CASA DEL PUEBLO II (AN ARIZONA NOT-FOR-PROFIT CORPORATION) dba CASA DEL PUEBLO II APARTMENTS HUD PROJECT NO. 123-EE103

Transcription

1 (AN ARIZONA NOTFORPROFIT CORPORATION) dba CASA DEL PUEBLO II APARTMENTS HUD PROJECT NO. 123EE103 REPORT ON AUDIT OF FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION AND COMPLIANCE AND INTERNAL CONTROL YEARS ENDED JUNE 30, 2016 AND 2015 Program: Section 202 of the National Housing Act accompanied with a Project Rental Assistance Contract ("PRAC")

2 (AN ARIZONA 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 1015 Accompanying information for year ended June 30, 2016 Accompanying information required by HUD 16 Computation of surplus cash, distributions and residual receipts 17 Supplemental information 1828 Schedule of changes in property and equipment 29 Schedule of expenditures of federal awards 30 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 3132 Independent auditor's report on compliance for each major program and on internal control over compliance required by the Uniform Guidance 3334 Summary of auditor s results 3536 Auditor s comments on audit resolution matters 37 Management agent certification 38 Certification of officers 39

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors of Casa del Pueblo II (An Arizona NotForProfit Corporation) Report on the Financial Statements We have audited the accompanying financial statements of Casa del Pueblo II, which comprise the statements of financial position as of June 30, 2016 and 2015, 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 Casa del Pueblo II 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 Casa del Pueblo II 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 Casa del Pueblo II Page Two Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Casa del Pueblo II as of June 30, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 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 16 to 29 is presented for purposes of additional analysis as required by the Consolidated Audit Guide for Audits of HUD Programs 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 September 20, 2016, on our consideration of Casa del Pueblo II 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 Casa del Pueblo II s internal control over financial reporting and compliance. September 20, 2016 Carmel, Indiana Dauby O Connor & Zaleski, LLC Certified Public Accountants 2

5 (AN ARIZONA NOTFORPROFIT CORPORATION) ASSETS STATEMENTS OF FINANCIAL POSITION JUNE 30, 2016 AND Current assets Cash and cash equivalents $ 549 $ 2,860 Accounts receivable residents Prepaid expenses 1,225 2,234 Total current assets 2,084 5,581 Deposits held in trustfunded Resident security deposits 8,689 8,689 Restricted deposits and funded reserves Reserve for replacements 240, ,715 Residual receipts reserve Total restricted deposits and funded reserves 240, ,805 Property and equipment Land 200, ,000 Buildings and land improvements 4,146,067 4,146,067 Furniture and equipment 275, ,918 4,621,985 4,621,985 Less: Accumulated depreciation (790,215) (641,870) Total property and equipment 3,831,770 3,980,115 $ 4,082,822 $ 4,221,190 See notes to financial statements 3

6 (AN ARIZONA NOTFORPROFIT CORPORATION) STATEMENTS OF FINANCIAL POSITION (CONTINUED) JUNE 30, 2016 AND 2015 LIABILITIES AND NET ASSETS Current liabilities Accounts payable trade $ 11,492 $ 8,467 Accounts payable HUD Accrued payroll and benefits 4,294 3,645 Accrued management fees 7,657 2,684 Prepaid rent 196 1,009 Total current liabilities 23,817 15,852 Deposits liabilities Resident security deposits 7,641 7,412 Long term liabilities Due to CPLC 10,000 10,000 Total liabilities 41,458 33,264 Net assets unrestricted HUD Capital Grant 4,579,100 4,579,100 Cumulative deficit from operations (537,736) (391,174) Total net assets 4,041,364 4,187,926 $ 4,082,822 $ 4,221,190 See notes to financial statements 4

