DIAKONIA HOUSING, INC. (AN INDIANA NOT-FOR-PROFIT CORPORATION) dba LONGFELLOW PLAZA HUD PROJECT NO

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1 (AN INDIANA NOTFORPROFIT CORPORATION) dba LONGFELLOW PLAZA HUD PROJECT NO REPORT ON AUDIT OF FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION AND COMPLIANCE AND INTERNAL CONTROL YEARS ENDED JULY 31, 2017 AND 2016 Program: Section 207 pursuant to Section 223(f) of the National Housing Act accompanied with a Section 8 Housing Assistance Payments Contract

2 (AN INDIANA NOTFORPROFIT CORPORATION) TABLE OF CONTENTS Page Independent auditor s report 12 Financial statements Statements of financial position 34 Statements of profit and loss changes in net assets 56 Statements of changes in net assets 7 Statements of cash flows 89 Notes to financial statements 1020 Accompanying information for the year ended July 31, 2017 Supplemental information 2135 Schedule of expenditures of federal awards 36 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 3738 Independent auditor's report on compliance for each major program and on internal control over compliance required by the Uniform Guidance 3940 Summary of auditor s results 4142 Corrective action plan 43 Summary schedule of prior audit findings 44 Management company certification 45 Certification of officers 46

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors of Diakonia Housing, Inc. (An Indiana NotForProfit Corporation) Report on the Financial Statements We have audited the accompanying financial statements of Diakonia Housing, Inc., which comprise the statements of financial position as of July 31, 2017 and 2016, and the related statements of profit and loss changes in net assets, changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our 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 audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to Diakonia Housing, Inc. s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Diakonia Housing, Inc. s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Diakonia Housing, Inc. Page Two Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diakonia Housing, Inc. as of July 31, 2017 and 2016, 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. Other Matters Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information shown on pages 21 to 35 is presented for purposes of additional analysis as required by the Uniform Financial Reporting Standards issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General, and is not a required part of the financial statements. The accompanying schedule of expenditures of federal awards, as required by the Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 15, 2017, on our consideration of Diakonia Housing, Inc. s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Diakonia Housing, Inc. s internal control over financial reporting and compliance. October 15, 2017 Carmel, Indiana Dauby O Connor & Zaleski, LLC Certified Public Accountants 2

5 (AN INDIANA NOTFORPROFIT CORPORATION) ASSETS STATEMENTS OF FINANCIAL POSITION JULY 31, 2017 AND Current assets Cash and cash equivalents $ 128,562 $ 66,198 Accounts receivable residents 1,185 1,986 Prepaid expenses 8,528 12,125 Total current assets 138,275 80,309 Deposits held in trustfunded Resident security deposits 31,092 28,908 Restricted deposits and funded reserves Escrow deposits 28,642 3,372 Reserve for replacements 297, ,923 Other reserves repairs escrow 41,242 1,873,804 Total restricted deposits and funded reserves 366,950 2,149,099 Property and equipment Land and land improvements 129,016 81,500 Buildings and improvements 4,417,488 3,304,317 Building equipment (portable) 64,287 64,287 Furnishings 1,204,760 66,908 Office furniture and equipment 20,518 20,518 Maintenance equipment 10,763 10,763 Construction in progress 603,281 5,846,832 4,151,574 Less accumulated depreciation (2,940,352) (2,771,138) Total property and equipment 2,906,480 1,380,436 Other assets Miscellaneous other assets donations (temporarily restricted) 1, Total assets $ 3,444,005 $ 3,639,379 See notes to financial statements 3

6 (AN INDIANA NOTFORPROFIT CORPORATION) STATEMENTS OF FINANCIAL POSITION (CONTINUED) JULY 31, 2017 AND 2016 LIABILITIES AND NET ASSETS Current liabilities Accounts payable operations $ 36,286 $ 35,321 Due to RHFFI 39,669 44,318 Accounts payable HUD 11,679 5,876 Accrued wages payable 10,163 9,484 Accrued payroll taxes payable Accrued management fee payable 749 6,317 Accrued interest mortgage note payable 11,838 12,020 Current portion of mortgage note payable 65,372 63,158 Deferred laundry contract 5,444 7,621 Deferred cable contract 4,499 5,500 Prepaid revenue 3,573 3,689 Total current liabilities 189, ,712 Deposits liabilities Resident security deposits 31,092 28,908 Long term liabilities Mortgage note payable 4,117,625 4,180,783 Less current portion (65,372) (63,158) Less unamortized debt issuance costs (192,477) (197,988) Residual receipts note payable 481, ,286 Developer fee payable 41, ,622 Total long term liabilities 4,382,297 4,580,545 Total liabilities 4,603,036 4,803,165 Net assets Net assets unrestricted (1,160,239) (1,164,413) Net assets temporarily restricted 1, Total net assets (1,159,031) (1,163,786) Total liabilities and net assets $ 3,444,005 $ 3,639,379 See notes to financial statements 4

7 (AN INDIANA NOTFORPROFIT CORPORATION) STATEMENTS OF PROFIT AND LOSS CHANGES IN NET ASSETS YEARS ENDED JULY 31, 2017 AND Rent revenue gross potential 5120 $ 350,994 $ 386,587 Tenant assistance payments , ,313 Rent revenue stores and commercial Garage and parking spaces 5170 Flexible subsidy revenue 5180 Rental Miscellaneous rent revenue 5190 revenue Excess rent 5191 Rent revenue/insurance 5192 Special claims revenue ,221 8,520 Retained excess income 5194 Lease revenue (nursing home or section 232B&C or AL) 5195 Total rental revenue potential at 100% occupancy 5100T $ 948,500 $ 945,720 Apartments 5220 ( 38,860 ) ( 112,329 ) Stores and commercial 5240 ( ) ( ) Vacancies Rental concessions 5250 ( ) ( ) Garage and parking spaces 5270 ( ) ( ) Miscellaneous 5290 ( ) ( ) Total vacancies 5200T ( 38,860 ) ( 112,329 ) Net rental revenue rent revenue less vacancies 5152N $ 909,640 $ 833,391 Nursing homes and other elderly care revenues 5300 $ $ Financial revenue property operations Revenue from investments residual receipts 5430 Financial Revenue from investments reserve for replacements revenue Revenue from investments miscellaneous Total financial revenue 5400T $ 742 $ 755 Laundry and vending ,242 5,851 Resident charges ,220 Interest reduction payments revenue 5945 Other Expiration of gift donor restrictions 5960 revenue Gifts Miscellaneous revenue ,377 3,197 Total other revenue 5900T 12,680 10,418 Total revenue 5000T $ 923,062 $ 844,564 Conventions and meetings ,270 Management consultants 6204 Advertising and marketing ,846 5,920 Other renting expenses ,910 1,841 Office salaries ,325 6,462 Office expenses ,223 17,837 Office or model apartment rent 6312 Admin. Management fee ,400 63,368 expenses Manager or superintendent salaries ,302 29,451 Administrative rent free unit 6331 Legal expenses (property) ,373 Audit expenses ,150 5,850 Bookkeeping fees/accounting services ,340 11,340 Bad debts ,294 3,044 Miscellaneous administrative expenses ,440 10,637 Total administrative expenses 6263T $ 196,503 $ 157,020 Fuel oil/coal 6420 Electricity ,629 96,460 Utilities Water ,957 7,916 expenses Gas ,826 1,547 Sewer ,906 15,585 Total utilities expense 6400T $ 127,318 $ 121,508 See notes to financial statements 5

