THE SALVATION ARMY TURLOCK RESIDENCES, INC. HUD Project No. 121-EE112-NP-WAH (A California Non-Profit Corporation)

Transcription

1 THE SALVATION ARMY TURLOCK RESIDENCES, INC. HUD Project No. 121-EE112-NP-WAH (A California Non-Profit Corporation) Financial Statements as of and for the Year Ended, September 30, 2017, Supplemental Schedules for the Year Ended September 30, 2017, and Independent Auditor's Report FREEMAN & FREEMAN Certified Public Accountants

2 CONTENTS Page No. Independent Auditor's Report 1-2 Financial Statements: Statement of Financial Position Statement of Activities Statement of Changes in Net Assets Statement of Cash Flows Notes to Financial Statements Supplemental Data Required by HUD: Balance Sheet Data Profit and Loss Data Statement of Cash Flows Schedule of Reserve Funds and Required Information Schedule of Changes in Fixed Assets and Depreciation Allowance Computation of Surplus Cash and Residual Receipts Lead Auditor Schedule of Expenditures of Federal Awards Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and other Matters base on an Audit of Financial Statements performed in accordance with Government Auditing Standards Independent Auditor's Report on Compliance for each Major Program and on Internal Control over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs and Prior Year Findings Managing Agent's Certification Certification of Board of Directors Independent Accountant's Report on Applying Agreed - Upon Procedures

3 FREEMAN & FREEMAN Certified Public Accountants 2808 E. Katella A venue, Suite 200 Orange, CA (714) Fax (714) E. Frederick Freeman, C.P.A. Mark J. Freeman, C.P.A. Board of Directors The Salvation Army Turlock Residences, Inc. Turlock, California Report on the Financial Statements INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of The Salvation Army Turlock Residences, Inc. (Project No. 121-EE 112-NP-W AH) (A California Non-Profit Corporation), which comprise the statement of financial position as of September 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 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 The Salvation Army Turlock Residences, Inc. as of September 30, 2017, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. -1-

4 Other Matters Our audit was conducted for the purpose of forming an opm1on on the financial statements as a whole. The accompanying supplementary information shown on pages 12 to 19 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 Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Un!form 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 November 9, 2017, on our consideration of The Salvation Army Turlock Residences, lnc.'s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering The Salvation Army Turlock Residences, lnc.'s internal control over financial reporting and compliance. FREEMAN & FREEMAN Certified Public Accountants Orange, California November 9,

5 (Project No. 121-EE112-NP-WAH) Statement of Financial Position September 30, 2017 CURRENT ASSETS Cash - operations Cash - entity Total current assets Tenant deposits held in trust ASSETS $ 52,250 77, ,744 21,346 RESTRICTED DEPOSITS AND RESERVES Replacement reserve Residual receipt reserve Total funded reserves 261,455 20, ,538 FIXED ASSETS Land Building Building equipment - portable Furnishings Maintenance equipment Total fixed assets Accumulated depreciation Net fixed assets Total Assets $ 220,000 7,116,361 4,266 55,265 1,401 7,397,293 (2,762,795) 4,634,498 5,067,126 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable - operations Accrued wages payable Accrued management fee payable Prepaid revenue Total current liabilities Tenant deposits held in trust $ 69,562 10,840 6, ,216 20,997 LONG TERM LIABILITIES Due to The Salvation Army Total long-term liabilities Total liabilities 215, , ,332 NET ASSETS Unrestricted net assets Capital advance - HUD Net Assets - other Total unrestricted net assets Net assets - Temporarily restricted Total net assets Total liabilities and net assets 6,474,200 (1,807,900) 4,666,300 77,494 4,743,794 $ 5,067,126 See accompanying notes to the financial statements. -3-