7 (AN ARIZONA NOTFORPROFIT CORPORATION) Rental revenue Vacancies Financial revenue Other revenue Admin. expenses Utilities expenses STATEMENTS OF PROFIT AND LOSS CHANGES IN NET ASSETS YEARS ENDED JUNE 30, 2016 AND Rent revenue gross potential $ 106,515 $ 103,049 Tenant assistance payments $ 77,709 $ 81,175 Rent revenue stores and commercial $ $ Garage and parking spaces $ $ Flexible subsidy revenue $ $ Miscellaneous rent revenue $ $ Excess rent $ $ Rent revenue/insurance $ $ Special claims revenue $ 84 $ Retained excess income $ $ Lease revenue (nursing home or section 232B&C or AL) $ $ Total rent revenue potential at 100% occupancy $ 184,308 $ 184,224 Apartments ( 165 ) ( 1,457 ) Stores and commercial ( ) ( ) Rental concessions ( ) ( ) Garage and parking spaces ( ) ( ) Miscellaneous ( ) ( ) Total vacancies ( 165 ) ( 1,457 ) Net rental revenue rent revenue less vacancies $ 184,143 $ 182,767 Nursing homes and other elderly care revenues $ $ Financial revenue property operations $ $ Revenue from investments residual receipts $ $ Revenue from investments reserve for replacements $ 140 $ 189 Revenue from investments miscellaneous $ $ Total financial revenue $ 140 $ 189 Laundry and vending revenue $ $ Resident charges $ 326 $ 230 Interest reduction payments revenue $ $ Expiration of gift donor restrictions $ $ Gifts $ $ Miscellaneous revenue $ 80 $ 285 Total other revenue $ 406 $ 515 Total revenue $ 184,689 $ 183,471 Conventions and meetings $ $ Management consultants $ $ Advertising and marketing $ 7 $ 7 Other renting expenses $ $ Office salaries $ 7,594 $ 7,219 Office expenses $ 10,016 $ 10,000 Office or model apartment rent $ $ Management fee $ 18,376 $ 18,240 Manager or superintendent salaries $ 15,235 $ 15,227 Administrative rent free unit $ $ Legal expenses (property) $ 140 $ 143 Audit expenses $ 5,535 $ 5,655 Bookkeeping fees/accounting services $ 778 $ 819 Bad debts $ 76 $ Miscellaneous administrative expenses $ 1,567 $ 1,401 Total administrative expenses $ 59,324 $ 58,711 Fuel oil/coal $ $ Electricity $ 42,007 $ 41,182 Water $ 10,235 $ 9,159 Gas $ $ Sewer $ 2,561 $ 2,362 Total utilities expense $ 54,803 $ 52,703 See notes to financial statements 5

8 (AN ARIZONA 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 JUNE 30, 2016 AND Payroll $ 14,244 $ 16,407 Supplies $ 5,593 $ 3,661 Contracts $ 16,632 $ 18,408 Operating and maintenance rent free unit $ $ Garbage and trash removal $ 95 $ 95 Security payroll/contract $ 3,518 $ 4,344 Security rent free unit $ $ Heating/cooling repairs and maintenance $ 3,263 $ 595 Snow removal $ $ Vehicle and maint. equipment operation and repairs $ $ Lease expense $ $ Miscellaneous operating and maintenance expenses $ 104 $ 593 Total operating and maintenance expenses $ 43,449 $ 44,103 Real estate taxes $ $ Payroll taxes (property's share) $ 3,377 $ 3,458 Property and liability insurance (hazard) $ 14,474 $ 13,245 Fidelity bond insurance $ $ Workmen's compensation $ 771 $ 684 Health insurance and other employee benefits $ 6,708 $ 7,533 Miscellaneous taxes, licenses, permits and insurance $ $ Total taxes and insurance $ 25,330 $ 24,920 Interest on first mortgage (or bonds) payable $ $ Interest on other mortgages $ $ Interest on notes payable (longterm) $ $ Interest on notes payable (shortterm) $ $ Interest on capital recovery payment (M2M) $ $ Mortgage insurance premium/service charge $ $ Miscellaneous financial expenses $ $ Total financial expenses $ $ Nursing homes and other elderly care expenses $ $ Total cost of operations before depreciation $ 182,906 $ 180,437 Profit (loss) before depreciation $ 1,783 $ 3,034 Depreciation $ 148,345 $ 148,345 Amortization $ $ Operating profit or (loss) $ (146,562) $ (145,311) Entity revenue $ $ Officer's salaries $ $ Incentive performance fee (M2M) $ $ Legal expenses $ $ Federal, state, and other income taxes $ $ Interest on notes payable $ $ Interest on mortgage payable $ $ Other expenses $ $ Net entity expenses $ $ Change in unrestricted net assets from operations $ (146,562) $ (145,311) Change in temporarily restricted net assets from operations $ $ Change in permanently restricted net assets from operations $ $ Change in total net assets from operations $ (146,562) $ (145,311) See notes to financial statements 6

