1980, BHDC provides qualified nonprofit housing development, ownership, and management services in Sonoma County. BHDC builds and manages family and senior rental housing and creates home ownership opportunities through its mutual self-help program. BHDC collaborates with service organizations to provide supportive housing for people with special needs, including people who are elderly, physically or mentally disabled, farm workers, or homeless. BHDC is also affiliated with and under common board control with other nonprofit corporations which have been formed either as supporting entities to BHDC, or as instruments to further BHDC s organizational objectives. These entities, which are included in the combined financial statements of BHDC in accordance with generally accepted accounting principles, are: Burbank Housing Communities Corporation (BHCC), a California nonprofit public benefit corporation, was incorporated in June It benefits and supports BHDC, in carrying out its exempt purposes, by providing affordable housing for low-income persons where no adequate housing exists for such groups; and owning or serving as a general partner or limited partner in limited partnerships which own and operate housing for the benefit of low-income persons in California who are in need of affordable, decent, safe and sanitary housing and related services. Burbank Housing Management Corporation (BHMC), a California nonprofit public benefit corporation, was incorporated in May 1994 to manage affordable rental housing properties in Sonoma County developed by BHDC and others. Burbank Housing Property Company (BHPC), a California nonprofit public benefit corporation, was incorporated in October 2004 to provide residential on-site management to BHDC owned and affiliated properties, as well as other affordable rental properties. BHPC is not exempt from federal income taxes, but is exempt from taxation by the State of California. BHDC is a controlling general partner, with interests ranging from 0.005% to 1%, in affordable housing limited partnerships, as follows: Controlling Affiliate Limited Partnership(s) Ownership Burbank Housing Development Corporation Arbors Rohnert Park Apartments, L.P % Colgan Meadows, L.P % Larkfield Oaks, L.P % Meda Cypress Ridge, L.P % Monte Vista Community, L.P % Oak Ridge Apartments Associates, L.P % Olive Grove Apartments, L.P % Vida Nueva Partners, L.P % Wilford Lane Village, L.P % Winter Creek Limited Partnership 0.010% Burbank Housing Development Corporation and Burbank Housing Management Corporation FMT Limited Partnership % 8

11 NOTES TO COMBINED FINANCIAL STATEMENTS Controlling Affiliate Limited Partnership(s) Ownership Burbank Housing Development Corporation and Burbank Housing Communities Corporation Amorosa I, L.P % Carrillo Place, L.P % Firehouse Partners, L.P % Healdsburg Family Apartments Investors, L.P % Jay s Place Partners, L.P % Old Elm Partners, L.P % Springs Village, L.P % Timothy Commons, L.P % Martha Way Corporation, Grosman Apartments, Inc. and Burbank Housing Communities Corporation Grosman Apartments Investors % Amorosa II, LLC Amorosa II, L.P % Bell Manor, LLC Bell Manor, L.P % Crossroads Apartments LLC Crossroads, L.P % Fife, LLC Fife Creek Commons, L.P % Forest Winds 2, LLC Forest Winds 2, L.P % Grays Meadow 2, LLC Grays Meadow 2, L.P % Logan Place, LLC Logan Place, L.P % Madrone Village 2 LLC Madrone Village 2, L.P % Park Lane Apartments, LLC Park Lane, L.P % Round Walk Village LLC Round Walk Village Partners 2, L.P % Rowan Court, LLC Rowan Court Partners, L.P % Tower 2 Apartments, LLC Tower 2 Apartments, L.P % Windsor Redwoods, LLC Windsor Redwoods, L.P % Stony Point, Inc. and Burbank Housing Communities Corporation Park Land Senior Apartment Investors, L.P % Stony Point Apartments Investors, L.P % West Oaks Apartments, L.P % Controlling Affiliate Project Name Ownership Burbank Housing Development Corporation wholly owned properties Apple Valley Lane Apartments % Cabernet Apartments % Fitch Mountain Terrace Apartments % Gravenstein Phase I Apartments % Gravenstein North II Apartments % Harvest Grove Apartments % Sonoma Valley Apartments % Tamayo House % West Avenue Apartments % 9