8 (AN INDIANA NOTFORPROFIT CORPORATION) Operating and maint. expenses Taxes and insurance Financial expenses Entity income and expenses Change in net assets from operations STATEMENTS OF PROFIT AND LOSS CHANGES IN NET ASSETS (CONTINUED) YEARS ENDED JULY 31, 2017 AND Payroll ,813 67,917 Supplies ,532 25,371 Contract ,056 49,713 Operating and maintenance rent free unit 6521 Garbage and trash removal ,676 3,733 Security payroll/contract ,513 2,434 Security rent free unit 6531 Heating/cooling repairs and maintenance ,357 Snow removal ,569 Vehicle and maint. equipment operation and repairs 6570 Lease expense 6580 Miscellaneous operating and maintenance expenses ,532 4,117 Total operating and maintenance expenses 6500T $ 144,953 $ 158,211 Real estate taxes 6710 Payroll taxes (property's share) ,991 8,446 Property and liability insurance (hazard) ,825 25,644 Fidelity bond insurance 6721 Workmen's compensation ,779 9,306 Health insurance and other employee benefits ,650 26,585 Miscellaneous taxes, licenses, permits and insurance ,589 4,003 Total taxes and insurance 6700T $ 84,834 $ 73,984 Interest on first mortgage (or bonds) payable , ,865 Interest on other mortgages 6825 Interest on notes payable (longterm) 6830 Interest on notes payable (shortterm) 6840 Interest on capital recovery payment 6845 Mortgage insurance premium/service charge ,031 4,676 Miscellaneous financial expenses 6890 Total financial expenses 6800T $ 157,805 $ 162,541 Nursing homes and other elderly care expenses ,680 40,137 Total cost of operations before depreciation 6000T $ 749,093 $ 713,401 Profit (loss) before depreciation 5060T $ 173,969 $ 131,163 Depreciation expense ,214 81,932 Amortization expense 6610 Operating profit or (loss) 5060N $ 4,755 $ 49,231 Entity revenue 7105 Officer's salaries 7110 Incentive performance fee 7115 Legal expenses 7120 Federal, state, and other income taxes 7130 Interest on notes payable 7141 Interest on mortgage payable 7142 Other expenses 7190 Total entity net (income) expense 7100T $ $ Profit or loss (net income or loss) $ 4,755 $ 49,231 Change in unrestricted net assets from operations ,174 49,175 Change in temporarily restricted net assets from operations Change in permanently restricted net assets from operations 3249 Change in total net assets from operations 3250 $ 4,755 $ 49,231 Part II 1. Total mortgage (or bond) principal payments required during the audit year [12 monthly payments]. This applies to all direct loans and HUDheld and fully insured mortgages. $ 63,158 $ 10, Total of 12 monthly deposits in the audit year into the Reserve for Replacements account, as required by the Regulatory Agreement, even if payments may be temporarily suspended or reduced. $ 25,000 $ 41, Reserves for Replacements, or Residual Receipts and Releases which are included as expense items on this Profit and Loss Statement. $ $ 4. Property Improvement Reserve Releases under the Flexible Subsidy Program that are included as expense items on this Profit and Loss Statement. $ $ See notes to financial statements 6

9 (AN INDIANA NOTFORPROFIT CORPORATION) STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED JULY 31, 2017 AND 2016 Temporarily Unrestricted Restricted Total Balance, August 1, 2015 $ (1,213,588) $ 571 $ (1,213,017) Change in net assets 49, ,231 Balance, July 31, 2016 (1,164,413) 627 (1,163,786) Change in net assets 4, ,755 Balance, July 31, 2017 $ (1,160,239) $ 1,208 $ (1,159,031) See notes to financial statements 7

10 (AN INDIANA NOTFORPROFIT CORPORATION) STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31, 2017 AND Cash flow from operating activities Revenue: Rental revenue $ 913,834 $ 847,623 Financial Gifts Other revenue 8,852 7,091 Total revenue 924, ,619 Expenditures: Administrative (72,049) (44,191) Management fees (67,968) (53,880) Utilities (121,227) (120,689) Salaries and wages (129,761) (105,999) Operating and maintenance (76,998) (99,226) Property insurance (23,825) (24,358) Miscellaneous taxes and insurance (63,443) (36,784) Other operating expenses (37,680) (40,282) Interest on mortgage note payable (143,245) (157,694) Mortgage insurance premium (5,434) (16,801) Total expenditures (741,630) (699,904) Net cash provided by (used in) operating activities 182, ,715 Cash flow from investing activities Purchase of property and equipment (1,833,645) (426,037) Net change in escrow deposits (25,270) (3,372) Net change in reserve for replacements (25,143) (54,581) Net change in other reserves repairs escrow 1,832,562 (1,873,804) Net change in miscellaneous other assets donations (temporarily restricted) (581) (56) Net cash provided by (used in) investing activities (52,077) (2,357,850) Cash flow from financing activities Principal payments on mortgage note payable old (1,784,118) Proceeds from mortgage note payable new 4,191,100 Principal payments on mortgage note payable new (63,158) (10,317) Advances from RHFFI 1,690, ,041 Repayments to RHFFI (1,694,762) (97,483) Increase in unamortized debt issuance costs (200) (179,132) Net cash provided by (used in) financing activities (68,007) 2,241,091 Net change in cash and cash equivalents 62,364 38,956 Cash and cash equivalents at beginning of year 66,198 27,242 Cash and cash equivalents at end of year $ 128,562 $ 66,198 See notes to financial statements 8

11 (AN INDIANA NOTFORPROFIT CORPORATION) Reconciliation of change in net assets to net cash provided by (used in) operating activities Change in net assets $ 4,755 $ 49,231 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 Depreciation 169,214 81,932 Amortization of debt issuance costs 5,711 1,904 Changes in: Accounts receivable residents 801 1,092 Accounts receivable HUD 10,803 Prepaid expenses 3,597 (10,839) Resident security deposits (2,184) (1,971) Accounts payable operations 965 (5,213) Accounts payable HUD 5,803 5,876 Accrued liabilities (4,922) 26,334 Accrued interest mortgage note payable (182) (1,733) Resident security deposits payable 2,184 1,971 Prepaid revenue (116) (495) Deferred laundry contract (2,177) (2,177) Deferred cable contract (1,001) (1,000) Total adjustments 177, ,484 Net cash provided by (used in) operating activities $ 182,448 $ 155,715 Supplemental information Cash flow from investing activities related to the purchase of property and equipment for the year ended July 31, 2017 includes $138,387, which was included in developer fee payable at July 31, See notes to financial statements 9

12 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS YEARS ENDED JULY 31, 2017 AND 2016 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Diakonia Housing, Inc. (the Corporation ) is a NotForProfit Corporation formed in accordance with the notforprofit statutes of the state of Indiana. The Corporation was formed for the purpose of operating a 100 unit community known as Longfellow Plaza (the Property ) located in Anderson, Indiana, which provides housing for low income elderly persons pursuant to Section 202 of the National Housing Act, as amended. On April 6, 2016, the original mortgage was refinanced under Section 207 pursuant to Section 223(f) of the National Housing Act, as amended. The Corporation entered into a Regulatory Agreement with the U.S. Department of Housing and Urban Development ( HUD ) which contains, among other things, restrictions on transferring any of the Corporation's property, assigning the rights to manage or receive the rents and profits of the property or assuming additional indebtedness. Pursuant to the Regulatory Agreement, the Property must maintain all units as affordable to low income elderly persons. The Property is obligated to recertify resident eligibility on an annual basis. The Property receives rent subsidies through a Housing Assistance Payments ("HAP") Contract with HUD. The contract is for a period of twenty years, expiring March 31, 2036, and provides subsidies to eligible residents to enable such residents to live in safe, adequate housing facilities they could not otherwise afford. Provisions of the contract establish maximum annual assistance payments by HUD to the Property. The Corporation can request from HUD an amount equal to 80% of contract rent during periods that the unit is vacant if certain conditions are met, but not to exceed 60 days. Claims must be submitted within 180 days of the date the unit was available for occupancy and should be submitted only after the claim period has ended. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation of the financial statements The primary intent of the financial statements is for the U.S. Office of Management and Budget. The financial statements will also be used by HUD; therefore, the presentation and account descriptions have been established to conform to their reporting guidelines. In addition, the financial statements are in conformity with the provisions required by the NotforProfit Entities Presentation of Financial Statements topic of the FASB Accounting Standards Codification ("ASC") This statement established standards for external financial reporting for NotforProfit Organizations. The NotforProfit Entities Presentation of Financial Statements topic of the FASB ASC primarily affects the display of the financial statements and requires that the amounts for each of three classes of net assets unrestricted, temporarily restricted and permanently restricted be displayed in an aggregate statement of financial position and the amounts of change in each of those classes of net assets be displayed in a statement of changes in net assets. 10

