NEW BRUNSWICK APARTMENTS, LLC (A Limited Liability Company) NJHMFA Project No.: 500 Financial Statements December 31, 2011 and 2010

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1 NJHMFA Project No.: 500 Financial Statements December 31, 2011 and 2010

2 FINANCIAL STATEMENTS DECEMBER 31, 2011 AND 2010 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT FINANCIAL STATEMENTS Balance Sheet Statement of Operations Statement of Changes in Members Capital... 7 Statement of Cash Flows Notes to Financial Statements NJHMFA SUPPLEMENTARY INFORMATION Schedule of Revenues Schedule of Operating Expenses Schedule of Changes in Fixed Asset Accounts Schedule of Changes in Reserve Accounts Balances Schedule of Receivables (other than tenants) Schedule of Loans, Notes and Mortgages Payable to Other than NJHMFA Schedule of Accounts Payable and Accrued Expenses Schedule of Computation of Managing Agent Fee Schedule of Computation of Real Estate Tax Expense Schedule of Computation of Cumulative Return on Capital Payable Schedule of Related Party Transactions and Cash Distribution to Members Schedule of Cash Flow Available for Payment of NJHMFA and/or CDA Cash Flow Loans Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on Audit of Financial Statements Performed in Accordance with Government Auditing Standards Schedule of Funding and Questioned Costs Auditor s Comments on Audit Resolution Matters Related to HUD Programs... 38

3 Salmin, Celona, Wehrle & Flaherty, LLP Certified Public Accountants 1170 chili avenue rochester, ny / 279 / 0120 fax 585 / 279 / postmaster@scwf-cpa.com INDEPENDENT AUDITOR S REPORT To the Members New Brunswick Apartments, LLC We have audited the accompanying balance sheet of New Brunswick Apartments, LLC, (a limited liability company) (the Company) as of December 31, 2011 and 2010, and the related statements of operations, changes in members capital and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in footnote 2 (Significant Accounting Policies), the Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America and the accounting policies and procedures specified by the New Jersey Housing and Mortgage Finance Agency (NJHMFA). The NJHMFA policies and procedures are substantially in accordance with accounting principles generally accepted in the United States of America except for the NJHMFA policies regarding the reporting of replacement reserve transactions. In our opinion, except for the effects of the Company s policies regarding reporting of replacement reserve transactions as discussed in the preceding paragraph (and footnote 2), the financial statements referred to above present fairly, in all material respects, the financial position of New Brunswick Apartments, LLC as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued out report dated February 27, 2012, on our consideration of New Brunswick Apartment, LLC 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1 The. Never Underestimate The Value. Members of the American Institute of Certified Public Accountants

4 Independent Auditor s Report New Brunswick Apartments, LLC Page 2 Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information is presented for purposes of additional analysis as required by the New Jersey Housing and Mortgage Finance Agency (NJHMFA), and is not a required part of the 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 financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 financial statements as a whole. This report is intended solely for the information and use of the members and the New Jersey Housing and Mortgage Finance Agency and is not intended to and should not be used by anyone other than these specified parties. Salmin, Celona, Wehrle & Flaherty, LLP Salmin, Celona, Wehrle & Flaherty, LLP Rochester, New York February 27,

5 BALANCE SHEET DECEMBER 31, 2011 AND ASSETS Current assets: Cash - operating $ 349,612 $ 229,554 Cash - entity Accounts receivable - tenants 38,168 28,405 Accounts receivable - HUD HAP contract 31,279 61,818 Prepaid taxes and insurance 16,856 22,551 Total current assets 436, ,461 Restricted deposits and funded reserves: Security deposits 144, ,542 NJHMFA escrows and reserves 297, ,056 Other escrows and reserves 1,725,766 1,686,478 Total restricted deposits and funded reserves 2,167,965 2,438,076 Rental property and equipment, net of accumulated depreciation 13,136,911 13,146,130 Deferred financing costs, net 933, ,165 Tax credit fees, net 85,170 96,526 Total assets $ 16,759,704 $ 17,000,358 Continued on next page 3

6 BALANCE SHEET DECEMBER 31, 2011 AND 2010 (Continued) LIABILITIES AND MEMBERS' CAPITAL (DEFICIT) Current liabilities: Mortgage payable - current portion $ 325,000 $ 305,000 Accounts payable - operations 118,759 70,242 Accrued interest payable 275, ,000 Member fees payable 274, ,851 Due to managing agent 10,059 10,055 Prepaid rent 19,456 14,529 Total current liabilities 1,022, ,677 Deposits and prepayment liabilities: Tenant security deposits 144, ,542 Total deposits and prepayment liabilities 144, ,542 Mortgage payable, net of current portion 12,720,000 13,045,000 Total liabilities 13,886,888 14,062,219 Members' capital (deficit) Members' capital contributions 4,530,416 4,530,416 Accumulated earnings (losses) (577,436) (850,549) Accumulated distributions (1,419,755) (1,409,103) Reserve for repairs & replacements 339, ,375 Total members' capital (deficit) 2,872,816 2,938,139 Total liabilities and capital $ 16,759,704 $ 17,000,358 See accompanying notes to financial statements 4