12 NOTES TO COMBINED FINANCIAL STATEMENTS Controlling Affiliate Project Name Ownership Burbank Housing Communities Corporation wholly owned properties Bodega Hills Apartments % Hendley Circle Apartments % Lavell Village Apartments % Santa Alicia Gardens % Burbank Housing / S.R. Corporation Sea Ranch 31 Apartments % Sea Ranch 14 Apartments % Charles Street Village, Inc. Charles Street Village % Vinecrest Senior Apartments, Inc. Vinecrest Senior Apartments % Entities Excluded From Combined Financial Statements The combined financial statements do not include the following entities for which BHDC s officers and/or board are deemed not to have majority control: BHDC is a non-managing member of Palisades Calistoga LLC, which is the general partner of Palisades Investors, L.P., of which BHDC s investment is accounted for under the equity method of accounting. On December 31, 2016, BHCC acquired the Special Limited Partner s 0.005% interest in Palisades Investors, L.P., for no consideration. BHCC determined the Special Limited Partner s interest had no fair value at date of receipt. Accordingly, no value has been recorded in the combined financial statements for the acquired limited partner interest. Future income or loss will be recorded under the equity method. BHDC is the sole member of Toussin LLC, which is the co-general partner of Toussin Senior Apartments, L.P., of which BHDC s investment is accounted for under the equity method of accounting. Single-purpose nonprofit corporations holding a general partner interest of 0.1% in their respective limited partnerships providing affordable housing for which BHDC s officers and/or board are deemed not to have majority control, namely: Nonprofit Corporation Burbank Housing Neighborhood Revitalization Corporation Limited Partnership(s) Papago Court / Apple Valley Apartments Investors, L.P. Paulin Creek Apartments Investors, L.P. Nonprofit corporations providing affordable housing for which BHDC provides property management or development services, but its officers and/or board are deemed not to have majority control, are Boulevard Apartments, Oak Creek Terrace, L.P. and Village Green II. 10

13 NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination Nonprofit Corporations: The combined financial statements include the accounts of BHDC and other nonprofit entities that are commonly controlled by BHDC s officers or board of directors (the Corporation). Other nonprofit entities, over which BHDC does not exercise majority control, are not included in the combined financial statements. All material intercompany balances and transactions have been eliminated in the combined financial statements. Limited Partnerships: Partnerships that are controlled by the Corporation are included in the combined financial statements. This means that all of the partnerships assets, liabilities, and partners equity are included in the combined financial statements. The partners equity of the partnerships are divided into two types: unrestricted controlling interests (that portion held by the Corporation) and unrestricted non-controlling interests (that portion held by third parties, typically limited partners). All material intercompany balances and transactions have been eliminated in the combined financial statements. Partnerships which the Corporation does not control, but over which it exercises significant influence, are included in the combined financial statements using the equity method of accounting. Under the equity method, the Corporation s share of the net equity in these limited partnerships is shown as an asset (Investments in Partnerships and Other Companies), rather than including all the partnerships assets, liabilities, and partners equity in the combined financial statements, as is done with partnerships that are controlled by the Corporation. Intercompany balances and transactions are not eliminated under the equity method. The Corporation s interests generally range from 0.005% to 0.1%. Eliminations: In order to avoid grossing-up account balances, and thereby overstating the combined financial statements, material intercompany balances and transactions are eliminated between controlled entities. Examples include: elimination of developer fee revenue on BHDC s books against the developer fee cost which is capitalized in the building cost on a partnership s books; elimination of partnership management, property management and accounting fees on BHMC s books against the corresponding operating expenses on a partnership or property s books; elimination of receivables from partnerships, properties, and projects on BHDC s books against the corresponding payables on the partnerships, properties, and projects books. Due to the significant amount of work the Corporation performs between controlled entities, eliminations are very large. Financial statements for each of the Corporation s areas of activity prior to eliminations are available in the Supplementary Information. Accounting Method The Corporation uses the accrual method of accounting, which recognizes income in the period earned and expenses when incurred, regardless of the timing of payments. 11