13 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of preparation of the financial statements (continued) The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Assets and liabilities and revenues, expenses, gains and losses are classified based on the existence or absence of donorimposed restrictions. Accordingly, assets of the Corporation and changes therein are classified and reported as follows: Unrestricted assets Assets that are not subject to donorimposed stipulations. These are available to support the Corporation s activities and operations at the discretion of the Board of Directors. Temporarily restricted assets Assets subject to donorimposed stipulations that will be met either by actions of the donor, the Corporation and/or the passage of time. Permanently restricted assets Assets subject to donorimposed stipulations that the corpus must be maintained permanently by the Corporation. The donors of these assets permit the Corporation to use all or part of the income or gains earned on related investments for general (unrestricted) or specific purposes (temporarily restricted). At July 31, 2017 and 2016, $1,208 and $627, respectively, of assets held by the Corporation are classified as temporarily restricted. All other assets are classified as unrestricted. Cash and cash equivalents For the statements of cash flows, all unrestricted investments with original maturities of three months or less are cash equivalents. At July 31, 2017 and 2016, cash and cash equivalents consist of an unrestricted checking account and a petty cash fund. Resident receivable and bad debt policy Resident rent charges for the current month are due on the first of the month. Residents who are evicted or moveout are charged with damages, if applicable. Resident receivables consist of amounts due for rental income or the charges for damages. The Corporation does not accrue interest on the resident receivable balances. Resident receivables are charged to bad debt expense when they are determined to be uncollectible based upon a periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debts; however, the effect of using the direct writeoff method is not material to the financial statements for the years ended July 31, 2017 and Bad debts expensed for the years ended July 31, 2017 and 2016 totaled $2,294 and $3,044, respectively. 11

14 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and equipment Property and equipment are recorded at cost and are depreciated using the straightline method over the estimated useful life, which ranges from 5 40 years. Deductions are made for retirements resulting from renewals or betterments. The Corporation is subject to the provisions of the Impairment or Disposal of LongLived Assets topic of the FASB ASC Impairment or Disposal of LongLived Assets has no retroactive impact on the Corporation s financial statements. The standard requires impairment losses to be recorded on longlived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. In such cases, the carrying value of assets to be held and used are adjusted to their estimated fair value and assets held for sale are adjusted to their estimated fair value less selling expenses. No impairment losses were recognized during the years ended July 31, 2017 and Change in accounting principle During the year ended July 31, 2017, the Corporation adopted the InterestImputation of Interest topic of the FASB ASC ("ASC 83530") related to the presentation of debt issuance costs. In previous periods, debt issuance costs were presented as a deferred asset on the statements of financial position. Effective for fiscal year ends beginning after December 15, 2015, the provisions of ASC require debt issuance costs to be presented as a reduction of the outstanding debt. There has been no change to the recognition and measurement of the debt issuance costs after initial recognition, therefore these costs will continue to be amortized over the life of the respective mortgage using the straightline method. However, the amortization of debt issuance costs is now required to be reported as a component of interest expense. Generally accepted accounting principles require that the effective yield method be used to amortize debt issuance costs; however, the effect of using the straightline method is not material to the financial statements for the years ended July 31, 2017 and The change in accounting principle resulted in the following changes in previously reported balances: Previously Restated Reported Adjustment 2016 Unamortized costs, net $ 197,988 $ (197,988) $ Less unamortized debt issuance costs 197, ,988 Interest on first mortgage (or bonds) payable 155,961 1, ,865 Amortization expense 1,904 (1,904) 12

15 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Donated assets Donations of property and equipment and other assets are recorded as revenue at their estimated fair value at the date of donation. Such donations are reported as unrestricted revenue unless the donor has restricted the donated asset to a specific purpose. Assets with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment and other assets are reported as restricted revenue. Absent donor stipulations regarding how long these donated assets must be maintained, the Corporation reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. The Corporation reclassifies temporarily restricted net assets to unrestricted net assets at that time. During the years ended July 31, 2017 and 2016, $650 and $150 of funds were donated to the Corporation to be used for specific purposes, respectively. The funds are classified as temporarily restricted net assets until they are used in accordance with the donor's instructions. At July 31, 2017 and 2016, temporarily restricted net assets total $1,208 and $627, respectively. Revenue recognition The Corporation rents apartment units on a month to month basis and recognizes revenues when earned. Under the Regulatory Agreement, the Corporation may not increase rents charged to residents without prior HUD approval. Advertising costs Advertising costs are expensed as incurred and are included in advertising and marketing in the statements of profit and loss changes in net assets. Property taxes The Corporation has received tax exemption relating to property taxes. See Note 8. Concentration of credit risk The Corporation maintains several cash accounts at various financial institutions which are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. If the financial institution failed, the Corporation could be at risk for the portion of the accounts which exceed the insured limit. Management regularly monitors the financial condition of the banking institutions, along with their balances in cash and assets whose use is limited, and tries to keep this potential risk to a minimum. The Property received approximately 66% of the net rental revenue from HAP for the year ended July 31,

16 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of credit risk (continued) The Corporation s operations are concentrated in the multifamily real estate market. In addition, the Corporation operates in a heavily regulated environment. The operations of the Corporation are subject to the administrative directives, rules and regulations of federal, state and local regulatory agencies, including, but not limited to, HUD. Such administrative directives, rules and regulations are subject to change by an act of Congress or an administrative change mandated by HUD. Such changes may occur with little notice or inadequate funding to pay for the related cost, including the additional administrative burden, if any, to comply with a change. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with accounting standards 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair value The Corporation is subject to the provisions of the Fair Value Measurement topic of the FASB ASC which provides guidance for assets and liabilities which are required to be measured at fair value and requires expanded disclosure for fair value measurement. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value and does not require any new fair value measurements. The Fair Value Measurement did not have a material impact on the Corporation s financial statements for the years ended July 31, 2017 and Accounting for uncertainty in income taxes The Corporation is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and state income tax and has been classified as an other than private foundation. Accordingly, no provision for federal and state taxes on revenue and income has been recognized in the accompanying financial statements. Generally, the Federal and State tax returns were subject to examinations from the three years after the later of the original or extended due date or the date filed with the applicable tax authority. Subsequent events Management performed an evaluation of the Corporation s activity through October 15, 2017, the audit report date, and has concluded that there are no significant subsequent events requiring disclosure through the date these financial statements were available to be issued. 14