7 STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND Revenue: Apartment rents $ 3,290,325 $ 3,197,011 Subtotal 3,290,325 3,197,011 Less: vacancy, concessions and collection losses (141,915) (191,376) Net rents 3,148,410 3,005,635 Service income 20,059 20,600 Financial income 44,846 43,927 Other income 18,339 21,719 Total revenue 3,231,654 3,091,881 Operating expenses: Administrative 121, ,851 Salaries & related charges 447, ,314 Maintenance & repairs 120, ,120 Maintenance contracts 305, ,879 Utilities 451, ,634 Management fees 186, ,704 Real estate taxes 335, ,206 Property & liability insurance 48,537 48,446 Total operating expenses 2,016,819 1,936,154 Net operating income 1,214,835 1,155,727 Interest and reserves: Interest on mortgage 685, ,542 Section 236 interest reduction (278,977) (278,977) Fees & charges 144, ,340 Provision for repair and replacement reserve (327,784) 17,218 Total interest, taxes, and reserves 222, ,123 Continued on next page 5

8 STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Continued) Net income (loss) before depreciation, amortization and entity fees 991, ,604 Depreciation expense (equal to NJHMFA mortgage principal amortization paid during the year) (305,000) (335,000) Net income (loss) before excess depreciation, amortization and entity fees 686, ,604 Excess depreciation/depreciation less than principal amortization (85,141) (75,049) Amortization of deferred costs (54,911) (54,911) Net income (loss) before entity fees 546, ,644 Member/entity fees (273,801) (185,847) Net income (loss) $ 273,113 $ (77,203) See accompanying notes to financial statements 6

9 STATEMENT OF CHANGES IN MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2011 AND Capital contributions (distributions): Investment member Balance at beginning of year $ 4,530,416 $ 4,530,416 Contributions during year 0 0 Balance at end of year 4,530,416 4,530,416 Accumulated losses: Balance at beginning of year (850,549) (773,346) Net loss during year 273,113 (77,203) Balance at end of year (577,436) (850,549) Accumulated distributions: Balance at beginning of year (1,409,103) (1,374,546) Distributions during year (10,652) (34,557) Balance at end of year (1,419,755) (1,409,103) Reserve for repairs & replacements: Balance at beginning of year 667, ,157 Additions to reserve 57,188 57,117 Withdrawals from reserve (384,972) (39,899) Balance at end of year 339, ,375 End of year members' capital $ 2,872,816 $ 2,938,139 See accompanying notes to financial statements 7

10 STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND Cash flows from operating activities: Net income (loss) $ 273,113 $ (77,203) Adjustments to reconcile net income (loss) to cash flows from operating activities: Depreciation and amortization 445, ,960 Provision for repair and replacement reserve (327,784) 17,218 (Increase) decrease in: Accounts receivable - tenant (9,763) (3,110) Accounts receivable - HUD 30,539 (19,199) Prepaid expenses 5,695 2,082 Increase (decrease) in: Accounts payable - operations (13,738) 57,296 Accrued interest payable (6,000) (7,000) Member fees payable 88,357 (196,114) Due to managing agent 4 (1,415) Miscellaneous current liabilites 0 (3,214) Prepaid rent 4,927 3,975 Total adjustments 217, ,479 Net cash provided by (used for) operating activities 490, ,276 Cash flows from investing activities: (Increase) decrease in NJHMFA restricted deposits and funded reserves 303,263 (245) (Increase) decrease in other restricted deposits and funded reserves (39,288) (8,546) Purchase of rental property and equipment (318,667) (39,243) Net cash provided by (used for) investing activities (54,692) (48,034) Cash flows from financing activities: Principal payments on mortgage payable (305,000) (335,000) Distributions to members (10,652) (34,557) Net cash provided by (used for) financing activities (315,652) (369,557) Continued on next page 8

11 STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Continued) Increase (decrease) in cash 120,058 (179,315) Cash - beginning of year 229, ,002 Cash - end of year $ 349,745 $ 229,687 Supplemental disclosure of cash flow information: Cash paid during the year for interest, net of interest subsidy of $278,977 in 2011 and $278,977 in 2010 $ 412,033 $ 425,565 Supplemental disclosure of non-cash investing and financing activities: Purchase of rental property and equipment included in accounts payable - operations $ 62,255 $ 0 See accompanying notes to financial statements 9