6 (Project No. Project No. 121-EE112-NP-WAH) Statement of Activities For the Year Ended September 30, 2017 REVENUES: RENTS Rent revenue - gross potential Tenant assistance payments Total rental revenue Vacancies - apartments Net rental revenue $ 288, , ,843 (1,532) 560,311 FINANCIAL REVENUE Financial revenue - project operations Revenue from investments - residual receipt reserve Revenue from investments - replacement reserve Total financial revenue OTHER REVENUE Laundry and vending revenue Tenant charges Donations and gifts Total other revenue Total revenue 3, , , , 102 EXPENSES: ADMINISTRATIVE EXPENSES Conventions and meetings Advertising Other renting expense Office salaries Office expenses Management fee Manager or superintendent salaries Legal expense Audit expense Bookkeeping fees/accounting services Total administrative expenses 3, ,101 37,339 75,515 40, ,360 9, ,003 UTILITY EXPENSES Electricity Water Gas Sewer Total utilities expense 64,471 3,817 6,348 30, ,200 See accompanying notes to financial statements

7 (Project No. 121-EE112-NP-WAH) Statement of Activities (Continued) For the Year Ended September 30, 2017 OPERATING AND MAINTENANCE EXPENSES Payroll Supplies Contracts Operating free rent Garbage and trash removal Heating/cooling repairs and maintenance Vehicle maintenance Total operating and maintenance expenses 62,367 11, ,278 15,672 3,257 4, ,291 TAXES AND INSURANCE Real estate taxes Payroll taxes (project's share) Property and liability insurance (Hazard) Worker's Compensation Heath insurance and other employee benefits Miscellaneous taxes, licenses, permits and insurance Total taxes and insurance 11 7,799 34,032 5,264 24, ,157 Total cost of operations before depreciation 648,651 Change in net assets before depreciation Depreciation Change in net assets $ 170, ,136 (16,685) Change in unrestricted net assets Change in temporarily restricted net assets Change in total net assets $ $ 77,494 (94,179) (16,685) See accompanying notes to financial statements

8 (Project No. Project No.121-EE112-NP-WAH) Statement of Changes in Net Assets For The Year Ended September 30, 2017 Unrestricted Temporarily Restricted Total Net Assets -September 30, 2016 $ 4,760,479 $ - $ 4,760,479 Change in Net Assets (94,179) 77,494 (16,685) Net Assets - September 30, 2017 $ 4,666,300 $ 77,494 $ 4,743,794 See accompanying notes to financial statements. -6-

9 (Project No. Project No. 121-EE112-NP-WAH) Statement of Cash Flows For the Year Ended September 30, 2017 CASH FLOWS FROM OPERA TING ACTIVITIES: Rental revenue Interest income Gifts Other income Total receipts $ 544, ,000 3, ,089 Administration Management fees Utilities Salaries and wages Operating Property insurance Miscellaneous taxes and insurance Tenant security deposits Total disbursements Net cash provided by (used in) operating activities (55,031) (89,233) (105,171) (105,146) (186,881) (78,192) (7,810) 492 (626,972) 176,117 CASH FLOWS FROM INVESTING ACTIVITIES: Net deposits to replacement reserve Net deposits to the residual receipts account Net purchase of fixed assets Net cash used in investing activities (47,037) 64,954 (101,827) (83,910) Net increase (decrease) in cash and cash equivalents 92,207 Beginning of period cash 37,537 End of period cash $ 129,744 See accompanying notes to financial statements. -7-

10 THE SALVA TI ON ARMY TURLOCK RESIDENCES, INC. (Project No. Project No. Project No. 121-EE112-NP-WAH) Statement of Cash Flows For the Year Ended September 30, 2017 RECONCILIATION OF NET ASSETS TO CASH PROVIDED BY OPERA TING ACTIVITIES: Change in net assets Adjustments to reconcile change in net asset To net cash provided by operating activities: Depreciation and amortization $ (16,685) 187,136 (Increase) decrease in: Accounts receivable Increase (decrease) in: Accounts payable Accrued liabilities Security deposits held in trust Prepaid revenue 15,745 (10,231) 492 (340) Net cash provided by operating activities $ 176,117 See accompanying notes to financial statements. -8-