17 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 2FINANCING Mortgage note payable old The Corporation entered into a mortgage loan agreement with the Federal Housing Administration ( FHA ) under Section 202 of the National Housing Act, as amended. The original amount of the mortgage was $2,998,500. The loan agreement provided, among other items, for the following: a. A term of 40 years maturing December 2024; b. An interest rate of 9.25% per annum; c. Monthly principal and interest payments of $23,708; and d. Monthly deposits to a reserve fund for replacing assets of the Property. For the year ended July 31, 2016, interest expense was $109,816, and interest paid totaled $123,569. At July 31, 2016, accrued interest is $0. The liability of the Corporation under the mortgage loan was limited to the underlying value of the property and equipment collateral in addition to other amounts on deposit. On April 6, 2016, the mortgage note was paid in full with proceeds from the new mortgage note. Mortgage note payable new On April 6, 2016, the Corporation entered into a new mortgage note agreement with the Federal Housing Administration under Section 207 pursuant to Section 223(f) of the National Housing Act, as amended. The mortgage is serviced by Bellweather Real Estate Capital, LLC. The original amount of the mortgage is $4,191,100. The note agreement and related documents provide, among other items, for the following: a. A term of 35 years maturing in May 2051; b. An interest rate of 3.45% per annum; c. Monthly principal and interest payments of $17,200.23; d. Monthly deposits to a reserve fund for replacing assets of the Property; e. An initial deposit to the repair escrow of $1,873,188; f. Monthly deposits to the insurance escrow; and g. Prepayment penalties as set forth in the rider to the mortgage note. For the years ended July 31, 2017 and 2016, interest expense was $143,063 and $46,145, and interest paid totaled $143,245 and $34,125, all respectively. At July 31, 2017 and 2016, accrued interest totals $11,838 and $12,020, respectively. The liability of the Corporation under the mortgage loan is limited to the underlying value of the property and equipment collateral in addition to other amounts in deposit. 15

18 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 2FINANCING (CONTINUED) Annual principal payments for each of the next five years and thereafter are as follows: 2018 $ 65, , , , ,031 Thereafter 3,767,034 4,117,625 Debt issuance costs (192,477) Debt issuance costs $ 3,925,148 Financing costs of $200,092 were incurred in connection with refinancing the Corporation's mortgage note payable. For the years ended July 31, 2017 and 2016, amortization expense was $5,711 and $1,904, respectively. At July 31, 2017 and 2016, accumulated amortization is $7,615 and $1,904, respectively, which is included in interest on first mortgage (or bonds) payable on the statements of profit and loss changes in net assets. Estimated amortization expense for each of the next five years and thereafter is as follows: 2018 $ 5, , , , ,711 Thereafter 163,922 Residual receipts note payable $ 192,477 A residual receipts note payable for $481,286 was recorded on April 6, 2016 to RHF Foundation, Inc. ("RHFFI") and bears no interest. The Corporation was required to record the residual receipts note payable to satisfy past due payables and outstanding liabilities owed to related entities at the time of the refinancing. The residual receipts note payable was made up of $203,180 from accounts payable operations, $139,819 from accrued management fees payable, $30,673 from due to RHF, and $107,614 from due to FPM. The note payable is due May Payment on this note requires the approval of the U.S. Department of Housing and Urban Development and can only occur if there are residual receipts, as defined. The residual receipts note payable totaled $481,286 at July 31, 2017 and

19 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 3RESERVE FOR REPLACEMENTS, RESIDUAL RECEIPTS RESERVE, REPAIRS ESCROW AND DISTRIBUTIONS Pursuant to the terms of the Regulatory Agreement, the Corporation is required to make monthly deposits to the reserve for replacements fund. This fund is under the control of HUD. Disbursements from such fund may only be made after receiving the written consent of the Secretary of HUD. At July 31, 2017 and 2016, these funds amounted to $297,066 and $271,923, respectively. Pursuant to the terms of the Regulatory Agreement for the original mortgage note payable, no cash distributions may be made to nonprofit owners, nor can they incur obligations on behalf of the Corporation, to themselves or any officers, directors, stockholders, trustees, partners, beneficiaries under a trust, or any of their nominees without prior written approval of HUD. Surplus Cash as defined by HUD, existing at the end of the fiscal year must be deposited in a reserve for replacements fund in the name of the Corporation. As a result of the refinance, the Corporation entered into a new Regulatory Agreement which also regulates the application of cash flow from the operation of the Property. In accordance with the New Regulatory Agreement "Surplus Cash" must be deposited into the residual receipts reserve. In accordance with the HAP Contract, if HUD determines at any time that Property funds are more than the amount needed for Property operations, reserve requirements and permitted distributions, HUD may require excess to be placed in an account to be used to reduce HUD payments or for other Property purposes. Upon termination of the Contract, any excess funds must be remitted to HUD. Pursuant to the terms of the escrow agreement for noncritical deferred repairs, a repairs escrow reserve shall be established from proceeds of the new mortgage note payable. Pursuant to the terms of the agreement, the repairs escrow reserve funds shall be used to complete noncritical deferred repairs to the Property. At July 31, 2017 and 2016, these funds amounted to $41,242 and $1,873,804, respectively. NOTE 4RELATED PARTIES AND MANAGEMENT AGREEMENT The Corporation is managed by Foundation Property Management, Inc. (the Agent ), an affiliate to the Sponsor (Retirement Housing Foundation), for a fee based on an established rate of 7.88% of income collected plus additional fees of $3 per unit per month as stated in the management agent's certification. Effective December 10, 2015 the fee is based on as established rate of 6.61% of income collected capped at $49 per unit per month plus additional fees of $3 per unit per month as stated in the management agent's certification. Property management fees totaled $62,400 and $63,368 for the years ended July 31, 2017 and 2016, respectively. Accrued management fee payable is $749 and $6,317 as of July 31, 2017 and 2016, respectively. During the year ended July 31, 2016, $139,819 of accrued management fees were reclassed to a residual receipts note as a condition to the refinance. See Note 3. 17

20 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 4RELATED PARTIES AND MANAGEMENT AGREEMENT (CONTINUED) In accordance with HUD regulations, the Agent is also entitled to be reimbursed for the actual costs incurred for frontline management activities performed at the central office (as these activities are defined by HUD). During each of the years ended July 31, 2017 and 2016, the Agent was reimbursed $14,868 for frontline management functions performed at the central office. These reimbursements are included in the following accounts on the statements of profit and loss changes in net assets: Office salaries Bookkeeping fees/accounting services Retirement Housing Foundation (RHF) is one of the members/owners of Caring Communities, a Reciprocal Risk Retention Group ( Caring Communities ), an insurance company based in the District of Columbia. Caring Communities, an A.M. Best A rated company, is a reciprocal interinsurance exchange existing as an association captive under the laws of the District of Columbia. Caring Communities is a reciprocal insurer owned by its member insureds and reinsureds. The members control all the voting interests of Caring Communities. Caring Communities provides professional, general liability, excess automobile and excess employers liability insurance for individual policies to each member. Caring Communities utilizes reinsurance to spread the risk of loss to reinsurers. The Corporation purchases its professional liability insurance through this affiliate and the premiums are supported by competitive bids. HUD has determined that the use of a Risk Retention Group is permissible under their program requirements. Liability insurance expense is included in property and liability insurance on the statements of profit and loss changes in net assets. Previously, $21,874 and $85,740 of amounts due to FPM were reclassified from accounts payable operations and accrued management fees, respectively, to due to FPM on the statements of financial position. During the year ended July 31, 2016, $107,614 was reclassed to a residual receipts note as a condition to the refinance. At July 31, 2017 and 2016, $0 remains due to FPM. Previously, $30,673 of amounts due to RHF were reclassified from accounts payable operations to Due to RHF on the statements of financial position. During the year ended July 31, 2016, $30,673 was reclassed to a residual receipts note as a condition to the refinance. At July 31, 2017 and 2016, $0 remains due to RHF. Previously, RHF Foundation, Inc. ("RHFFI"), an affiliate of the Sponsor, paid financing costs in the amount of $20,760 on behalf of the Corporation. During the years ended July 31, 2017 and 2016, RHFFI paid an additional $1,690,113 and $121,042, respectively, for financing costs and capital improvements. These advances may be repaid from the reserve for replacements, the repairs escrow reserve, or the residual receipts reserve with HUD approval. During the years ended July 31, 2017 and 2016, $1,694,762 and $97,483, respectively, were repaid using mortgage note payable proceeds and the repairs escrow reserve. At July 31, 2017 and 2016, $39,669 and $44,318 remains payable, respectively, and is included in due to RHFFI on the statements of financial position. 18