14 NOTES TO COMBINED FINANCIAL STATEMENTS Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Basis of Presentation The Corporation reports information regarding its financial position and activities according to three classes of net assets, as applicable: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The combined financial statements generally reflect the same classification of net assets as appears on the individual financial statements of each affiliated entity, except for the following: Unamortized portion of capital advances from HUD under the Section 202 program, which are recorded as temporarily restricted net assets in the combined financial statements, but as unrestricted net assets in the individual property financial statements. Unamortized portion of recoverable grants from American Recovery and Reinvestment Act of 2009 (ARRA), which are recorded as temporarily restricted net assets in the combined financial statements, but as deferred revenue in the individual property financial statements. Revenue Recognition Contributions: Contributions are recognized as revenue when they are unconditionally communicated. Grants represent contributions if resource providers receive no value in exchange for the assets transferred. Contributions are recorded at their fair value as unrestricted support, temporarily restricted support, or permanently restricted support, depending on the absence or existence of donor-imposed restrictions as applicable. 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 combined statements of activities as net assets released from restrictions. If donors restrictions are satisfied in the same period that the contribution is received, the contribution is reported as unrestricted support. Government grants, excluding fee-for-service or cost-reimbursement type contracts, are treated as contributions. Rental Income: Rental income is shown at its maximum gross potential. Vacancy loss is shown as a reduction in rental income. Rental units occupied by employees are included in rental income and as an expense of operations. Sales of Owned Single-Family Housing Projects: Net revenue on the sale of single-family housing projects is recognized on the basis of units sold and when all of the following conditions are met: a title to the property is transferred to the buyer, a significant down payment is received, the earnings process is complete, and the collection of any remaining receivables is reasonably assured. 12

15 NOTES TO COMBINED FINANCIAL STATEMENTS These single-family housing projects are largely built using a mutual self-help housing program. A mutual self-help housing program brings participating families together as an organized group under the supervision of BHDC to build their homes and their new community from the ground up. This program offers affordable homeownership to eligible, lower income, first-time homebuyers. It includes a reduced mortgage loan, favorable loan terms, and reduced cash down payment requirement. Home mortgages for self-help families are provided by the U.S. Department of Agriculture or the California Housing Finance Agency, and is arranged by BHDC. Construction Revenue from Single-Family Housing Projects: BHDC periodically acts as the general contractor for the construction of single-family housing projects under various mutual self-help housing programs. The Corporation has adopted the completed-contract method of accounting for revenue recognition, due to the short-term nature of the construction and relative absence of profit. Use of the completed-contract method does not result in revenue recognition that is materially different than would be determined under the percentage-of-completion method. Under the completed-contract method, all revenue is deferred until completion of the single-family home. The cost of construction is accumulated as Development in progress general contracted projects until completion, at which time the related revenue and cost are recognized. Progress billings under construction contracts are recorded as Billings on construction contracts in the combined statements of financial position, while deferred revenue is recorded as Unrecognized construction revenue. Developer Fees Multifamily Rental Housing Projects: Developer fees for development of multi-family rental projects that are in development or under construction are recognized under the percentage-of-completion method as stipulated in the development services agreements. Developer fees received in advance are recorded as deferred revenue. Developer fee profits recognized from combined Affiliates or consolidated subsidiaries are eliminated as intercompany transactions. BHDC estimates that 100% of its developer fees, excluding the portions that are paid by it or its Affiliates capital contributions, cover related project costs. Project costs include costs of development, such as consultants, allocated internal salaries and benefits, related overhead, and other non-reimbursed fees. Therefore, real property costs have been reduced by the portions that are paid by it or its Affiliates capital contributions. Cash and Cash Equivalents Cash is defined as cash in demand deposit accounts as well as cash on hand. Not included as cash are funds restricted as to their use, regardless of liquidity, such as operating reserve, restricted reserve, cash restricted for development, transition reserve, workers compensation and tenant security deposits. The Corporation occasionally maintains cash on deposit at various banks in excess of the Federal Deposit Insurance Corporation limit. The uninsured cash balance, including restricted accounts, was approximately $4,800,000 as of December 31, The Corporation has not experienced any losses in such accounts. Cash equivalents are highly liquid investments that are readily convertible to known amounts of cash. Generally, only investments with original maturities of three months or less qualify as cash equivalents. Accounts Receivable Amounts were receivable from related parties and managed properties for operational advances, construction advances and/or development and other fees. Such amounts are generally either received during the subsequent year, or become notes receivable over a longer period. All material intercompany balances and transactions have been eliminated in the combined financial statements. 13