12 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND BACKGROUND AND ORGANIZATION The following represents certain background and organization information: Project name: Location of project: Number and type of residential units: Commercial space (if any): Type of entity: State of formation: New Brunswick Apartments New Brunswick, New Jersey 206 low income multifamily rental apartments None Limited Liability Company New Jersey Formation date: May, 2001 Scheduled termination of existence: December 31, 2052 (or earlier as provided in operating agreement) Project acquisition: December, 2002 Rehabilitation completion: October, 2003 Major/Non-Major HUD programs: Rent Supplement (RS) Contract under Section 8 program covering 24 units (non-major) Interest Reduction Payments (IRP) under Section 236(e)(2) (non-major) Housing Assistance Payments Contract (HAP) covering 43 units (major) Significant revenue source(s): HUD Interest Reduction Payments (IRP), Rent Supplement (RS) payments, Housing Assistance Payments (HAP), rental assistance payments from other government agencies on behalf of certain tenants and the tenants themselves Significant operating and regulatory agreements/restrictions: New Jersey Housing and Mortgage Financing Agency (NJHMFA) Bond and Low Income Housing Credit (LIHC) Regulatory Agreement through later of October 1, 2023 HUD 236(e)(2) Use Agreement through October 2028 Rent Supplement contract through October

13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND BACKGROUND AND ORGANIZATION, Continued Target occupancy: 206 units to be rented to tenants who must meet HUD Section 236(e)(2) requirements. 94% of the units are LIHC restricted. 2. SIGNIFICANT ACCOUNTING POLICIES Accounting Method - The Company reports on the accrual method of accounting for both financial and income tax reporting purposes. The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and the accounting policies and procedures specified by the New Jersey Housing and Mortgage Finance Agency (NJHMFA). The NJHMFA policies and procedures are substantially in accordance with accounting principles generally accepted in the United States of America except for the NJHMFA policies regarding the reporting of replacement reserve transactions. Replacement Reserve - NJHMFA policies require that 1) deposits to the replacement reserve be classified as an expense item in the statement of operations as well as a direct increase to members capital in the statement of members capital and 2) transfers from the replacement reserve be netted with the deposits in the expense item in the statement of operations as well as a direct decrease to members capital in the statement of changes in members capital. If the replacement reserve transactions were reported in accordance with accounting principles generally accepted in the United States of America (i.e. transactions are reported only as transfers between cash accounts), the following items would be increased (decreased): Members capital (as of December 31): Accumulated earnings (losses) Reserve for repairs and replacements $ 339,591 (339,591) $ 667,375 (667,375) Net effect on members capital $ 0 $ 0 Statement of operations (for the year ended December 31): Provision for repair and replacement reserve $ 327,784 $ (17,218) Net income (loss) $ (327,784) $ 17,218 Use of 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 and 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 vary from those estimates. The most significant estimate included in the preparation of the financial statement is related to assets lives. 11

14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND SIGNIFICANT ACCOUNTING POLICIES, Continued Rental Property and Equipment - Rental property and equipment are stated at cost and include $288,504 of interest that was capitalized through Depreciation is calculated using straight-line method over the estimated useful lives of the related assets as follows: Buildings and improvements Land improvements Appliances, flooring and equipment years 15 years 7 years Improvements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Upon disposal of depreciable property, the appropriate property accounts are reduced by related cost and accumulated depreciation. The resulting gains and losses are reflected in the Statements of Operations. The Company 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 tax credits and 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 2011 and Other Assets Other assets include deferred permanent mortgage financing costs in the amount of $1,306,649 which are amortized on the straight-line method over the term of the respective loans and tax credit allocation/compliance fees of $170,340 which are being amortized on the straight-line method over the 15 year term of the low-income tax credit compliance period. Cash - The Company considers all cash on hand, cash in banks and short term investments with an original maturity of three months or less to be cash for financial reporting purposes. For the purposes of reporting cash flows in the statement of cash flows, cash includes cash - operating and cash-entity. Accounts Receivable - The Company records accounts receivable in the balance sheet at the amount invoiced to the tenant or governmental agency adjusted for an allowance for doubtful accounts. The allowance for doubtful accounts is periodically estimated by management and includes all tenant accounts for which it appears there will be a problem with collection. Individual tenant receivables are deemed uncollectible and written off once reasonable collection efforts have been made or when the respective tenant is deceased. The Company does not have a material concentration of credit risk, with respect to accounts receivable, due to the generally short payment terms (i.e. rent is due at the beginning of the service month). In addition, the allowance for doubtful accounts is not significant. 12