11 (Project No. 121-EE112-NP-WAH) Notes to Financial Statements September 30, Organization The Salvation Army Turlock Residences, Inc. is a non-profit corporation organized under the laws of the State of California. The Project constructed and now operates an apartment complex of 80 units under Section 202 of the National Housing Act. The Project is known as The Salvation Army Turlock Silvercrest Residence, Turlock, California, (Project No. 121-EEl 12-NP-WAH). The Project was completed for occupancy January 7, 2002, and is regulated by HUD as to rent charges and operation method. The Project's major programs are its Section 202 capital advance and its Project rental assistance contract. 2. Summary of Significant Accounting Policies The Project maintains its accounts and the accompanying financial statements are presented on the accrual basis. Fixed assets are stated at cost and depreciated over the assets estimated useful life using the straight-line method of depreciation. No provision is made for income taxes since the corporation has been determined to be exempt from Federal income tax under Section 501 (c) (3) of the Internal Revenue Code and California Franchise tax under Section (d) of the Revenue and Taxation Code. Generally, income tax returns related to the current and three prior years remain open for examination by taxing authorities. Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. The Project is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted assets, temporary restricted net assets, and permanently restricted net assets. Contributions and revenue are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions that are not fulfilled in the accounting period. 3. HUD Restricted Deposits Under the terms of the Regulatory Agreement, the Project is required to set aside specified amounts for the replacement of property and other Project expenditures as approved by HUD. Restricted funds, in the amount of$214,418 at September 30, 2017, are held in separate accounts and generally not available for operating purposes. In accordance with the PRAC contract, if HUD determines at any time that residual receipt funds are more than the amount needed for Project purposes, HUD may require any excess to be remitted to HUD upon notice. 4. Due to The Salvation Army The amount due to the sponsor represents temporary advances. The non-interest-bearing obligations are reimbursable by the corporation from cash flow from operations, proceeds ofrefinancing, or sale of the Project, if permitted by HUD. -9-

12 (Project No. 121-EE112-NP-WAH) Notes to Financial Statements September 30, Capital Advance - HUD The Project received a capital advance from HUD. The capital advance bears no interest and requires no repayment as long as the housing remains available to eligible elderly low-income households for a period of forty years. Failure to keep the housing available for elderly low-income persons would result in HUD billing the Project the entire capital advance outstanding plus interest since the date of the first advance. 6. Management Fee The Project pays a management fee equal to 12.00% ofrevenues collected to The Salvation Army Silvercrest Department. 7. Repayment to HUD The Project repaid HUD $65,037 of excess residual receipts. The Project reduced HUD tenant payments revenue for the amount repaid to HUD. 8. Local Tax Exemptions Under the provisions of applicable local laws, the corporation has been determined to be exempt from the real and personal property taxes, except that levied by the Flood Control District. 9. Other Matters Management has stated that there are no actions or claims pending against the corporation. 10. Related Partv The Project reimburses The Salvation Army for property/liability insurance, workers' compensation insurance, employee health insurance, employee retirement benefits, management fees and legal fees. The total reimbursed to The Salvation Army in the current year amounted to $158,668. At September 30, 2017, the Project owed $42,859 to The Salvation Army for these reimbursements. The Project also has an obligation to The Salvation Army. See Note 4 for discussion about this obligation. The Project is related to The Salvation Army because the two companies have a common board of directors. 11. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and cash held in demand deposit, sweep, savings accounts, and certain investments in highly liquid instruments with original maturities of three months or less. Not included in cash are funds restricted as to their use, regardless of their liquidity, such security deposits and replacement reserves. -10-