16 NOTES TO COMBINED FINANCIAL STATEMENTS The allowances for uncollectible accounts are determined on a specific identification basis, based upon management s assessment. Based on an assessment of the entity s current credit worthiness, an estimate of the balance that may not be collected is made. In addition, an amount of estimated credit losses on the aggregate remaining accounts receivable is made based on past collection experience. Once all efforts to collect have been undertaken, the unpaid balance is written off as a charge to the allowance for doubtful accounts or loan losses. Subsequent recoveries, if any, are credited to the allowance. Notes Receivable from Homeowners The Corporation believes the present value of notes receivable from homeowners is not readily determinable, and therefore records valuation allowances equal to the principal amount of the notes. The allowances for uncollectible accounts are determined on a specific identification basis, based upon management s assessment. Due to the uncertainty of repayment timing and unpredictability of asset value, an estimate of the balance that may not be collected is made. Once all efforts to collect have been undertaken, the unpaid balance is written off as a charge to the allowance for doubtful accounts or loan losses. Subsequent recoveries, if any, are credited to income. Allowance for Uncollectible Rents Management elects to record bad debts using the direct write-off method related to rents for the housing properties. Accounting principles generally accepted in the United States of America require that the allowance method be used to reflect bad debts. However, the effect of the use of the direct write-off method is not materially different from the result that would have been obtained had the allowance method been followed. Development in Progress Project Cost Reimbursement and Development Expenses: The Corporation incurs costs during the development phase of each affordable housing project. These costs are recorded as assets which generally are recoverable from the projects either from unit sales, loan proceeds, equity investor contributions, or from residual receipts generated by the projects. Any funds expended on a project that does not pass beyond the pre-development stage are recorded as expenses ( loss on abandonment of projects ) when further activity on the project ceases. In 2015, management estimated that a portion of the development in progress of the Catalina project was unrealizable and a loss of $1,000,000 was recognized in 2015 (see Note 14). Capitalized Interest BHDC capitalizes interest incurred during development as a component of development in progress. During 2016 and 2015, BHDC capitalized interest of $181,082 and $258,484, respectively. Investments in Partnerships and Other Companies Investments in partnerships and other companies over which the Corporation s officers and/or board are deemed not to have majority control but exercise significant influence are accounted for using the equity method of accounting. The investments are initially recorded at cost and then adjusted for the proportionate share of undistributed earnings or losses. Investments in partnerships and other companies which are controlled by the Corporation have been eliminated in the combined financial statements. The Corporation records commitments, in its capacity as the general partner of certain tax credit developments under construction, to invest in the projects. All material intercompany balances and transactions have been eliminated in the combined financial statements. 14

