325 E. 3RD LIMITED PARTNERSHIP. Financial Statements and Schedule. December 31, 2017 and (With Independent Auditors Report Thereon)

Transcription

1 Financial Statements and Schedule (With Independent Auditors Report Thereon)

2 KPMG LLP Suite West Eighth Avenue Anchorage, AK Independent Auditors Report The Partners 325 E. 3rd Limited Partnership: We have audited the accompanying financial statements of 325 E. 3rd Limited Partnership, which comprise the balance sheets as of, and the related statements of operations, partners capital, 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 U.S. generally accepted accounting principles; 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. Auditors 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. 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 auditors 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 auditors consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 325 E. 3rd Limited Partnership as of, and the results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

3 Other Matter Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenses 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 schedule is fairly stated, in all material respects, in relation to the financial statements taken as a whole. July 23, 2018

4 Balance Sheets Assets Current assets: Cash $ 21,376 54,865 Tenant accounts receivable 6,237 1,539 Due from affiliates 7,841 5,761 Total current assets 35,454 62,165 Reserved and restricted cash: Operating reserves 30,658 Replacement reserves 6,000 Tenant deposits held in trust 17,249 17,600 Total reserved and restricted cash 53,907 17,600 Rental property: Building 5,601,930 5,559,757 Site improvements 115, ,432 Office furniture and equipment 15,191 15,191 5,732,553 5,690,380 Less accumulated depreciation (171,649) (24,153) Total rental property 5,560,904 5,666,227 Other assets: Prepaid land lease 148, ,000 Capitalized costs 9,221 49,444 Total assets $ 5,807,611 5,945,436 Liabilities and Partners Capital Current liabilities: Due to affiliates $ 32,950 81,640 Accounts payable 52,266 Construction loan payable, net of issuance costs 3,326,838 Total current liabilities 85,216 3,408,478 Tenant deposits held in trust 17,249 17,600 Developer fee payable 79, ,360 Interest on related party note payable 9,395 Related party note payable 402,468 Total liabilities 593,528 3,973,438 Partners capital 5,214,083 1,971,998 Total liabilities and partners capital $ 5,807,611 5,945,436 See accompanying notes to financial statements. 3

5 Statements of Operations Years ended Revenue: Gross potential rent, net of $1,861 vacancy loss during 2017 $ 55,111 7,300 Other revenue 25 Grant funded operating subsidy 76, ,179 7,300 Expenses: Maintenance and operating 55,016 5,500 Utilities 27,294 Taxes and insurance 42,644 5,208 Administrative 97,083 5,338 Financial 80,882 38,288 Depreciation and amortization 148,164 49, , ,842 Net loss $ (319,904) (96,542) See accompanying notes to financial statements. 4

6 Statements of Partners Capital Years ended Enterprise Housing Partners XXVI RC 325 Limited Third, LLC Partnership Total Partners capital at January 1, 2016 $ Capital contributions 1,868, ,000 2,068,540 Net loss (10) (96,532) (96,542) Partners capital at December 31, ,868, ,468 1,971,998 Syndication costs (20,000) (20,000) Capital contributions 1,734,960 1,847,029 3,581,989 Net loss (32) (319,872) (319,904) Partners capital at December 31, 2017 $ 3,603,458 1,610,625 5,214,083 See accompanying notes to financial statements. 5

7 Statements of Cash Flows Years ended Cash flows from operating activities: Net loss $ (319,904) (96,542) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 148,164 49,508 Noncash interest expense 48,950 33,288 Lease expense paid by RC 325 Third, LLC 3,500 Changes in assets and liabilities that provided (used) cash: Increase in tenant accounts receivable (4,698) (1,539) Increase in due from affiliates (2,080) (5,761) Decrease in prepaid land lease 1,875 Increase in due to affiliates 15,150 7,000 Increase in accounts payable 52,266 Increase (decrease) in tenant deposit liability (351) 17,600 Net cash provided by (used in) operating activities (60,628) 7,054 Cash flows from investing activity: Cash paid for rental property (574,173) (5,218,380) Net cash used in investing activity (574,173) (5,218,380) Cash flows from financing activities: Construction loan proceeds 3,313,390 Contruction loan repayment (3,326,838) Proceeds from related party note payable 402,468 Partner contributions 3,581,989 2,065,040 Cash paid for tax credit and syndication costs (20,000) (50,000) Cash paid for debt issuance costs (44,639) Net cash provided by financing activities 637,619 5,283,791 Net increase in cash and restricted cash 2,818 72,465 Cash and restricted cash, beginning 72,465 Cash and restricted cash, end $ 75,283 72,465 Supplemental disclosure of non-cash investing activity: Rental property acquired through accounts payable $ 622,000 Supplemental disclosure of cash investing activity: Cash paid during the year for interest $ 26,782 33,288 See accompanying notes to financial statements. 6