15 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND SIGNIFICANT ACCOUNTING POLICIES, Continued Income Taxes - The Company does not pay federal or state income taxes on its income. Instead, the Company s income, deductions and other income tax attributes are reported to each member, based on their respective ownership, and included in their respective income tax returns. The Company follows the provisions of Financial Accounting Standards Board Accounting Standards Codification pertaining to accounting for uncertainty in income taxes. Federal and state tax authorities generally have the right to examine and audit the previous three years of tax returns filed. Any interest and penalties assessed to the Company are recorded in operating expenses ($0 for the years ended December 31, 2011 and 2010). Management is not aware of any uncertain tax positions requiring measurement or disclosure in these financial statements. Rental Income - Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. All leases between the Company and the tenants of the property are typically for one year or less and classified as operating leases. Rent increases must be approved by HUD and/or NJHMFA. Advertising - Advertising costs are expensed as incurred. Account Reclassification - Certain account balances at December 31, 2010 were reclassified to conform to account classifications used by the Partnership at December 31, These changes had no effect on reported results of operations or financial position. 3. RENTAL PROPERTY AND EQUIPMENT Rental property and equipment consists of the following at December 31: Land $ 1,757,524 $ 1,757,524 Land improvements 372, ,000 Building, improvements and components 13,944,249 13,729,064 Equipment, furniture and fixtures 442, ,277 16,516,787 16,135,865 Less: Accumulated depreciation (3,379,876) $13,136,911 (2,989,735) $ 13,146,130 13

16 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND MORTGAGE PAYABLE Mortgage payable consists of the following at December 31: A $14,940,000 first mortgage loan from the Middlesex County Improvement Authority (the MCIA) in the original amount of $14,940,000 funded with the proceeds of a multi-family housing mortgage revenue bonds Series 2002 (the bonds). The mortgage bears interest at 6.2% per annum for a term of 30 years (matures 2035). The loan requires monthly payments of interest and principal sufficient to meet the scheduled principal redemptions and is secured by a first mortgage on substantially all of the rights and assets of the Company. The bond reserves held by the mortgage trustee are held principally for debt servicing. The MCIA mortgage requires monthly deposits into the tax and insurance escrow and monthly deposits into a replacement reserve. The bonds are secured by a Deed of Trust and Security agreement, with a standby credit enhancement instrument provided by Fannie Mae. In addition, the IRP payments are forwarded directly to the bond trustee to be used for applicable debt servicing. $ 13,045,000 $13,350,000 Less: current portion 13,045, ,000 $ 12,720,000 13,350, ,000 $13,045,000 Future payments of principal consist of the following for the years ended December 31: Payments into Bond Bond Reserve Maturity 2012 $ 791,184 $ 325, , , , , , , , ,000 Thereafter 15,703,793 11,190,000 $ 19,692,891 $ 13,045,000 14

17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND MORTGAGE PAYABLE, Continued In addition to payments of principal and interest, the Company incurs the following fees related to its mortgage loan: Credit facility fee $ 6,167 $ 6,167 2.NJHMFA monthly service fee of $928 per month $ 11,140 $ 11, Bond servicer fee $126,863 $128,583 $144,170 $145, MEMBERS CAPITAL (DEFICIT) ACCOUNT The following represents certain ownership information: Name Percent interest Managing member: New Brunswick Apartments Management, LLC.001% Investment member: Columbia Housing/PNC Institutional Fund XVI, LP 99.99% Special Investor member: Columbia Housing SLP Corporation 0.00% The investment member s capital contribution was $4,530,416. The operating agreement provides for reimbursement to the investment member by the managing members for any subsequent tax credit adjustments or recapture that would reduce the annual tax credits below $548,540 per year. In general, profits and losses from operations are allocated to the members according to their percent interest. The following details the activity in the members capital (deficit) accounts based upon their respective profit and loss percentages: 15

18 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND MEMBERS CAPITAL (DEFICIT) ACCOUNT, Continued Members Managing Investment Total Balance - January 1, 2010 (374,605) 3,407,286 $ 3,032,681 Net loss (8) (77,195) (77,203) Distributions (34,557) (34,557) Reserve for repair and replacement 2 17,216 17,218 Balance - December 31, 2010 (374,611) 3,312,750 2,938,139 Net income , ,113 Distributions (10,652) (10,652) Reserve for repair and replacement (33) (327,751) (327,784) Balance - December 31, 2011 $ (374,617) $ 3,247,433 $ 2,872,816 Subject to lender and regulatory approval, cash flow (as defined in the operating agreement) from operations shall be applied as follows: First, to the investment member as payment of the investor services fee (cumulative) payable in the original annual amount of $7,500 in 2004, increasing 3% annually; Second, to the investment member or any affiliate thereof, for payment of any other fees, debts, liabilities, or obligations owed to any such person (including tax credit adjusters); Third, to the developer as payment of the deferred development fee until payment in full of the deferred development fee; Fourth, to the managing member as repayment of any outstanding operating deficit loans; Fifth, to the payment of the company management fee (non-cumulative) in the original annual amount of $7,500 (in 2004), increasing 3% annually; Sixth, to the managing member as payment of an annual incentive management fee (IMF) (non cumulative) in the amount of 12% of effective gross income as defined in the operating agreement; (however, in no event shall the IMF together with all other distributions to the managing member exceed 90% of net cash flow) and Seventh, any remaining net cash flow shall be distributed 90% to the managing member and 10% to the investment member. Gains, losses and cash flow from a sale or refinance shall be allocated according to the terms of the operating agreement. 16