9 (AN ARIZONA NOTFORPROFIT CORPORATION) STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED JUNE 30, 2016 AND 2015 Cumulative HUD Capital Surplus from Grant Operations Total Balance, July 1, 2014 $ 4,579,100 $ (245,863) $ 4,333,237 Change in unrestricted net assets (145,311) (145,311) Balance, June 30, ,579,100 (391,174) 4,187,926 Change in unrestricted net assets (146,562) (146,562) Balance, June 30, 2016 $ 4,579,100 $ (537,736) $ 4,041,364 See notes to financial statements 7

10 (AN ARIZONA NOTFORPROFIT CORPORATION) STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2016 AND Cash flow from operating activities Revenue: Rental income $ 183,562 $ 183,437 Financial Other income , ,141 Expenditures: Administrative (17,721) (17,967) Management fees (13,403) (18,292) Utilities (54,582) (43,098) Salaries and wages (36,424) (38,640) Operating and maintenance (26,723) (26,371) Property insurance (13,465) (15,479) Miscellaneous taxes and insurance (10,856) (11,675) Resident security deposits 229 (388) (172,945) (171,910) Net cash provided by (used in) operating activities 11,163 12,231 Cash flow from investing activities Change in reserve for replacements (13,546) (13,979) Change in residual receipts reserve 72 (28) Net cash provided by (used in) investing activities (13,474) (14,007) Net change in cash and cash equivalents (2,311) (1,776) Cash and cash equivalents, beginning 2,860 4,636 Cash and cash equivalents, ending $ 549 $ 2,860 See notes to financial statements 8

11 (AN ARIZONA NOTFORPROFIT CORPORATION) STATEMENT OF CASH FLOWS (CONTINUED) YEARS ENDED JUNE 30, 2016 AND Reconciliation of change in unrestricted net assets to net cash provided by (used in) operating activities Change in unrestricted net assets $ (146,562) $ (145,311) Adjustments to reconcile change in unrestricted net assets to net cash provided by (used in) operating activities: Depreciation 148, ,345 Changes in: Accounts receivable residents Accounts receivable other 8,642 Prepaid expenses 1,009 (2,234) Resident security deposits funded (1) Accounts payable trade 3,025 2,346 Accounts payable HUD 131 (282) Accrued liabilities 5, Resident security deposits liability 229 (387) Prepaid rent (813) 71 Total adjustments 157, ,542 Net cash provided by (used in) operating activities $ 11,163 $ 12,231 See notes to financial statements 9

12 (AN ARIZONA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2016 AND 2015 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Casa del Pueblo II (an Arizona NotForProfit Corporation) (the Corporation ) was organized to construct, own and operate a 38 unit apartment community known as Casa Del Pueblo II Apartments (the "Community") in Tucson, Arizona pursuant to Section 202 of the National Housing Act, as amended. The Corporation has entered into the standard FHA Regulatory Agreement governing the operation of the Community with the Federal Housing Administration Section of Department of Housing and Urban Development ( HUD ). The Corporation entered into a Project Rental Assistance Contract ( PRAC ) for 38 units with HUD. The contract expires January 31, PRAC is subsidies provided to eligible residents by HUD 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 Community. The Community is obligated to recertify tenant eligibility on an annual basis. The Corporation can request from HUD an amount equal to 50% 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 assetsunrestricted, temporarily restricted and permanently restrictedbe 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. All assets held by the Corporation at June 30, 2016 and 2015, are classified as unrestricted. The financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. 10

13 (AN ARIZONA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 2016 AND 2015 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and cash equivalents For the Statement of Cash Flows, all unrestricted investments with the original maturities of three months or less are cash equivalents. As of June 30, 2016 and 2015, cash and cash equivalents consist of petty cash and a checking account held at a bank. 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 or cleaning fees, if applicable. Resident receivables consist of amounts due for rental income or the charges for damages and cleaning fees. 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 June 30, 2016 and Bad debt expensed for the years ended June 30, 2016 and 2015 was $76 and $0, respectively. Property and equipment Land, buildings and improvements are recorded at cost. Building costs are depreciated under the straightline method over an estimated useful life of forty years. Land improvements and personal property and equipment are depreciated under the straightline method over an estimated useful life of ten years. 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 June 30, 2016 and Rental income Rental income is recognized as rents become due. Rental payments received in advance are deferred until earned. All leases between the Corporation and the residents of the Community are operating leases. 11