8 Notes to Financial Statements (1) Organization 325 E. 3rd Limited Partnership (the Partnership) was organized as a limited liability partnership on January 20, 2016 under the laws of the State of Alaska for the purpose of acquiring, constructing, and operating a 20-unit apartment complex located in Anchorage, Alaska (the project). The property was placed in service on November 4, The term of the Partnership shall continue in perpetuity, unless dissolved sooner in accordance with the provisions of the Limited Partnership Agreement. The project has qualified for and been allocated low-income housing credits pursuant to the Internal Revenue Code Section 42 (Section 42), which regulates the use of the project as to occupant eligibility and gross unit rent, among other requirements. The project must meet the provisions of these requirements during each of the 15 consecutive years in order to remain qualified to receive the credits. In addition, the Partnership has executed a land use restriction agreement, which requires the utilization of the project pursuant to Section 42 for a minimum of 30 years, even if the Partnership disposes of the project. (2) Summary Of Significant Accounting Policies (a) Risks and Uncertainties The Partnership is subject to various risks and uncertainties in the ordinary course of business that could have adverse impacts on its operating results and financial condition. Future operations could be affected by changes in the economy or other conditions in the geographical area where the property is located or by changes in federal low-income housing subsidies or the demand for such housing. (b) Cash and Credit Risk The Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At times cash deposits exceed the federally insured limits of the financial institution and expose the Partnership to credit risk. At, there were no balances over the federally insured limits. The Partnership believes it is not exposed to any significant risk of loss on these funds. (c) Capitalization and Depreciation Land, buildings, and furniture and fixtures are recorded at cost. Improvements are capitalized, while expenditures for maintenance and repairs are expensed. Upon disposal of the depreciable property, the appropriate property accounts are reduced by the related costs and accumulated depreciation. 7 (Continued)

9 Notes to Financial Statements Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. For financial statement purposes, the following estimated useful lives are used: Estimated life Method Land None Building and improvements 40 Straight-line Site improvements 40 Straight-line Furniture and fixtures 5 Straight-line (d) Impairment The Partnership reviews its investment in rental property for impairment whenever events or changes in circumstances indicate that the carrying value of such property may not be recoverable. For assets held and used, if management s estimate of the aggregate future cash flows to be generated by the property, undiscounted and without interest charges, including the low-income housing tax credits and any estimated proceeds from the eventual disposition of the real estate are less than their carrying amounts, an impairment loss has occurred. The amount of the impairment loss is equal to the excess of the asset s carrying value over its estimated fair value. The determination of undiscounted cash flows requires significant estimates by management. Subsequent changes in estimated undiscounted cash flows could impact the determination of whether impairment exists. No impairment loss has been recognized during the years ended. (e) Income Taxes The Partnership has elected to be treated as a pass-through entity for income tax purposes and, as such, is not subject to income taxes. Rather, all items of taxable income, deductions and tax credits are passed through to, and are reported by, its owners on their respective income tax returns. The Partnership s federal tax status as a pass-through entity is based on its legal status as a Partnership. Accordingly, the Partnership is not required to take any tax positions in order to qualify as a pass-through entity. The Partnership is required to file and does file tax returns with the Internal Revenue Service and other taxing authorities. Accordingly, these financial statements do not reflect a provision for income taxes and the Partnership has no other tax positions, which must be considered for disclosure. (f) Rental Income and Prepaid Rents Rental income is recognized as rent becomes due. Rental payments received in advance are deferred until earned. (g) Tenant Receivables and Bad Debt Tenant receivables are reported net of an allowance for doubtful accounts. Management s estimate of the allowance is based on historical collection experience and a review of the current status of tenant account receivable. It is reasonably possible that management s estimate of the allowance will change. As of, the allowance for doubtful accounts was $0. 8 (Continued)