19 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND RELATED PARTY TRANSACTIONS Related party transactions were as follows for the years ended December 31: Investor service fee (cumulative) to investor member, increasing by 3% annually, payable from available cash flow. $ 9,224 $ 8,958 Company management fee (non-cumulative) to the managing member, increasing by 3% annually, payable from available cash flow. $ 9,224 $ 8,958 Incentive management fee (non-cumulative) to managing member equal to 12% of effective gross revenue payable from available cash flow. However, the fee together with all other distributions to the managing member shall not exceed 90% of net cash flow. $ 255,353 $ 167,931 All receipts of the Company are deposited into a bank account in the name of the Company. The Company s expenses (excluding payroll and related expenses) are paid out of a central disbursement account which is held and operated by the management company. The expenses that are disbursed from this account are directly charged to and subsequently reimbursed by the Company. For administrative and economic efficiency purposes, the management company maintains a centralized payroll system and employee benefit programs for all employees of the entities that it manages. The actual payroll and benefit charges of the Company s employees are charged directly to the Company. Amounts due to related parties consist of the following at December 31: Investor service fee payable $ 9,226 $ 8,960 Company management fee payable $ 9,226 $ 8,960 Incentive management fee payable $ 255,756 $ 167, MANAGEMENT FEE The property is managed by Community Realty Management (CRM), an unrelated party, pursuant to a management agreement approved by HUD. For the year ended December 31, 2011, and 2010 the management agreement provided for a management fee of $73.78 and $71.08 per unit, respectively. In 2011 and 2010, a bonus fee of $4,500 and $5,000, respectively, payable to CRM was charged to operations, which was approved by NJHMFA. During 2011 and 2010, property management fees charged to operations totaled $186,888 and $180,704, respectively. CRM is also paid for accounting and bookkeeping fees which aggregated $11,340 in 2011 and $11,040 in

20 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND RESTRICTED DEPOSITS AND FUNDED RESERVES In connection with the project s mortgage loan agreements, the Company was required to establish the following reserve accounts that are maintained by Commerce Bank (the trustee) or NJHMFA: Tax and Insurance Escrow Funds - The Company makes monthly deposits into the tax and insurance escrow fund to be used for real estate taxes and mortgage insurance. Reserve for Replacements - This fund is used to finance the cost of repairs or replacements of major capital improvements. The Company must obtain NJHMFA s approval prior to disbursing the funds. The company is required to deposit $56,650 annually to the Reserve for Replacement fund. Bond Reserve The bond fund is used for the principal and interest payment on the Middlesex County Improvement Authority Bonds. In connection with the project s operating agreement, the Company was required to establish the following reserves that are maintained by the Company: Lender Prepayment & Reserve An initial deposit of $375,000 was required. The reserve may be used at the discretion of the special member, upon mortgage loan conversion to prepay the mortgage loan as deemed necessary to enable the project to maintain a debt service coverage of 120% as defined in the agreement. Any withdrawals from the reserve requires the approval of the special member and are subject to all lender and agency regulations. Environmental Insurance Reserve An initial deposit of $100,000 was required. The environmental insurance reserve is to be used to cover any deductible payments under the Company s environmental liability insurance policy. Any withdrawals from the reserve requires the approval of the managing member and the special member. Excess Income Reserve Upon acquisition, the Company acquired the excess income reserve of the seller entity. This money will be used for the project rehabilitation and replacement of project assets. Construction Escrow The construction escrow was established to hold the final retainage payment on the construction contract. Upon selection of the construction contract, the money will be released. 18

21 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND FEDERAL LOW INCOME HOUSING TAX CREDIT Each building of the project has qualified and been allocated low-income housing tax credits pursuant to Internal Revenue Code Section 42, which regulates the use of the project as to occupant eligibility and unit gross rent, among other requirements. Each building of the project must meet the provisions of these regulations during each of fifteen consecutive years in order to continue to qualify to receive the tax credits. Failure to comply with occupant eligibility and/or unit gross rent, or to correct noncompliance within a specified time period could result in recapture of previously taken low-income housing tax credits plus interest. Such potential noncompliance may require an adjustment to the contributed capital by the investment member. Following is the federal low income housing tax credit information for the project: Status: Forms 8609 received Maximum annual credit: $548,540 Set-aside: 40/60 Tax credit delivery period: 2003 through OTHER COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS Under the terms of an interest reduction payment (IRP) contract with HUD Section 236, the Company will receive interest reduction payments in monthly installment up to a maximum of $278,977 per year through October 1, 2023, in exchange for agreeing to limit the rents charged on 206 units to the greater of 30% of the tenants income, or a basic rental sufficient to meet operating cash requirements. During 2011 and 2010, the Company received $278,977 and $278,977, respectively. The Company receives its rental income from individual tenants and from the U.S. Department of Housing and Urban Development (HUD) under a Section 8 Project-Based Housing Assistance Payments Contract and Rent Supplement Contract. Rental assistance received from HUD for 2011 and 2010 aggregated $1,932,242 and $1,716,502, respectively. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company also maintains escrows and reserve balances on deposit with the bonds trustee and NJHMFA, which are not covered by Federal Deposit Insurance. These financial instruments potentially subject the Company to a concentration of credit risk. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents or on escrow and reserve funds. The operating agreement stipulates that the managing member shall guarantee and fund any operating deficits for a period ending on the 3 rd anniversary of construction completion. The maximum guarantee is $1,000,000 which is reduced by $333,333 per year. Advances to the Company for any operating deficits shall be classified as an operating deficit loan, the repayment of which is provided for pursuant to the terms of the operating agreement. As of December 31, 2011, and 2010 there were no operating deficit loans. The third anniversary of construction completion was in 2007 and therefore the managing member no longer guarantees any operating deficits. 19