21 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 4RELATED PARTIES AND MANAGEMENT AGREEMENT (CONTINUED) The developer, Retirement Housing Foundation, earned a developer fee of $546,666 during the year ended July 31, 2016, in connection with overseeing the refinancing of the original mortgage and repairs being made to the Property. At July 31, 2017 and 2016, a developer fee of $41,235 and $179,622 remain payable, respectively. This amount will be paid from the reserve for replacements, the repairs escrow, or the residual receipts reserve with HUD approval. NOTE 5DEFERRED LAUNDRY CONTRACT Previously, the Corporation entered into a contract with JETZ Service Co., Inc. ("JETZ") in which JETZ paid the Corporation a decorating allowance of $10,887 to provide laundry facilities to the Property for five years. The Corporation will recognize the revenue on a straightline basis over the term of the contract. At July 31, 2017 and 2016, the deferred laundry contract totals $5,444 and $7,621, respectively. NOTE 6DEFERRED CABLE CONTRACT Previously, the Corporation entered into a contract with Comcast of Illinois/Indiana/Ohio, LLC ( Comcast ), in which Comcast paid the Corporation $10,000 to provide the Property cable services for a ten year period. The Corporation will recognize the revenue on a straight line basis over the ten year term of the contract. At July 31, 2017 and 2016, the deferred cable contract totals $4,499 and $5,500, respectively. NOTE 7MULTIFAMILY HOUSING SERVICE COORDINATOR The Corporation utilizes a multifamily housing service coordinator to provide assistance to residents. The Corporation funds the service coordinator program through the operating budget. During the years ended July 31, 2017 and 2016, service coordinator expense totaled $37,680 and $40,137, respectively. NOTE 8REAL ESTATE TAXES The Corporation has been exempt from real estate taxes from its inception. In October 2012, the Corporation received a notice from the taxing authority that the exemption approval for tax years 2012 and beyond was postponed due to an incomplete application. A hearing was set for October 30, 2012 to determine the Corporation's status, but was subsequently postponed by the taxing authority. The hearing occurred on June 30, 2016 and the exemption was reinstated. 19

22 (AN INDIANA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JULY 31, 2017 AND 2016 NOTE 9CONSTRUCTION CONTRACT In conjunction with the refinance, the corporation entered into two construction contracts both dated March 24, 2016 with an unrelated party to complete a portion of the repairs. The original amount of the contract was $1,613,334, which was increased to $1,676,539 with change orders. At July 31, 2017, both construction contracts were completed, and the fixed assets were placed into service. At July 31, 2017 and 2016, $0 remained payable. 20

23 BALANCE SHEET DATA SUPPLEMENTAL INFORMATION Organization Name Diakonia Housing, Inc. For Year Ending July 31, 2017 ASSETS FHA/Contract Number See cover page Acct No. Description of Account 1120 Cash Operations 128, Construction Cash Account 1125 Cash Entity 1130 Tenant/Member Accounts Receivable (Coops) 1, Allowance for Doubtful Accounts 1130N Net Tenant Accounts Receivable 1, Accounts Receivable HUD 1137 Medicare/Medicaid/Other Insurance Receivable 1138 Allowance for Doubtful Accounts (Medicare/Medicaid/Other Insurance Receivable) 1137N Net Medicare/Medicaid/Other Insurance Receivable 1140 Accounts and Notes Receivable Operations 1145 Accounts and Notes Receivable Entity 1160 Accounts Receivable Interest 1165 Interest Reduction Payment Receivable 1170 Short Term Investments Operations 1175 Short Term Investments Entity 1180 Inventory 1190 Miscellaneous Current Assets 1200 Prepaid Expenses 8, T Total Current Assets 138, Tenant/Patient Deposits Held in Trust 31, Escrow Deposits 28, Replacement Reserve 297, Other Reserves 41, Residual Receipts Reserve 1355 Bond Reserves 1367 Sinking Fund 1381 Management Improvement and Operating Plan 1300T Total Deposits 366, Land 129, Buildings 4,417, Building Equipment (Portable) 64, Furniture for Project/Tenant Use 1460 Furnishings 1,204, Office Furniture and Equipment 20, Maintenance Equipment 10, Motor Vehicles 1490 Miscellaneous Fixed Assets 1400T Total Fixed Assets 5,846, Accumulated Depreciation 2,940, N Net Fixed Assets 2,906, Investments Operations 1515 Investments Entity 1525 Cash Restricted for Longterm Investment 1590 Miscellaneous Other Assets 1, T Total Other Assets 1, T Total Assets $ 3,444,005 21

24 LIABILITIES 2105 Bank Overdraft Operations 2110 Accounts Payable Operations 36, Accounts Payable Construction/Development 2112 Accounts Payable Project Improvement Items 2113 Accounts Payable Entity 39, Incentive Performance Fee Payable 2115 Accounts Payable 236 Excess Income due HUD 2116 Accounts Payable Section 8 & Other 11, Accrued Wages Payable 10, Accrued Payroll Taxes Payable Accrued Management Fee Payable Accrued Lease Payments Payable 2130 Accrued Interest Payable Section Accrued Interest Payable First Mortgage (or Bonds) 11, Accrued Interest Payable Other Mortgages 2133 Accrued Interest Payable Other Loans and Notes (Surplus Cash) 2134 Accrued Interest Payable Other Loans and Notes 2135 Accrued Interest Payable Flexible Subsidy Loan 2136 Accrued Interest Payable Capital Improvements Loan 2137 Accrued Interest Payable Operating Loss Loan 2139 Accrued Interest Payable Capital Recovery Payment (M2M) 2150 Accrued Property Taxes 2160 Notes Payable (Shortterm) 2170 Mortgage (or Bonds) Payable First Mortgage (Bonds) (Short Term) 65, Other Mortgages Payable (Short Term) 2173 Other Loans and Notes Payable Surplus Cash (Short Term) 2174 Other Loans and Notes (Short Term) 2175 Flexible Subsidy Loan Payable (Short Term) 2176 Capital Improvement Loan Payable (Short Term) 2177 Operating Loss Loan Payable (Short Term) 2179 Capital Recovery Payment Payable (Short Term M2M) 2180 Utility Allowances 2190 Miscellaneous Current Liabilities 9, Prepaid Revenue 3, T Total Current Liabilities 189, Tenant/Patient Deposits Held In Trust (Contra) 31, Accounts Payable Entity (Long Term) 2306 Accrued Lease Payments Payable Long Term 2310 Notes Payable (LongTerm) 2311 Notes Payable Surplus Cash 481, Mortgage (or Bonds) Payable First Mortgage (or Bonds) 4,052, Other Mortgages Payable (Long Term) 2323 Other Loans and Notes Payable Surplus Cash 2324 Other Loans and Notes Payable 2325 Flexible Subsidy Loan Payable 2326 Capital Improvement Loan Payable 2327 Operating Loss Loan Payable 2329 Capital Recovery Payment (M2M) 2330 Interest on Loans or Notes Payable (Long Term) 2331 Accrued Interest Other Mortgages Payable (Long Term) 2332 Accrued Interest Notes Payable (Surplus Cash) (Long Term) 2340 Debt Issuance Costs 192, Miscellaneous Long Term Liabilities 41, T Total Long Term Liabilities 4,382, T Total Liabilities $ 4,603,036 NET ASSETS 3131 Unrestricted Net Assets (1,160,239) 3132 Temporarily Restricted Net Assets 1, Permanently Restricted Net Assets 3130 Total Net Assets (1,159,031) 2033T Total Liabilities and Equity/Net Assets $ 3,444,005 22