10 Notes to Financial Statements (h) Advertising Costs Advertising costs are charged to operations when incurred. (i) Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (j) Reclassifications Certain reclassifications were made to the prior year information to conform to current year presentation. (k) Subsequent Events The Partnership has evaluated subsequent events through July 23, 2018, the date which the financial statements were available to be issued. (3) Capitalized Costs The costs incurred to obtain funding for the project and to obtain tax credits have been capitalized: Tax credit fees $ 10,000 10,000 Other 40,000 Less accumulated amortization (779) (556) Net capitalized costs $ 9,221 49,444 Estimated amortization expense for each of the ensuing years through December 31, 2021 is $667. (4) Restricted Escrow Deposits And Reserves Operating Reserve The Partnership is required to fund an operating reserve from limited partner capital contributions and surplus cash as defined in the partnership agreement in the initial amount of $146,630. The operating reserve will be fully funded upon payment of the fifth installment of the limited partner s capital contribution, scheduled for no later than October 1, The balance of operating reserves was $30,658 at December 31, Replacement Reserve The Partnership is required to fund a replacement reserve as defined in the partnership agreement in the amount of three hundred dollars per unit per year increasing at three percent annually. The balance of replacement reserves was $6,000 at December 31, (Continued)

11 Notes to Financial Statements (5) Partners Capital Contributions The Partnership has one General Partner, RC 325 Third, LLC, which has a 0.01% interest and one Limited Partner, Enterprise Housing Partners XXVI Limited Partnership, which has a 99.99% interest. In accordance with the First Amended and Restated Agreement of Limited Partnership, the Limited Partner is required to make capital contributions of $2,247,000 in installments. The installments are subject to adjustment depending on certain conditions being met, primarily related to the amount and timing of low-income housing tax credits the Partnership is able to obtain. At the Limited Partner had contributions remaining of $199,972 and $2,007,000, respectively. The General Partner is expected to make capital contributions of $3,600,000. At December 31, 2017 and 2016 the General Partner had contributions remaining of $0 and $1,731,460, respectively. (6) Partnership Profits, Losses, and Distributions Profits and losses are allocated 0.01% to the General Partner and 99.99% to the Limited Partner. Cash flow to the extent available, as defined by the First Amended and Restated Agreement of Limited Partnership, shall be distributed 0.01% to the General Partner and 99.99% to the Limited Partner. Profits and losses arising from the sale, refinancing, or other disposition of all or substantially all of the Partnership s assets will be specially allocated as prioritized by the First Amended and Restated Agreement of Limited Partnership. (7) Notes Payable The Partnership had a construction loan with Wells Fargo Bank which was paid in full on June 12, At December 31, 2016, the loan had a maximum amount of $3,400,000, a balance of $3,346,678, and unamortized debt issuance costs of $19,840. The loan was collateralized by rental property and incurred interest at 2% plus 66.8% of LIBOR (2.41% at December 31, 2016). The Partnership entered into a loan with Rural Alaska Community Action Program, Inc. (the sole member of RC 325 Third, LLC) for $402,468 maturing December 31, 2047 and collateralized by a Deed of Trust on the rental property. The loan was funded May 9, As amended, the loan bears interest at 3.5% and payments are due to the extent there is available cash flow from the Project. (8) Transaction with Affiliates and Related Parties (a) Developer Fee As provided in the Development Services Agreement, the Partnership shall pay the developer fee totaling $822,000. The developer fee is payable in the amount of $361,680 to V2, LLC, $361,680 to Trapline, LLC, and $98,640 to Rural Alaska Community Action Program, Inc., for services rendered for overseeing the construction and development of the complex. As of December 31, 2017, the Partnership owed $39,600, $39,600, and $10,800 to the parties, respectively, in developer fees with a total developer fee payable of $90,000. As of December 31, 2016, the Partnership owed $273,680, $273,680, and $74,640 to the parties, respectively, in developer fees with a total developer fee payable of $622,000. The developer fee due date is December 31, 2031 based on section 4(b) of the Developer Services agreement. 10 (Continued)

12 Notes to Financial Statements (b) Property Management Fee The Partnership has entered into a management agreement with Rural Alaska Community Action Program, Inc., the owner of the General Partner. The monthly fee equals $1,000 per month. During the years ended, property management fees of $12,000 and $2,000 were incurred, of which $12,000 and $0 remains payable, respectively. (c) Investor Service Fee Per the Investor Service Agreement, the Partnership shall pay the investor service fee annually to the servicer, an affiliate of the Limited Partner, for property management oversight, tax credit compliance monitoring, and related services in the amount of $5,000, to be increased annually by 3%. The fee shall be payable from cash flow available. If cash flow is not sufficient to pay such fee, then any unpaid fees shall accrue without interest and shall be payable out of the next available cash flow. During the years ended, investor service fees totaled $5,150 and $5,000, of which $5,150 and $5,000 remains payable, respectively. (d) Due to Affiliates Summary The General Partner is owed funds from the Partnership for developer fee payable and management fee payable. The Limited Partner is owed funds from the Partnership for investor services fees payable. Amounts due to the General Partner and Limited Partner at are as follows: General Partner: Developer fee $ 10,800 74,640 Property management fee 12,000 2,000 Limited Partner: Investor services fee 10,150 5,000 Total $ 32,950 81,640 (9) Operating Deficit Contributions According to the First Amended and Restated Agreement of Limited Partnership, the General Partner has an obligation to make operating deficit contributions equal to the amount of any operating deficit that exists. This obligation shall terminate on the date that the following have occurred simultaneously: (i) the Project has operated at the Required Expense Coverage determined by audited financial statements for a period of at least two consecutive Fiscal Years, which two year period shall have commenced no earlier than three years after the first day of the year in which the later of the Stabilization Date is achieved and Loan Conversion occurs; (ii) the balance in the Operating Reserve equals or exceeds the Operating Reserve Amount; and (iii) that all projected operating, rental and services subsidies remain fully funded and available to the Project in the amount shown in the Projections. Operating Deficit Contributions shall be repayable, without interest, solely from Cash Flow or as provided in Article VIII of the Limited Partnership Agreement. 11 (Continued)