14 (AN ARIZONA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 2016 AND 2015 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Real estate taxes The Corporation is exempt from real estate taxes. Accordingly, no provision for real estate taxes has been recognized in the accompanying financial statements. Concentration of credit risk The Corporation deposits its cash in financial institutions. At times, deposits may exceed federally insured limits. The Corporation has not experienced any losses in such accounts. The rental income from the PRAC totaled $77,793 and $81,175 or 42% and 44% of net rental revenue for the years ended June 30, 2016 and 2015, all respectively. The PRAC expires January 31, 2017, subject to annual appropriations to HUD from Congress. Management cannot reasonably estimate the ramifications, if any, of this uncertainty. 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 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 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 June 30, 2016 and

15 (AN ARIZONA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 2016 AND 2015 NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 September 20, 2016, 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. NOTE 2FINANCING AND GOVERNMENT ASSISTANCE The Corporation has entered into a Capital Advance Program Mortgage Note (the Note ) for a capital advance not to exceed $4,678,100. The capital advance amount was amended to $4,579,100, all of which has been advanced as of June 30, The Note bears no interest and repayment is not required as long as the housing project remains available for very low income persons in accordance with Section 202 and is operated in accordance with the Regulatory Agreement and regulations. The Note is secured by the mortgage upon the land, building and equipment and other amounts held by the Corporation. The debt evidenced by this Note may not be prepaid without the prior written approval of HUD. Provided (1) the housing project has remained available for very low income elderly persons for a period of 40 years; and (2) the Note has not otherwise become due and payable by reason of defaults under the Note, mortgage or Regulatory Agreement or that date, the Note shall be deemed to be paid and discharged. If a default occurs under the terms of this Note, mortgage, the Regulatory Agreement or the regulations, at the option of the holder of this Note, the entire principal should at once become due and payable without notice. 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 on deposit. Pursuant to the terms of the Regulatory Agreement, the Corporation is required to make monthly deposits of $1, to the Reserve for Replacements Fund. This fund is under the control of the HUD. Disbursements from such fund may only be made for the purpose of effecting replacement of structural elements and mechanical equipment of the Community and after receiving the written consent of the Secretary of HUD. At June 30, 2016 and 2015, these funds amounted to $240,261 and $226,715, respectively. 13

16 (AN ARIZONA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 2016 AND 2015 NOTE 3CASH DISTRIBUTIONS AND RESIDUAL RECEIPTS FUND Pursuant to the terms of the Regulatory Agreement, no cash distributions may be made to nonprofit owners, nor can they incur obligations on behalf of the Community, to themselves or any officers, directors, stockholders, trustees, partners, beneficiaries under a trust, or any of their nominees without prior written approval of HUD. Residual Receipts ( Surplus Cash ) as defined by HUD, existing at the end of the fiscal year must be deposited in an interest bearing residual receipts fund in the name of the Community. Withdrawals from the residual receipts fund may only be made with the approval of HUD. During the year ended June 30, 2015, the Community deposited $100 into the residual receipt fund to offset bank fees. At June 30, 2016 and 2015, these funds amount to $18 and $90, all respectively. In accordance with the PRAC, if HUD determines at any time that residual receipt funds are more than the amount needed for Community purposes, HUD may require any excess to be placed in an account to be used to reduce HUD payments or for other Community purpose. Upon termination of the PRAC, any excess funds must be remitted to HUD upon notice. In accordance with HUD Memorandum issued June 19, 2015, upon termination of the PRAC contract residual receipt funds in excess of $250 per unit must be remitted to HUD on an annual basis. At the end of the Regulatory Agreement any funds remaining in the residual receipt fund must be remitted to HUD. HUD has the right upon notice to request the entire residual receipt balance be remitted to HUD; however, the Corporation does not believe this is likely. Any funds remaining in the residual receipts funds will be approved by HUD to be utilized for Community purposes. NOTE 4MANAGEMENT CONTRACT AND RELATED PARTIES The Community is managed by Tiempo, Inc. (the Agent ), an affiliated entity through common board members. In accordance with an executed management agreement, the Agent earned a management fee equal to 10.5% of residential income collected as defined by HUD, with a maximum of $40 per unit per month. Effective March 1, 2016, management fees equal 10.5% of residential income collected and capped at $1, per month. During the years ended June 30, 2016 and 2015, management fees earned totaled $18,376 and $18,240, and management fees paid totaled $13,403 and $18,292, all respectively. At June 30, 2016 and 2015, $7,657 and $2,684, respectively, remained payable. The onsite personnel are employees of Chicanos Por La Causa, Inc. ( CPLC ), an affiliated entity through common board members. As such, CPLC is reimbursed for the actual costs of salaries, benefits and processing. In accordance with HUD regulations, CPLC 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 the years ended June 30, 2016 and 2015, $10,530 and $10,380, respectively, was reimbursed by the Community for central office management functions and bookkeeping. This reimbursement is included in the following accounts: Office salaries Bookkeeping Payroll taxes Workers' compensation Health insurance 14