22 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND RECONCILIATION TO TAXABLE INCOME (LOSS) A reconciliation of financial statement net income (loss) to taxable income (loss) of the Company for the years ended December 31: Financial statement net income (loss) $ 273,113 $ (77,203) Adjustments: Provision for repair and replacement reserve (327,784) 17,218 Excess of depreciation and amortization for income tax purposes over financial reporting purposes (299,728) (109,002) Managing member fees 88,091 (196,383) 12. SUBSEQUENT EVENTS $ (266,308) $ (365,370) Management has evaluated subsequent events through the date of the auditor s report, the date which the financial statements were available for issue. 20

23 SUPPLEMENTAL DATA REQUIRED BY NJHMFA

24 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF REVENUE FOR THE YEARS ENDED DECEMBER 31, 2011 AND Rents Apartment gross potential rent $ 1,358,083 $ 1,480,509 Tenant assistance payments 1,932,242 1,716,502 Vacancy and concessions: dwelling unit rental (137,466) (160,933) Bad debt losses (4,449) (30,443) Net apartment rent 3,148,410 3,005,635 Service income Laundry machines 20,059 20,600 20,059 20,600 Financial income Income from investments 9,078 8,477 Late charges and other 5,771 3,993 Municipal reimbursement 35,768 35,450 Other (inc. damages, nsf, other fees and land settlement) 12,568 17,726 63,185 65,646 Total revenue $ 3,231,654 $ 3,091,881 21

25 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 ADMINISTRATIVE EXPENSES Stationary supplies $ 6,108 $ 5,635 Telephone 9,279 7,603 Dues and subscriptions 90 1,218 Postage 3,614 5,573 Other office expenses 12,587 13,689 Advertising 16,881 19,466 Inspection & other fees 9,898 5,265 Other professional services 6,824 0 Legal services (including land settlement) 4,076 6,490 Credit check fees 3,213 5,835 Auditing (year end) 13,500 12,475 Bookkeeping services 11,340 11,040 Miscellaneous administrative expenses 23,733 25,562 $ 121,143 $ 119,851 SALARIES AND RELATED CHARGES Superintendent and manager salaries $ 122,516 $ 133,069 Maintenance salaries 119, ,969 Office and administrative salaries 104, ,504 Employee benefits (pension, medical, etc.) 52,485 48,949 Employer's payroll taxes 32,836 30,084 Workmen's compensation 15,022 14,739 $ 447,252 $ 430,314 Continued on next page 22

26 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Continued) MAINTENANCE AND REPAIRS Carpentry $ 4,929 $ 5,037 Plumbing 23,375 15,638 Electrical 11,224 7,618 Windows and glass Vehicle and equipment 1,328 1,678 Snow removal 3,311 3,119 Painting and decorating 24,689 19,356 Janitorial supplies 1,786 2,481 HVAC supplies 26,188 17,507 Miscellaneous maintenance supplies 11,294 9,065 Kitchen equpiment 6,238 3,045 Other 5,226 15,234 $ 120,514 $ 100,120 MAINTENANCE CONTRACTS Rubbish removal $ 37,518 $ 37,048 Grounds, parking, and landscaping 33,156 39,155 Cleaning 7,481 5,184 Security 2,451 7,032 Exterminating 35,046 46,181 HVAC 5,086 14,119 Painting and decorating 152, ,950 Other maintenance contracts 32,041 19,210 $ 305,403 $ 314,879 UTILITY EXPENSES Water $ 134,088 $ 107,343 Sewer charges 143, ,771 Electricity 52,722 52,467 Gas 120, ,053 $ 451,103 $ 416,634 23

27 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF CHANGES IN FIXED ASSET ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 2011 FIXED ASSETS AT COST Balance at Other changes Balance at January 1, 2011 Additions Deductions (explain) December 31, 2011 Land $ 1,757,524 $ 0 $ 0 $ 0 $ 1,757,524 Land improvements 346,000 26, ,846 Building and improvements 13,729, , ,944,249 Furniture and equipment - portable 303, , ,168 $ 16,135,865 $ 380,922 $ 0 $ 0 $ 16,516,787 24