17 NOTES TO COMBINED FINANCIAL STATEMENTS Fair Value of Financial Instruments It is not practicable for management to estimate the fair value of accounts and notes receivable and notes payable because of the nature of such instruments and because there is no readily available market information for financial instruments with similar terms. Property and Equipment/Investment in Real Estate and Deferred Costs Property and equipment are stated at cost of acquisition or construction, or fair value if donated. The cost of maintenance and repairs is charged to expense as incurred. Depreciation is computed based on the straight-line method over the estimated useful lives of the assets. Deferred costs are incurred in order to obtain tax credits for the limited partnerships. Deferred costs are stated at cost and amortized on a straight-line basis. Organization costs are expensed as incurred. Costs incurred in order to obtain permanent financing for the limited partnerships are stated at cost and amortized on a straight-line basis into interest expense over the term of the loan. Permanent loan costs are reported as a direct deduction from the face amount of the related debt. See Note 18 for details of the change in accounting policy which has been applied retrospectively. Development in progress is not depreciated until the completion of construction. The useful lives of the assets are estimated as follows: Building and improvements Office furniture and equipment, and leasehold improvements Tax credit costs 5 to 40 years 3 to 15 years 10 to 15 years In accordance with generally accepted accounting principles, the Corporation reviews its investment in real estate for impairment whenever events or changes in circumstances indicate that the carrying value of such property may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the real estate to the future net undiscounted cash flow expected to be generated by the rental property, including the low-income housing credits and/or any estimated proceeds from the eventual disposition of the real estate. If the real estate is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the real estate exceeds the fair value of such property. There were no impairment losses recognized in 2016 and Income Taxes BHDC, BHMC, and BHCC are exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code and the related California code sections. BHPC is not exempt from federal income taxes, but is exempt from taxation by the State of California. The income or loss from partnerships is reported by the partners on their income tax returns. No income tax provision has been included in the combined financial statements for the LLCs which are generally considered disregarded entities. The income and loss of the LLCs is included in the tax returns of their respective sole members. Only the annual California limited liability company minimum tax and the annual fee are included as expense in the combined financial statements. The Corporation believes that it has appropriate support for any tax positions taken, and as such, does not have any uncertain tax positions that are material to the financial statements. The Corporation s federal and state income tax and information returns for the years 2012 through 2015 are subject to examination by regulatory agencies, generally for three years and four years after they were filed for federal and state, respectively. 15

18 NOTES TO COMBINED FINANCIAL STATEMENTS Guarantees Generally accepted accounting principles require a liability to be recorded for the fair value of the stand ready obligation associated with a guarantee issued after December 31, Guarantees issued between entities under common control or on behalf of an entity under common control are excluded. Consequently, no liabilities have been recorded as all guarantees are considered to be issued to entities under common control (see Note 14). Allocation of Partnership Income/Loss and Tax Credits The affiliated partnerships are generally expected to generate low-income housing tax credits, which will be allocated in the same manner as the income or loss of the partnerships. Because the limited partners losses are limited to their investments, the limited partners equity will not be reduced below zero unless future capital contributions will be made in an amount sufficient to absorb the losses. All remaining losses are allocated to the general partners. Any subsequent income allocable to the limited partners is allocated to the general partners first until the general partners share of that income offsets the losses not previously recognized by the limited partners. Functional Expenses Allocation The costs of providing program services and supporting services have been summarized on a functional basis in the combined statements of activities. Accordingly, certain costs are allocated among program services and supporting services based on usage of resources. Subsequent Events Management has reviewed and found no material subsequent events through July 13, 2017, the date on which the combined financial statements were available to be issued. Reclassification Certain amounts previously reported in the 2015 financial statements were reclassified to conform to the 2016 presentation for comparative purposes. NOTE 3 RECEIVABLE FROM LIMITED PARTNERSHIPS AND OTHER ENTITIES The Corporation receives various fees and reimbursements from related parties and managed properties. These include fees for the development of affordable housing; fees pursuant to partnership agreements that affiliated organizations have entered into; project cost reimbursements for costs advanced during the pre-development and development stages of affordable housing projects; and repayment of advances made by the Corporation to its related parties and managed properties. 16