17 (AN ARIZONA NOTFORPROFIT CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 2016 AND 2015 NOTE 4MANAGEMENT CONTRACT AND RELATED PARTIES (CONTINUED) Accounts receivable other During the year ended June 30, 2014, the Corporation paid utility expenses on behalf of Pueblo Senior Housing, Inc. ("Phase I") in the amount of $8,642, which were repaid to the Corporation in At June 30, 2016 and 2015, no amounts remained receivable. Due to CPLC In prior years, the minimum capital investment liability of $10,000, funded by CPLC during construction, was reclassified to due to CPLC. In the future, this amount can be repaid to CPLC from available surplus cash and with HUD approval. 15

18 (AN ARIZONA NOTFORPROFIT CORPORATION) ACCOMPANYING INFORMATION REQUIRED BY HUD YEAR ENDED JUNE 30, 2016 Reserve for replacements In accordance with provisions of the Regulatory Agreement, cash is held by Mutual of Omaha Bank, to be used for replacing assets for the Community. Balance, July 1, 2015 $ 226,715 Deposits ($1, x 12) 15,365 Interest 140 Withdrawals (1,929) Bank service fee (30) Balance, June 30, 2016 $ 240,261 Residual receipts reserve In accordance with provisions of the Regulatory Agreement, surplus cash, as defined by HUD, existing at the end of the fiscal year, must be deposited in residual receipts. Withdrawals may only be made with the approval of HUD. Balance, July 1, 2015 $ 90 Bank service fee (72) Interest Balance, June 30, 2016 $ 18 16

19 (AN ARIZONA NOTFORPROFIT CORPORATION) COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS AND RESIDUAL RECEIPTS YEAR ENDED JUNE 30, 2016 Part A Compute Surplus Cash 1. Cash $ 9, Accounts Receivable HUD $ 3. Other $ (a) Total Cash (Add Lines 1, 2, and 3) $ 9,238 Current Obligations 4. Accrued Mortgage (or Bond) Interest Payable $ 5. Delinquent Mortgage (or Bond) Principal Payments $ 6. Delinquent Deposits to Reserve for Replacements $ 7. Accounts Payable (due Within 30 days) $ 11, Loans and Notes Payable (due Within 30 days) $ 9. Deficient Tax Insurance or MIP Escrow Deposits $ 10. Accrued Expenses (not Escrowed) $ 11, Prepaid Revenue $ Resident Deposits Held in Trust $ 7, Other Current Obligations $ (b) Less Total Current Obligations (Add Lines 4 Through 13) $ 31,458 (c) Surplus Cash (Deficiency) (Line (a) Minus Line (b)) $ (22,220) PART B Compute Distributions to Owners and Required Deposit to Residual Receipts 1. Deposit Due Residual Receipts $ 0 17