25 PROFIT AND LOSS DATA SUPPLEMENTAL INFORMATION Organization Name Diakonia Housing, Inc. For Year Ending July 31, 2017 FHA/Contract Number See cover page Acct No. Description of Account Rent Revenue 5120 Rent Revenue Gross Potential 350, Tenant Assistance Payments 592, Rent Revenue Stores and Commercial Garage and Parking Spaces 5180 Flexible Subsidy Revenue 5190 Miscellaneous Rent Revenue 5191 Excess Rent 5192 Rent Revenue/Insurance 5193 Special Claims Revenue 5, Retained Excess Income 5195 Lease Revenue (Nursing Home or Section 232 B&C or AL) 5100T Total Rent Revenue 948,500 Vacancies 5220 Apartments 38, Stores and Commercial 5250 Rental Concessions 5270 Garage and Parking Space 5290 Miscellaneous 5200T Total Vacancies 38, N Net Rental Revenue (Rent Revenue Less Vacancies) 909, Revenue 5300 Nursing Homes/ Assisted Living/Board & Care/Other Elderly Care/Coop/ and Other Revenues Financial Revenue 5410 Financial Revenue Project Operation Revenue from Investments Residual Receipts 5440 Revenue from Investments Replacement Reserve Revenue from Investments Miscellaneous T Total Financial Revenue 742 Other Revenue 5910 Laundry and Vending Revenue 6, Tenant Charges Interest Reduction Payments Revenue 5560 Expiration of Gift Donor Restrictions 5970 Gifts Miscellaneous Revenue 5, T Total Other Revenue 12, T Total Revenue 923,062 Administrative Expenses 6203 Conventions and Meetings Management Consultants 6210 Advertising and Marketing 8, Other Renting Expenses 1, Office Salaries 29, Office Expenses 20, Office or Model Apartment Rent 6320 Management Fee 62, Manager or Superintendent Salaries 36, Administrative Rent Free Unit 6340 Legal Expense Project 7, Audit Expense 5, Bookkeeping Fees/Accounting Services 11, Bad Debts 2, Miscellaneous Administrative Expenses 10, T Total Administrative Expenses 196,503 Utilities Expenses 6420 Fuel Oil/Coal 6450 Electricity 97, Water 9, Gas 1, Sewer 17, T Total Utilities Expense 127,318 23

26 Operating & Maintenance Expenses 6510 Payroll 64, Supplies 21, Contracts 47, Operating and Maintenance Rent Free Unit 6525 Garbage and Trash Removal 3, Security Payroll/Contract 2, Security Rent Free Unit 6546 Heating/Cooling Repairs and Maintenance Snow Removal Vehicle and Maintenance Equipment Operation and Repairs 6580 Lease Expense 6590 Miscellaneous Operating and Maintenance Expenses 4, T Total Operating and Maintenance Expense 144,953 Taxes & Insurance 6710 Real Estate Taxes 6711 Payroll Taxes (Project's Share) 9, Property & Liability Insurance (Hazard) 23, Fidelity Bond Insurance 6722 Workmen's Compensation 7, Health Insurance and Other Employee Benefits 40, Miscellaneous Taxes, Licenses, Permits and Insurance 2, T Total Taxes and Insurance 84,834 Financial Expenses 6820 Interest on First Mortgage (or Bonds) Payable 148, Interest on Other Mortgages 6830 Interest on Notes Payable (Long Term) 6840 Interest on Notes Payable (Short Term) 6845 Interest on Capital Recovery Payment (M2M) 6850 Mortgage Insurance Premium/ Service Charge 9, Miscellaneous Financial Expenses 6800T Total Financial Expenses 157, Expenses 6900 Nursing Homes/Assisted Living/ Board & Care/Other Elderly Care Expenses 37,680 Operating Results 6000T Total Cost of Operations before Depreciation 749, T Profit (Loss) before Depreciation 173, Depreciation Expenses 169, Amortization Expense 5060N Operating Profit or (Loss) 4,755 Corporate or Mortgagor Revenue/Expenses 7105 Entity Revenue 7110 Officer's Salaries 7115 Incentive Performance Fee 7120 Legal Expenses 7130 Federal, State, and Other Income Taxes 7141 Interest on Notes Payable 7142 Interest on Mortgage Payable 7190 Other Expenses 7100T Net Entity Expenses Change in Net Assets from Operations 3247 Change in Unrestricted Net Assets from Operations 4, Change in Temporarily Restricted Net Assets from Operations Change in Permanently Restricted Net Assets from Operations 3250 Change in Total Net Assets from Operations $ 4,755 Part II Total first mortgage (or bond) principal payments required during the audit period (usually 12 months). This applies to all S direct loans, HUDheld and HUDinsured first mortgages. $ 63,158 The total of all monthly reserve for replacement deposits (usually 12 months) required during the audit period even if S deposits have been temporarily waived or suspended. $ 25,000 Replacement Reserves, or Residual Receipts and Releases which are included as expense items on this Profit and Loss S statement. $ Project Improvement Reserve releases under the Flexible Subsidy Program that are included as expense items on this S Profit and Loss statement. $ 24

27 EQUITY DATA SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 Acct No. Description of Account S Previous Year Unrestricted Net Assets (1,164,413) 3247 Change in Unrestricted Net Assets from Operations 4,174 S Other Changes in Unrestricted Net Assets 3131 Unrestricted Net Assets (1,160,239) S Previous Year Temporarily Restricted Net Assets Change in Temporarily Restricted Net Assets from Operations 581 S Other Changes in Temporarily Restricted Net Assets 3132 Temporarily Restricted Net Assets 1,208 S Previous Year Permanently Restricted Net Assets 3249 Change in Permanently Restricted Net Assets from Operations S Other Changes in Permanently Restricted Net Assets 3133 Permanently Restricted Net Assets S Previous Year Total Net Assets (1,163,786) 3250 Change in Total Net Assets from Operations 4,755 S Other Changes in Total Net Assets 3130 Total Net Assets $ (1,159,031) 25

28 CASH FLOW DATA SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 Acct No. Description of Account Cash Flow from Operating Activities S Rental Receipts 913,834 S Interest Receipts 742 S Gifts 650 S Other Operating Receipts 8,852 S Entity/Construction Receipts S Total Receipts 924,078 S Administrative (72,049) S Management Fee (67,968) S Utilities (121,227) S Salaries and Wages (129,761) S Operating and Maintenance (76,998) S Lease Payments S Real Estate Taxes S Property Insurance (23,825) S Miscellaneous Taxes and Insurance (63,443) S Tenant Security Deposits S Other Operating Expenses (37,680) S Interest on Mortgages (143,245) S Interest Payments Second Mortgage S Interest Payments Third Mortgage S Interest on Notes Payable S Interest on Capital Recovery Payment S Mortgage Insurance Premium (MIP) (5,434) S Miscellaneous Financial S Entity Incentive Performance Fee S Entity/Construction Disbursements S Total Disbursements (741,630) S Net Cash provided by (used in) Operating Activities 182,448 Cash Flow from Investing Activities S Net Deposits to the Mortgage Escrow account (25,270) S Net Deposits to the Reserve for Replacement account (25,143) S Net Deposits to Other Reserves 1,832,562 S Net Deposits to the Residual Receipts account S Net Deposits to the Management Improvement and Operating Plan account S Net Deposits to the Long Term Investment account S Net Purchase of Fixed Assets (1,833,645) S Other Investing Activities (581) S Entity/Construction Investing Activities S Net Cash provided by (used in) Investing Activities (52,077) 26