19 NOTES TO COMBINED FINANCIAL STATEMENTS Receivable from limited partnerships is summarized as follows: Developer fees $ 2,454,031 $ 878,340 Partnership management fees 3,221,784 3,272,585 Development and operational advances 678, ,154 Total 6,354,797 4,831,079 Less: allowance for doubtful receivables (849,000) (536,117) Total net of the allowance for doubtful receivables 5,505,797 4,294,962 Eliminations (4,815,574) (3,715,390) Net combined total 690, ,572 Less: current portion (24,000) (40,365) Long-term portion $ 666,223 $ 539,207 The Corporation evaluates receivables from limited partnerships based on the following credit quality indicators: related versus non-related party. These credit quality indicators are updated at least annually. Details about the receivable from limited partnerships follow: Related Party Non-Related Party Past Due Allowance Net Partnership management fees $ 120,538 $ - $ - $ - $ 120,538 Development and operational advances 403, ,124 - (100,853) 569,685 Total $ 523,952 $ 267,124 $ - $ (100,853) $ 690,223 Receivable from other entities is summarized as follows: Capital contributions receivable $ 21,201,438 $ 14,063,281 Inter-company receivables 22,455 12,209,963 Development and operational advances 5,382,838 5,607,359 Park fee credits - 205,330 Other 282, ,491 Total 26,889,245 32,391,424 Eliminations (26,581,356) (31,862,521) Net combined total $ 307,889 $ 528,903 17

20 NOTES TO COMBINED FINANCIAL STATEMENTS The Corporation evaluates receivables from other entities based on the following credit quality indicators: government versus non-government. These credit quality indicators are updated at least annually. Details about the receivable from other entities follow: Government Non-Government Past Due Allowance Net Other $ - $ 307,889 $ - $ - $ 307,889 Total $ - $ 307,889 $ - $ - $ 307,889 NOTE 4 DEVELOPMENT IN PROGRESS Details of development in progress follow: Development in Progress general contracted projects: Single-family homes: Catalina Townhomes $ 8,716,015 $ 13,168,766 Total $ 8,716,015 $ 13,168,766 Development in Progress: Rental properties: Crossroads $ 10,485,729 $ 6,038,566 Lantana Place 4,570,998 4,429,644 Madrone Village (1) - 1,822,203 Park Lane Apartments (1) - 4,029,615 Other 305,176 - Other: Fulton mitigation 4,038,968 3,902,696 Various site search costs (2) - 242,888 Sub-total 19,400,871 20,465,612 Eliminations (324,723) (74,916) Total $ 19,076,148 $ 20,390,696 (1) Development was completed in (2) Site search costs of $249,917 were written off in 2016, including $242,888 of prior years carried costs. 18

21 NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 5 RESTRICTED CASH The Corporation has set aside funds as required by various loan, regulatory, grant, and partnership agreements. Details follow: Cash restricted for development $ 568,688 $ 356,472 Loan funds for project working capital 62, ,199 Cash restricted for homeownership lending 113, ,860 Replacement, operating and other reserves 15,612,179 15,976,177 Tenant security deposits 2,109,047 2,053,199 Workers compensation 85, ,803 Total 18,551,766 19,194,710 Less: current portion (95,991) (480,028) Long-term portion $ 18,455,775 $ 18,714,682 NOTE 6 NOTES AND INTEREST RECEIVABLE FROM LIMITED PARTNERSHIPS AND OTHERS The Corporation provided deferred loans to related parties and managed properties to assist in the development of affordable rental housing projects as follows: Interest Receivable Interest Principal Receivable Principal Note receivable from Lavell Village Apartments, secured by the property, bears 9% interest compounded annually, and is due and payable in Payments of principal and interest shall be made to the extent of net cash flow, as defined by the terms of the loan. $ 1,198,263 $ 310,000 $ 1,088,683 $ 310,000 Demand note receivable from a limited partnership, unsecured, bears 0% interest, with principal and interest due within 10 days of demand notice or by December 31, , ,625 Three seller carryback notes receivable from limited partnerships, secured by the property, bear interest at the applicable federal rate at time of sale, compounded annually, and are due on various dates through Payments of principal and interest shall be made to the extent of net cash flow, as defined by the terms of the loan. 571,848 8,920, ,239 9,095,007 19