20 BALANCE SHEET DATA SUPPLEMENTAL INFORMATION Organization Name Casa del Pueblo II For Year Ending June 30, 2016 ASSETS FHA/Contract Number See cover page Acct No. Description of Account 1120 Cash Operations Construction Cash Account 1125 Cash Entity 1130 Tenant/Member Accounts Receivable (Coops) Allowance for Doubtful Accounts 1130N Net Tenant Accounts Receivable 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 1, T Total Current Assets 2, Tenant/Patient Deposits Held in Trust 8, Escrow Deposits 1320 Replacement Reserve 240, Other Reserves 1340 Residual Receipts Reserve Bond Reserves 1367 Sinking Fund 1381 Management Improvement and Operating Plan 1300T Total Deposits 240, Land 200, Buildings 4,146, Building Equipment (Portable) 275, Furniture for Project/Tenant Use 1460 Furnishings 1465 Office Furniture and Equipment 1470 Maintenance Equipment 1480 Motor Vehicles 1490 Miscellaneous Fixed Assets 1400T Total Fixed Assets 4,621, Accumulated Depreciation 790, N Net Fixed Assets 3,831, Investments Operations 1515 Investments Entity 1520 Deferred Financing Costs 1525 Cash Restricted for Longterm Investment 1590 Miscellaneous Other Assets 1500T Total Other Assets 1000T Total Assets $ 4,082,822 18

21 LIABILITIES 2105 Bank Overdraft Operations 2110 Accounts Payable Operations 11, Accounts Payable Construction/Development 2112 Accounts Payable Project Improvement Items 2113 Accounts Payable Entity 2114 Incentive Performance Fee Payable 2115 Accounts Payable 236 Excess Income due HUD 2116 Accounts Payable Section 8 & Other Accrued Wages Payable 4, Accrued Payroll Taxes Payable 2123 Accrued Management Fee Payable 7, Accrued Lease Payments Payable 2130 Accrued Interest Payable Section Accrued Interest Payable First Mortgage (or Bonds) 2132 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) 2172 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 2210 Prepaid Revenue T Total Current Liabilities 23, Tenant/Patient Deposits Held In Trust (Contra) 7, Due to CPLC 2306 Accrued Lease Payments Payable Long Term 2310 Notes Payable (LongTerm) 2311 Notes Payable Surplus Cash 2320 Mortgage (or Bonds) Payable First Mortgage (or Bonds) 2322 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) 2390 Miscellaneous Long Term Liabilities 10, T Total Long Term Liabilities 10, T Total Liabilities $ 41,458 NET ASSETS 3131 Unrestricted Net Assets 4,041, Temporarily Restricted Net Assets 3133 Permanently Restricted Net Assets 3130 Total Net Assets 4,041, T Total Liabilities and Equity/Net Assets $ 4,082,822 19

22 PROFIT AND LOSS DATA SUPPLEMENTAL INFORMATION Organization Name Casa del Pueblo II For Year Ending June 30, 2016 FHA/Contract Number See cover page Acct No. Description of Account Rent Revenue 5120 Rent Revenue Gross Potential 106, Tenant Assistance Payments 77, Rent Revenue Stores and Commercial 5170 Garage and Parking Spaces 5180 Flexible Subsidy Revenue 5190 Miscellaneous Rent Revenue 5191 Excess Rent 5192 Rent Revenue/Insurance 5193 Special Claims Revenue Retained Excess Income 5195 Lease Revenue (Nursing Home or Section 232 B&C or AL) 5100T Total Rent Revenue 184,308 Vacancies 5220 Apartments Stores and Commercial 5250 Rental Concessions 5270 Garage and Parking Space 5290 Miscellaneous 5200T Total Vacancies N Net Rental Revenue (Rent Revenue Less Vacancies) 184, Revenue 5300 Nursing Homes/ Assisted Living/Board & Care/Other Elderly Care/Coop/ and Other Revenues Financial Revenue 5410 Financial Revenue Project Operation 5430 Revenue from Investments Residual Receipts 5440 Revenue from Investments Replacement Reserve Revenue from Investments Miscellaneous 5400T Total Financial Revenue 140 Other Revenue 5910 Laundry and Vending Revenue 5920 Tenant Charges Interest Reduction Payments Revenue 5560 Expiration of Gift Donor Restrictions 5970 Gifts 5990 Miscellaneous Revenue T Total Other Revenue T Total Revenue 184,689 Administrative Expenses 6203 Conventions and Meetings 6204 Management Consultants 6210 Advertising and Marketing Other Renting Expenses 6310 Office Salaries 7, Office Expenses 10, Office or Model Apartment Rent 6320 Management Fee 18, Manager or Superintendent Salaries 15, Administrative Rent Free Unit 6340 Legal Expense Project Audit Expense 5, Bookkeeping Fees/Accounting Services Bad Debts Miscellaneous Administrative Expenses 1, T Total Administrative Expenses 59,324 Utilities Expenses 6420 Fuel Oil/Coal 6450 Electricity 42, Water 10, Gas 6453 Sewer 2, T Total Utilities Expense 54,803 20