28 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF CHANGES IN FIXED ASSET ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 2011 (Continued) 0 DEPRECIATION RESERVE NET BOOK VALUE Balance at Other changes Balance at Carrying value at January 1, 2011 Additions Deductions (explain) December 31, 2011 December 31, 2011 Land $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,757,524 Land improvements 167,236 23, , ,648 Building and improvements 2,541, , ,898,211 11,046,038 Furniture and equipment - portable 281,045 9, , ,701 $ 2,989,735 $ 390,141 $ 0 $ 0 $ 3,379,876 $ 13,136,911 25

29 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF CHANGES IN RESERVE ACCOUNT BALANCES FOR THE YEAR ENDED DECEMBER 31, Balance at Other changes Interest Balance at January 1, 2011 Deposits Withdrawals (explain) earned December 31, 2011 Replacement reserve $ 600,522 $ 0 $ (303,640) $ 0 $ 377 $ 297,259 Real estate tax escrow Insurance escrow Total NJHMFA escrow and reserves 601,056 0 (303,640) ,793 Replacement reserve 66,853 56,650 (81,332) ,332 Real estate tax escrow 47, ,469 (335,979) ,828 Insurance escrow 84,616 34,763 (37,463) ,916 Bond reserves 663,879 1,023,553 (1,008,885) 0 7, ,769 Lender reserve 709,373 43, , ,220 Environmental insurance reserve 102, ,352 Excess income reserve 1,948 11,101 (12,925) Construction escrow 10, ,225 Total other reserves 1,686,478 1,507,218 (1,476,584) 0 8,654 1,725,766 $ 2,287,534 $ 1,507,218 $ (1,780,224) $ 0 $ 9,031 $ 2,023,559 26

30 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF RECEIVABLES (OTHER THAN TENANTS) DECEMBER 31, 2011 AND Accounts receivable - subsidy $ 31,279 $ 61,818 $ 31,279 $ 61,818 27

31 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF LOANS, NOTES AND MORTGAGES PAYABLE TO OTHER THAN NJHMFA DECEMBER 31, 2011 AND Middlesex County Improvement Authority $ 13,045,000 $ 13,350,000 $ 13,045,000 $ 13,350,000 28

32 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES DECEMBER 31, 2011 AND AP - operations - HD Supply Facilities Maintenance $ 3,137 $ 0 AP - operations - Waste Manangement Inc 2,957 2,870 AP - operations - Welcome Home America, Inc. 0 1,263 AP - operations - Snelling Staffing Services 0 2,656 AP - operations - Western Pest Services 1,970 1,605 AP - operations - Birdsall 2,131 1,115 AP - operations - Central Wholesalers 5,645 0 AP - operations - For Rent Magazine 1,382 0 AP - operations - Frederick's Heating & A/C LLC 1,947 0 AP - operations - GPH Inc 1,605 0 AP - operations - Home Depot Credit Services 1,085 0 AP - operations - Karlin, Tal 1,024 0 AP - operations - Montclair Supply Corp 9,261 0 AP - operations - Nick Radeos Painting 2,300 0 AP - operations - Quality Cleaning Services 2,028 0 AP - operations - Sherwin Williams 7,519 3,750 AP - operations - Woodruff Energy US, LLC 5,954 0 AP - operations - City of New Brunswick 0 29,369 AP - operations - Other Vendors (under $1,000) 6,559 8,227 AP - operations - Arias Machine, Inc. 62,255 0 AP - operations - Public Service Electric and Gas Co. 0 15,510 AP - operations - J.C. Ehrlich Co., Inc. 0 3,877 Total Accounts payable - operations 118,759 70,242 Accrued interest 275, ,000 Member fees payable 274, ,851 Due to managing agent 10,059 10,055 Prepaid rent 19,456 14,529 $ 697,482 $ 561,677 29

33 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF COMPUTATION OF MANAGING AGENT FEE FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 Management Fee Calculation Total number of units Fee per unit $ $ Monthly management fee 15,199 14,642 Number of months in reporting period Fee for the months January - December $ 182,388 $ 175,704 Bounus management fee 4,500 5,000 $ 186,888 $ 180,704 30

34 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF COMPUTATION OF REAL ESTATE TAX EXPENSE FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 ACCRUED PROPERTY TAX ACTIVITY Real estate taxes payable at January 1 $ 0 $ 0 Real estate taxes incurred during the year 335, ,206 Real estate taxes paid during the year (335,979) (325,206) Real estate taxes payable (prepaid) at December 31 $ 0 $ 0 Note: The Company is not party to a PILOT agreement. 31