22 NOTES TO COMBINED FINANCIAL STATEMENTS Interest Receivable Interest Principal Receivable Principal Two notes receivable from limited partnerships, unsecured, bearing 0% and 3% interest, and are due and payable on August 1, 2073 and December 31, 2070, respectively. 14, ,864 10, ,715 Two notes receivable from limited partnerships. The loans are secured by the property, bearing interest of 2.91%-3.65% interest compounded annually, and are due and payable on February 27, 2069 and November 24, Payments of principal and interest shall be made to the extent of net cash flow, as defined by the terms of the loans. 36, ,819 21, ,819 Six notes receivable from limited partnerships. The loans are secured by the properties, generally bear 3% interest compounded annually, and payments of principal and interest shall be made to the extent of net cash flow, as defined by the terms of the loans. The loans were made with subsidies received from the Federal Home Loan Bank s Affordable Housing Program. 879,729 1,098, ,172 1,098,531 Twelve and eleven demand notes from the general partners of limited partnerships at December 31, 2016 and 2015, respectively, bearing interest from 0% to 3%, generally with principal and interest due within 10 days of demand notice or at maturity , ,359 Total 2,701,442 11,813,042 2,301,424 11,586,056 Eliminations (2,197,781) (11,157,598) (1,832,830) (10,930,612) Net combined total $ 503,661 $ 655,444 $ 468,594 $ 655,444 The Corporation evaluates notes and interest receivable from limited partnerships based on the following credit quality indicators: collateralized versus non-collateralized. These credit quality indicators are updated at least annually. Details about the notes and interest receivable from limited partnerships follow: Collateralized Non-Collateralized Past Due Allowance Net Related-party notes and accrued interest $ 1,020,080 $ 139,025 $ - $ - $ 1,159,105 20

23 NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 7 NOTES RECEIVABLE FROM HOMEOWNERS In assisting eligible individuals to become owners of affordable housing, the Corporation has provided assistance in the form of purchase money loans, which are secured by junior deeds of trust on the homeowners properties. Terms vary somewhat but generally are for 30 years. These loans do not require repayment until the loan terms have expired or the homeowner disposes of the property. Additionally, terms may involve the sharing of appreciation in the affordable housing. The Corporation may have an option to purchase the property should the homeowner decide to sell. Such loans aggregated to $9,150,286 and $9,006,665 at December 31, 2016 and 2015, respectively. With the exception of a mobile home note of $31,700 in which the Corporation has a superior lien position of, it is the Corporation s policy to provide a valuation allowance equal to the note value since the present value of the notes cannot be readily determined. Any proceeds from the sale or refinancing of a home secured with a purchase money loan are recognized as revenue if the Corporation is the sole beneficiary. Otherwise, it is held in trust and reflected on the Corporation s financial statements as a liability. For the years ended December 31, 2016 and 2015, amounts of $119,774 and $18,376, respectively, were recognized as revenue. As of December 31, 2016 and 2015, the liability for homeownership lending was $71,629. Whenever possible, the Corporation intends to re-lend these proceeds to a qualified buyer to facilitate their purchase of a home which is available for re-sale. Consistent with the policy at initial sale, a valuation allowance equal to the note value is recorded when the loan is made. NOTE 8 PROPERTY AND EQUIPMENT Details of property and equipment follow: General Operations 2016 Rental Operations Total Land $ - $ 53,618,349 $ 53,618,349 Building and improvements - 463,511, ,511,327 Office furniture and equipment, and leasehold improvements 531,853 7,835,947 8,367, , ,965, ,497,476 Less: accumulated depreciation (246,876) (121,666,758) (121,913,634) Total property and equipment 284, ,298, ,583,842 Eliminations - (7,336,418) (7,336,418) Net combined total $ 284,977 $ 395,962,447 $ 396,247,424 21