29 Cash Flow from Financing Activities S Principal Payments First Mortgage (or Bonds) (63,158) S Principal Payments Second Mortgage S Principal Payments Third Mortgage S Proceeds from Mortgages, Loans or Notes Payable S Principal Payments on Loans or Notes Payable S Proceeds from Flexible Subsidy Loans S Flexible Subsidy Loan principal payments S Proceeds from Capital Improvement Loans S Principal payments on Capital Improvement Loan Payable S Proceeds from Operating Loss Loans S Principal payments on Operating Loss Loan Payable S Proceeds from Capital Recovery Payment S Principal Payments on Capital Recovery Payment S Distributions S Contributions S Other Financing Activities (200) S Entity/Construction Financing Activities (4,649) S Net Cash provided by (used in) Financing Activities (68,007) S Net increase (decrease) in Cash and Cash Equivalents 62,364 Cash and Cash Equivalents S Beginning of Period Cash 66,198 S Gifts of Investment S1200T End of Period Cash $ 128,562 Reconciliation of Net Profit (Loss) to Net Cash Provided by (Used in) Operating Activities 3250 Change in Total Net Assets from Operations 4,755 Adjustments to Reconcile Net Profit (Loss) to Net Cash Provided by (Used in) Operating Activities 6600 Depreciation Expenses 169, Amortization Expense S Amortization of Debt Issuance Costs 5,711 S Decrease (increase) in Tenant/Member Accounts Receivable 801 S Decrease (increase) in Accounts Receivable Other S Increase in Gifts Receivable S Decrease (increase) in Accrued Receivable S Decrease (increase) in Prepaid Expenses 3,597 S Decrease (increase) in Cash Restricted for Tenant Security Deposits (2,184) S Decrease (increase) in Entity/Construction Asset Accounts S Increase (decrease) in Accounts Payable 6,768 S Increase (decrease) in Accounts Payable HUD Excess Rents S Increase (decrease) in Accrued Liabilities (4,922) S Increase (decrease) in Accrued Interest Payable (182) S Increase (decrease) in Tenant Security Deposits held in trust 2,184 S Increase (decrease) in Prepaid Revenue (116) S Other adjustments to reconcile net profit (loss) to Net Cash provided by (used in) Operating Activities (3,178) S Increase (decrease) in Entity/Construction Liability accounts Net Cash provided by (used in) Operating Activities S Net Cash provided by (used in) Operating Activities $ 182,448 S Comments Cash flow from investing activities related to the purchase of property and equipment for the year ended July 31, 2017 includes $138,387, which was included in developer fee payable at July 31,

30 DETAIL OF ACCOUNTS SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 Acct No. Detail Description Balance Sheet Data 1140 Accounts and Notes Receivable Operations Capital advance receivable Commercial rents receivable Grant receivable Insurance refund Insurance settlement Intercompany receivable Laundry revenue receivable Lessee receivable Management fee overpayment receivable Mortgage insurance premium refund Mortgage proceeds receivable Other tenant receivables Overpaid/prepaid distributions Partner/officer/sponsor receivable Property tax refund Receivable from other project or business Related party receivable Sales tax refund Reserve withdrawals receivable Service coordinator receivable Syndication proceeds receivable Vendor rebate Vendor refund Other (must detail) 1140 Total Accounts and Notes Receivable Operations 1145 Accounts and Notes Receivable Entity Asset management fee receivable Capital contributions receivable Income taxes receivable Entity interest receivable Leasee receivable Partner/officer/sponsor receivable Related party receivable Syndication proceeds receivable Other (must detail) 1145 Total Accounts and Notes Receivable Entity 1190 Miscellaneous Current Assets Payroll deposits Utility deposits Other (must detail) 1190 Total Miscellaneous Current Assets 1330 Other Reserves Repairs escrow 41, Total Other Reserves 41,242 28

31 1590 Miscellaneous Other Assets Construction in progress Notes receivable related parties Offering costs Utility deposits Donations (temporarily restricted) 1,208 Other (must detail) 1590 Total Miscellaneous Other Assets 1, Accrued Interest Payable Other Mortgages Second Mortgage Third Mortgage Fourth Mortgage Fifth Mortgage 2132 Total Accrued Interest Payable Other Mortgages 2172 Other Mortgages Payable (Short Term) Second Mortgage Third Mortgage Fourth Mortgage Fifth Mortgage 2172 Total Other Mortgages Payable (Short Term) 2190 Miscellaneous Current Liabilities Deferred cable contract 4,499 Deferred laundry contract 5, Total Miscellaneous Current Liabilities 9, Other Mortgages Payable (Long Term) Second Mortgage Third Mortgage Fourth Mortgage Fifth Mortgage 2322 Total Other Mortgages Payable (Long Term) 2331 Accrued interest Other Mortgages Payable (Long Term) First Mortgage Second Mortgage Third Mortgage Fourth Mortgage Fifth Mortgage 2331 Total Accrued interest Other Mortgages Payable (Long Term) 2390 Miscellaneous Longterm Liabilities Developer fee payable 41, Total Miscellaneous Longterm Liabilities 41,235 Profit and Loss Data 5190 Miscellaneous Rent Revenue 5190 Total Miscellaneous Rent Revenue 5290 Miscellaneous 5290 Total Miscellaneous 29

32 5490 Revenue from Investments Miscellaneous Interest on other reserves repairs escrow Total Revenue from Investments Miscellaneous Miscellaneous Revenue Laundry contract revenue 2,177 Cable contract revenue 1,000 Other 2, Total Miscellaneous Revenue 5, Miscellaneous Administrative Expenses Dues and subscriptions 7,958 Accommodation expense 870 Transportation expense 611 Auto expense 419 Meals expense 334 Recreation and rehabilitation 69 Other Total Miscellaneous Administrative Expenses 10, Miscellaneous Operating and Maintenance Expenses 6590 Total Miscellaneous Operating and Maintenance Expenses 6790 Miscellaneous Taxes, Licenses, Permits and Insurance 6790 Total Miscellaneous Taxes, Licenses, Permits and Insurance 6890 Miscellaneous Financial Expenses 6890 Total Miscellaneous Financial Expenses 7190 Other Expenses 7190 Total Other Expenses Equity Data S Other Changes in Total Net Assets S Total Other Changes in Total Net Assets Cash Flow Data S Entity/Construction Receipts S Total Entity/Construction Receipts 30

33 S Entity/Construction Disbursements S Total Entity/Construction Disbursements S Net Deposits to Other Reserves Change in other reserves repairs escrow 1,832,562 S Total Net Deposits to Other Reserves 1,832,562 S Other Investing Activities Change in miscellaneous other assets donations (temporarily restricted) (581) S Total Other Investing Activities (581) S Entity/Construction Investing Activities S Total Entity/Construction Investing Activities S Other Financing Activities Increase in unamortized debt issuance costs (200) S Total Other Financing Activities (200) S Entity/Construction Financing Activities Advances from RHFFI 1,690,113 Repayments to RHFFI (1,694,762) S Total Entity/Construction Financing Activities (4,649) S Decrease (increase) in Entity/ Construction Asset accounts S Total Decrease (increase) in Entity/ Construction Asset accounts S Other adjustments to reconcile net profit (loss) to Net Cash provided by (used in) Operating Activities Change in deferred cable contract (1,001) Change in deferred laundry contract (2,177) S Total Other adjustments to reconcile net profit (loss) to Net Cash provided by (used in) Operating Activities (3,178) S Increase (decrease) in Entity/Construction Liability accounts S Total Increase (decrease) in Entity/Construction Liability accounts 31