35 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF COMPUTATION OF CUMULATIVE RETURN ON CAPITAL PAYABLE FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 Transaction Cumulative Period of Activity Description of activity amount balance As part of the NJHMFA deed restriction and regulatory agreement, as long as the Owner funds and maintains an operating reserve account equal to six months of operating expenses, the return on equity restrictions shall be suspended. Annual cash distributions are limited by agreements between the Company and the Agency to HUD's limit of $453,042, which represents 10% of the initial equity investment, to the extent surplus cash as defined by HUD is available. Surplus cash per HUD as of December 31, 2011 was $294,

36 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF RELATED PARTY TRANSACTIONS AND CASH DISTRIBUTIONS TO MEMBERS FOR THE YEARS ENDED DECEMBER 31, 2011 AND Related party transactions: New Brunswick Apartment Management LLC Company management fee $ 9,224 $ 8,958 Incentive management fee 255, ,931 $ 264,577 $ 176,889 Columbia Housing/PNC Institutional Fund XVI LP Investor service fee 9,224 8,958 $ 9,224 $ 8,958 Cash distributions to the members: Columbia Housing/PNC Institutional Fund XVI, LP $ 10,652 $ 34,557 Columbia Housing SLP Corporation 0 0 New Brunswick Apartment Management LLC 0 0 $ 10,652 $ 34,557 Payment of entity fees (deemed payment of cash distributions): State of New Jersey New Jersey State filing fee $ 450 $ 0 New Brunswick Apartment Management LLC Company management fee 8,958 8,689 Incentive management fee 167, ,583 Columbia Housing/PNC Institutional Fund XVI, LP Investor service fee 8,958 8,689 $ 185,894 $ 381,961 33

37 SUPPORTING DATA REQUIRED BY NJHMFA SCHEDULE OF CASH FLOW AVAILABLE FOR PAYMENT OF NJHMFA AND/OR CDA "CASH FLOW" LOANS FOR THE YEAR ENDED DECEMBER 31, 2011 Please refer to footnote 3 of the financial statements. The partnership does not have any "cash flow" loans from NJHMFA or CDA. Accordingly, this schedule is not applicable. 34

38 Salmin, Celona, Wehrle & Flaherty, LLP Certified Public Accountants 1170 chili avenue rochester, ny / 279 / 0120 fax 585 / 279 / postmaster@scwf-cpa.com 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 Members New Brunswick Apartments, LLC We have audited the financial statements of New Brunswick Apartments, LLC (a limited liability company) as of and for the year ended December 31, 2011, and have issued our report thereon dated February 27, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered New Brunswick Apartments, LLC s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Entity s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Entity s internal control over financial reporting. 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 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. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether New Brunswick Apartments, LLC 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 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 our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 35 The. Never Underestimate The Value. Members of the American Institute of Certified Public Accountants

39 Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters New Brunswick Apartments, LLC Page 2 In addition, during the performance of our audit of the financial statements of New Brunswick Apartments, LLC, we reviewed the following on a test basis: 1. Reports required by HUD for timely filing and accuracy; 2. The validity of the Section 8 contract and amendments thereto; 3. The accuracy of the maximum chargeable rents; 4. The qualifications of the tenants as to admission and their required monthly contributions; 5. The certification and recertification of tenants; and 6. The files located at the project and the managing agent s office for adequacy. As a result of our review of the items noted above, nothing came to our attention that would invalidate the future and uninterrupted receipts of the federal subsidies, under existing rules and regulations. This report is intended solely for the information and use of the members, management, and the New Jersey Housing and Mortgage Finance Agency and should not be used by anyone other than these specified parties. Salmin, Celona, Wehrle and Flaherty, LLP Salmin, Celona, Wehrle and Flaherty, LLP Rochester, New York February 27,

40 SCHEDULE OF FINDINGS AND QUESTIONED COSTS DECEMBER 31, 2011 No findings requiring disclosure were noted based on the audit procedures performed. 37

41 AUDITOR S COMMENTS ON AUDIT RESOLUTION MATTERS RELATING TO HUD PROGRAMS DECEMBER 31, 2010 There were no findings noted during the 2010 audit that required disclosure in the schedule of findings and questioned costs. 38

42 Salmin, Celona, Wehrle & Flaherty, LLP Certified Public Accountants 1170 chili avenue rochester, ny / 279 / 0120 fax 585 / 279 / postmaster@scwf-cpa.com February 27, 2012 Mr. Michael Simmons Community Realty Management, Inc 36 Main Street Pleasantville, New Jersey Re: New Brunswick Apartments, LLC Dear Mr. Simmons: This letter is written to communicate our findings as required by New Jersey Housing and Mortgage Finance Agency (NJHMFA) based on our audit for the year ended December 31, Please note that, based on our audit procedures performed (including inquiries of management), we noted the following: In performing our audit procedures we did not become aware of any reportable conditions as a result of our engagement. It appears that federal, state and local income and payroll tax returns were filed on time and the related tax payments were made on a timely basis. Very truly yours, John F. Norton John F. Norton, CPA The. Never Underestimate The Value. Members of the American Institute of Certified Public Accountants