13 Notes to Financial Statements (10) Grant Funded Operating Subsidy The General Partner receives funds from the Department of Housing and Urban Development under the Continuum of Care program to support operating expenses for the project. These funds are used for expenses such as facility cleaning and grounds work, facility utilities (gas, electric, water, and sewer), elevator maintenance, and insurance. (11) Ground Lease On January 20, 2016, the Partnership executed a ground lease with Alaska Project Development, LLC. The lease runs from the placed in service date through December 31, 2095 and requires 938 payments. Beginning November 2021, the monthly base rent shall be adjusted to reflect the increase, if any, in the cost of living over the preceding five years. The following is a schedule of future minimum lease payments under the agreement: Amount Year ending December 31: 2018 $ 21, , , , ,000 Thereafter 867,000 $ 972,000 January 20, 2016 a Memorandum of Right of First Refusal and Option to Purchase between Alaska Project Development, LLC and Rural Alaska Community Action Program, Inc. was executed. This right of first refusal and option to purchase terminates on January 1, There was a prepayment of $150,000 on this land lease that is being expensed over the 80 year lease period. At December 31, 2017 the remaining amount to be expensed was $148,125. (12) Property Purchase Option According to the First Amended and Restated Agreement of Limited Partnership, the General Partner has an option to purchase Partnership property at the end of the low-income housing tax credit compliance period at a price that would facilitate the purchase while protecting the Partnership s tax benefits from the project. Such option is based on the General Partner or sponsor maintaining the low-income occupancy of the project and is in a form satisfactory to legal and accounting counsel. (13) Construction Contract The Partnership entered into a Construction Contract Agreement dated January 8, 2016 in the amount of $3,487,589, including change orders, for construction services in connection with the project. At, construction in the amount of $3,487,589 and $3,474,840 has been completed and billed, respectively. 12 (Continued)

14 Notes to Financial Statements (14) Contingencies The project s low-income housing credits are contingent on its ability to maintain compliance with applicable sections of Section 42. Failure to maintain compliance with occupant eligibility, and/or unit gross rent, or to correct noncompliance within a specified time period could result in recapture of previously taken tax credits plus interest. Noncompliance with state requirements could result in recapture of the project s state low-income housing tax credits. In addition, such potential noncompliance may require an adjustment to the contributed capital by the Limited Partner. The Partnership does not believe there is any litigation pending or threatened against it that, individually or in the aggregate, reasonable may be expected to have a material adverse effect on the Partnership. The Partnership, as an owner of real estate, is subject to various federal, state, and local environmental laws. Compliance by the Partnership with existing laws has not had a material adverse effect on the Partnership. However, the Partnership cannot predict the impact of new or changed laws or regulations on its current properties. 13

15 Schedule of Expenses Year ended December 31, 2017 Schedule 1 Maintenance and operating: Lease $ 21,000 Janitor contract 13,993 Property management fee 12,000 Telephone 3,410 Amortization of prepaid lease 1,875 Security contract 275 Miscellaneous 2, ,016 Utilities: Electric 16,681 Gas 7,152 Trash 1,233 Water 1,168 Snow removal 1,060 27,294 Taxes and insurance: Real estate taxes 35,103 Property and liability insurance 7,541 42,644 Administrative: Audit and tax return 61,750 Legal fees 20,000 Tax credit audit fees 11,000 Compliance contract 3,785 Office supplies 505 Bank fees 43 97,083 Financial: Fees on construction loan 39,555 Interest on construction loan 26,782 Interest on note payable 9,395 Investor services fee 5,150 80,882 Depreciation and amortization: Depreciation 147,496 Amortization ,164 Total expenses $ 451,083 See accompanying independent auditors report. 14