23 Operating & Maintenance Expenses 6510 Payroll 14, Supplies 5, Contracts 16, Operating and Maintenance Rent Free Unit 6525 Garbage and Trash Removal Security Payroll/Contract 3, Security Rent Free Unit 6546 Heating/Cooling Repairs and Maintenance 3, Snow Removal 6570 Vehicle and Maintenance Equipment Operation and Repairs 6580 Lease Expense 6590 Miscellaneous Operating and Maintenance Expenses T Total Operating and Maintenance Expense 43,449 Taxes & Insurance 6710 Real Estate Taxes 6711 Payroll Taxes (Project's Share) 3, Property & Liability Insurance (Hazard) 14, Fidelity Bond Insurance 6722 Workmen's Compensation Health Insurance and Other Employee Benefits 6, Miscellaneous Taxes, Licenses, Permits and Insurance 6700T Total Taxes and Insurance 25,330 Financial Expenses 6820 Interest on First Mortgage (or Bonds) Payable 6825 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 6890 Miscellaneous Financial Expenses 6800T Total Financial Expenses 6900 Expenses 6900 Nursing Homes/Assisted Living/ Board & Care/Other Elderly Care Expenses Operating Results 6000T Total Cost of Operations before Depreciation 182, T Profit (Loss) before Depreciation 1, Depreciation Expenses 148, Amortization Expense 5060N Operating Profit or (Loss) (146,562) 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 (146,562) 3248 Change in Temporarily Restricted Net Assets from Operations 3249 Change in Permanently Restricted Net Assets from Operations 3250 Profit or Loss (Net Income or Loss) $ (146,562) 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. $ 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. $ 15,365 Replacement Reserves, or Residual Receipts and Releases which are included as expense items on this Profit and Loss S statement. $ 1,928 Project Improvement Reserve releases under the Flexible Subsidy Program that are included as expense items on this S Profit and Loss statement. $ 21

24 EQUITY DATA SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Casa del Pueblo II See cover page For Year Ending June 30, 2016 Acct No. Description of Account S Previous Year Unrestricted Net Assets 4,187, Change in Unrestricted Net Assets from Operations (146,562) S Other Changes in Unrestricted Net Assets 3131 Unrestricted Net Assets 4,041,364 S Previous Year Temporarily Restricted Net Assets 3248 Change in Temporarily Restricted Net Assets from Operations S Other Changes in Temporarily Restricted Net Assets 3132 Temporarily Restricted Net Assets 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 4,187, Change in Total Net Assets from Operations (146,562) S Other Changes in Total Net Assets 3130 Total Net Assets $ 4,041,364 22

25 CASH FLOW DATA SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Casa del Pueblo II See cover page For Year Ending June 30, 2016 Acct No. Description of Account Cash Flow from Operating Activities S Rental Receipts 183,562 S Interest Receipts 140 S Gifts S Other Operating Receipts 406 S Entity/Construction Receipts S Total Receipts 184,108 S Administrative (17,721) S Management Fee (13,403) S Utilities (54,582) S Salaries and Wages (36,424) S Operating and Maintenance (26,723) S Lease Payments S Real Estate Taxes S Property Insurance (13,465) S Miscellaneous Taxes and Insurance (10,856) S Tenant Security Deposits 229 S Other Operating Expenses S Interest on Mortgages 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) S Miscellaneous Financial S Entity Incentive Performance Fee S Entity/Construction Disbursements S Total Disbursements (172,945) S Net Cash provided by (used in) Operating Activities 11,163 Cash Flow from Investing Activities S Net Deposits to the Mortgage Escrow account S Net Deposits to the Reserve for Replacement account (13,546) S Net Deposits to Other Reserves S Net Deposits to the Residual Receipts account 72 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 S Other Investing Activities S Entity/Construction Investing Activities S Net Cash provided by (used in) Investing Activities (13,474) 23