34 SCHEDULE OF REQUIRED RESERVES SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 SCHEDULE OF RESERVE FOR REPLACEMENT Acct No. Description of Account 1320P Balance at Beginning of Year 271, DT Total Monthly Deposits 25, ODT Other Deposits 1320INT Interest on Replacement Reserve Accounts RGL Realized Gain or (Loss) 1320UGL Unrealized Gain or (Loss) 1320WT Approved Withdrawals 1320OWT Other Withdrawals 1320 Balance at End of Year 297, R Deposits suspended or waived indicator No Reserve for Replacements Details 1320ODT Other Deposits 1320ODT Total Other Deposits 1320OWT Other Withdrawals 1320OWT Total Other Withdrawals SCHEDULE OF RESIDUAL RECEIPTS 1340P Balance at Beginning of Year 1340DT Total Deposits 1340ODT Other Deposits 1340INT Interest on Residual Receipts Accounts 1340RGL Realized Gain or (Loss) 1340UGL Unrealized Gain or (Loss) 1340WT Approved Withdrawals 1340OWT Other Withdrawals 1340 Balance at End of Year Residual Receipts Details 1340ODT Other Deposits 1340ODT Total Other Deposits 1340OWT Other Withdrawals 1340OWT Total Other Withdrawals 32

35 COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS, AND RESIDUAL RECEIPTS SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS, AND RESIDUAL RECEIPTS Acct No. Description of Account S Cash 159, Tenant subsidy due for period covered by financial statement S Other S Total Cash 159,654 S Accrued Mortgage Interest Payable 11,838 S Delinquent Mortgage Principal Payments S Delinquent Deposits to Reserve for Replacements S Accounts Payable (due within 30 days) 47,965 S Loans and Notes Payable (due within 30 days) S Deficient Tax Insurance or MIP Escrow Deposits S Accrued Expenses [not escrowed] 11, Prepaid Revenue 3, Tenant Security Deposits Liability 31,092 S Other Current Obligations 10,131 S Total Current Obligations 115,886 S Surplus Cash (Deficiency) 43,768 S Annual Distribution Earned During Fiscal Period Covered by the Statement S Distribution Accrued and Unpaid as of the End of the Prior Fiscal Period S Distributions and Entity Expenses Paid During Fiscal Period Covered by Statement S Distribution Earned but Unpaid S Amount Available for Distribution During Next Fiscal Period S Incentive Performance Fee Payable (M2M) S Percentage Surplus Cash Split (M2M) 0% S Surplus Cash Available for Second Mortgage Payments (M2M) S Surplus Cash Available for Distribution (M2M) S Deposit Due Residual Receipts 43,768 Surplus Cash Details (Annual) S Other Cash Approved reserve for replacements withdrawals S Total Other Cash S Other Current Obligations August 2017 mortgage principal, escrow and reserve for replacements deposits 10,131 S Total Other Current Obligations 10,131 33

36 SCHEDULE OF CHANGES IN FIXED ASSET ACCOUNTS SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 SCHEDULE OF CHANGES IN FIXED ASSET ACCOUNTS Acct No. Description of Account 1410P Beginning Balance for , AT Additions for , DT Deductions for Land 129, P Beginning Balance for ,304, AT Additions for ,113, DT Deductions for Buildings 4,417, P Beginning Balance for , AT Additions for DT Deductions for Building Equipment (Portable) 64, P Beginning Balance for AT Additions for DT Deductions for Furniture for Project/Tenant Use 1460P Beginning Balance for , AT Additions for ,137, DT Deductions for Furnishings 1,204, P Beginning Balance for , AT Additions for DT Deductions for Office Furniture and Equipment 20, P Beginning Balance for , AT Additions for DT Deductions for Maintenance Equipment 10, P Beginning Balance for AT Additions for DT Deductions for Motor Vehicles 1490P Beginning Balance for , AT Additions for DT Deductions for , Miscellaneous Fixed Assets 1400PT Total Beginning Balance for Fixed Assets 4,151, AT Total Asset Additions 2,298, DT Total Asset Deductions 603, T Total Fixed Assets 5,846, P Beginning Balance for Accumulated Depreciation 2,771, Total Provisions 169, ADT Total Accumulated Depreciation from Disposed Assets Ending Balance for Accumulated Depreciation 2,940, N Total Net Book Value 2,906,480 34

37 SCHEDULE OF CHANGES IN FIXED ASSET ACCOUNTS (CONTINUED) SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Diakonia Housing, Inc. See cover page For Year Ending July 31, 2017 SCHEDULE OF CHANGES IN FIXED ASSET ACCOUNTS (CONTINUED) Acct No. Description of Account Fixed Asset Details 1410AT Construction in progress placed into service 47, DT 1420AT A/C unit, construction in progress placed into service 1,113, DT 1440AT 1440DT 1450AT 1450DT 1460AT Construction in progress placed into service 1,137, DT 1465AT 1465DT 1470AT 1470DT 1480AT 1480DT 1490AT 1490DT Construction in progress placed into service 603,281 35

38 (AN INDIANA NOTFORPROFIT CORPORATION) SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JULY 31, 2017 U.S. Department of Housing and Urban Development Mortgage Insurance for the Purchase or Refinancing of Existing Multifamily Housing Projects (CFDA No ) Balance of mortgage note payable as of August 1, 2016, under Section 207, pursuant to Section 223(f) of the National Housing Act $ 4,180,783 Section 8 Housing Assistance Payments Program (CFDA No ) 597,431 $ 4,778,214 Notes to the Schedule of Expenditures of Federal Awards Note 1: The schedule of expenditures of federal awards is prepared on the accrual basis of accounting. Note 2: The Corporation has elected to not use the 10% de minimis cost rate. Note 3: The balance of HUD Section 207, pursuant to Section 223(f) mortgage note payable at July 31, 2017 is $4,117,

39 INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors of Diakonia Housing, Inc. (An Indiana NotForProfit Corporation) We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Diakonia Housing, Inc., which comprise the statement of financial position as of July 31, 2017, and the related statements of profit and loss changes in net assets, changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated October 15, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Diakonia Housing, Inc. s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Diakonia Housing, Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of Diakonia Housing, Inc. s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of Diakonia Housing, Inc. s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 37

40 Diakonia Housing, Inc. Page Two Compliance and Other Matters As part of obtaining reasonable assurance about whether Diakonia Housing, Inc. s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of Diakonia Housing, Inc. s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Diakonia Housing, Inc. s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. October 15, 2017 Carmel, Indiana Dauby O Connor & Zaleski, LLC Certified Public Accountants 38

41 INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors of Diakonia Housing, Inc. (An Indiana NotForProfit Corporation) Report on Compliance for Each Major Federal Program We have audited Diakonia Housing, Inc. s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Diakonia Housing, Inc. s major federal programs for the year ended July 31, Diakonia Housing, Inc. s major federal programs are identified in the summary of auditor s results section of the accompanying summary of auditor s results. Management s Responsibility Management is responsible for compliance with the federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of Diakonia Housing, Inc. s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Diakonia Housing, Inc. s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Diakonia Housing, Inc. s compliance. Opinion on Each Major Federal Program In our opinion, Diakonia Housing, Inc. complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended July 31,