26 Cash Flow from Financing Activities S Principal Payments First Mortgage (or Bonds) 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 S Entity/Construction Financing Activities S Net Cash provided by (used in) Financing Activities S Net increase (decrease) in Cash and Cash Equivalents (2,311) Cash and Cash Equivalents S Beginning of Period Cash 2,860 S Gifts of Investment S Endowment Gifts Received S1200T End of Period Cash $ 549 Reconciliation of Net Profit (Loss) to Net Cash Provided by (Used in) Operating Activities 3250 Change in Total Net Assets from Operations (146,562) Adjustments to Reconcile Net Profit (Loss) to Net Cash Provided by (Used in) Operating Activities 6600 Depreciation Expenses 148, Amortization Expense S Decrease (increase) in Tenant/Member Accounts Receivable 177 S Decrease (increase) in Accounts Receivable Other S Increase in Gifts Receivable S Decrease (increase) in Accrued Receivable S Decrease (increase) in Prepaid Expenses 1,009 S Decrease (increase) in Cash Restricted for Tenant Security Deposits S Decrease (increase) in Entity/Construction Asset Accounts S Increase (decrease) in Accounts Payable 3,156 S Increase (decrease) in Accounts Payable HUD Excess Rents S Increase (decrease) in Accrued Liabilities 5,622 S Increase (decrease) in Accrued Interest Payable S Increase (decrease) in Tenant Security Deposits held in trust 229 S Increase (decrease) in Prepaid Revenue (813) S Other adjustments to reconcile net profit (loss) to Net Cash provided by (used in) Operating Activities 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 $ 11,163 S Comments 24

27 DETAIL OF ACCOUNTS SUPPLEMENTAL INFORMATION Organization Name FHA/Contract Number Casa del Pueblo II See cover page For Year Ending June 30, 2016 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 Leasee 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 25

28 1590 Miscellaneous Other Assets Construction in progress Notes receivable related parties Offering costs Utility deposits Other (must detail) 1590 Total Miscellaneous Other Assets 2132 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 2190 Total Miscellaneous Current Liabilities 2322 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 Due to CPLC 10, Total Miscellaneous Longterm Liabilities 10,000 Profit and Loss Data 5190 Miscellaneous Rent Revenue 5190 Total Miscellaneous Rent Revenue 5290 Miscellaneous 5290 Total Miscellaneous 26

29 5490 Revenue from Investments Miscellaneous 5490 Total Revenue from Investments Miscellaneous 5990 Miscellaneous Revenue HUD 20% repayment income Total Miscellaneous Revenue Miscellaneous Administrative Expenses 6390 Total Miscellaneous Administrative Expenses 6590 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 27

30 S Entity/Construction Disbursements S Total Entity/Construction Disbursements S Other Investing Activities S Total Other Investing Activities S Entity/Construction Investing Activities S Total Entity/Construction Investing Activities S Other Financing Activities S Total Other Financing Activities S Entity/Construction Financing Activities S Total Entity/Construction Financing Activities 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 S Total Other adjustments to reconcile net profit (loss) to Net Cash provided by (used in) Operating Activities S Increase (decrease) in Entity/Construction Liability accounts S Total Increase (decrease) in Entity/Construction Liability accounts 28

31 (AN ARIZONA NOTFORPROFIT CORPORATION) SCHEDULE OF CHANGES IN PROPERTY AND EQUIPMENT YEAR ENDED JUNE 30, 2016 ASSETS Balance Balance 7/1/2015 Additions Deletions 6/30/2016 Land $ 200,000 $ $ $ 200,000 Buildings and land improvements 4,146,067 4,146,067 Furniture and equipment 275, ,918 $ 4,621,985 $ $ $ 4,621,985 Accumulated depreciation $ 641,870 $ 148,345 $ $ 790,215 Net Book Value $ 3,831,770 29

32 (AN ARIZONA NOTFORPROFIT CORPORATION) SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2016 U.S. Department of Housing and Urban Development Supportive Housing for the Elderly (CFDA No ) Balance of HUD Capital Advance Grant as of July 1, 2015, under Section 202 of the National Housing Act $ 4,579,100 Project Rental Assistance Contract 77,793 $ 4,656,893 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 Capital Advance Grant under Section 202 of the National Housing Act at June 30, 2016 is $4,579,

33 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 Casa del Pueblo II (An Arizona 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 Casa del Pueblo II, which comprise the statement of financial position as of June 30, 2016, 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 September 20, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Casa del Pueblo II 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 Casa del Pueblo II s internal control. Accordingly, we do not express an opinion on the effectiveness of Casa del Pueblo II 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 Casa del Pueblo II 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. 31