13 (Project No. 121-EE112-NP-WAH) Notes to Financial Statements September 30, Temporarily Restricted Net Assets The Project received a donation in the amount of$253,000 from the Wilnor Corporation. The donor restricted the use of the donation for certain repairs and improvements to the Project. During the year, the Project used $175,506 of these funds for major repairs and improvements. 13. Project Rental Assistance Contract The Project has entered into a Project Rental Assistance Payments Contract with HUD. The agreement provides for an annual commitment for 79 units. 15. Current Vulnerability Due to Certain Concentrations The Project's principal asset is the apartment building. The Project's operations are concentrated in the multifamily real estate market. In addition, the Project operates in a heavily regulated environment. The operations of the Project are subject to the administrative directives, rules and regulations offederal, 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, to comply with a change. 16. Concentration of Credit Risk Financial instruments which potentially subject the Project's to concentrations of credit risk consist of cash and savings accounts. The Project places its cash and savings accounts with creditworthy, high-quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. Such account balances may, at times, exceed the federally insured limit. 17. Subsequent Events Subsequent events have been evaluated by management through November 9, 2017, the date the financial statements were available to be issued

14 SUPPLEMENTAL INFORMATION REQUIRED BY HUD

15 (Project No. 121-EE112-NP-WAH) Balance Sheet Data September 30, 2017 (With HUD Chart of Accounts) CURRENT ASSETS 1120 Cash - operations 1125 Cash - entity l l 99T Total current assets 1191 Tenant deposits held in trust ASSETS $ 52,250 77, ,744 21,346 RESTRICTED DEPOSITS AND RESERVES 1320 Replacement reserve 1340 Residual receipt reserve 1300T Total funded reserves 261,455 20, ,538 FIXED ASSETS 1410 Land 1420 Building 1440 Building equipment - portable 1460 Furnishings 1470 Maintenance equipment 1400T Total fixed assets 1495 Accumulated depreciation 1400N Net fixed assets looot Total Assets 220,000 7,116,361 4,266 55,265 1,401 7,397,293 (2,762,795) 4,634,498 $ 5,067,126 CURRENT LIABILITIES 2110 Accounts payable - operations 2120 Accrued wages payable 2123 Accrued management fee payable 2120 Prepaid revenue 2122T Total current liabilities 2191 Tenant deposits held in trust LONG TERM LIABILITIES 2310 Due to The Salvation Army 2300T Total long-term liabilities 2000T Total liabilities NET ASSETS T Unrestricted net assets Capital advance - HUD Net Assets - other Total unrestricted net assets Net assets - Temporarily restricted Total net assets Total liabilities and net assets LIABILITIES AND NET ASSETS $ 69,562 10,840 6, ,216 20, , , ,332 6,474,200 (1,807,900) 4,666,300 77,494 4,743,794 $ 5,067,

16 REVENUES: RENTS 5120 Rent revenue - gross potential 5121 Tenant assistance payments 5 loot Total rental revenue 5220 Vacancies - apartments 5152N Net rental revenue (Project No. Project No. 121-EE112-NP-WAH) Profit and Loss Data For the Year Ended September 30, 2017 (With HUD Chart of Accounts) $ 288, , ,843 (1,532) 560,311 FINANCIAL REVENUE 5410 Financial revenue - project operations 5430 Revenue from investments - residual receipt reserve 5440 Revenue from investments - replacement reserve 5400T Total financial revenue OTHER REVENUE 5910 Laundry and vending revenue 5920 Tenant charges 5970 Donations and gifts 5900T Total other revenue 5000T Total revenue 3, , , ,102 EXPENSES: ADMINISTRATIVE EXPENSES 6203 Conventions and meetings 6210 Advertising 6250 Other renting expense 6310 Office salaries 6311 Office expenses 6320 Management fee 6330 Manager or superintendent salaries 6340 Legal expense 6350 Audit expense 6351 Bookkeeping fees/accounting services 6263T Total administrative expenses 3, ,101 37,339 75,515 40, ,360 9, ,003 UTILITY EXPENSES 6450 Electricity 6451 Water 6452 Gas 6453 Sewer 6400T Total utilities expense 64,471 3,817 6,348 30, ,

17 (Project No. 121-EE112-NP-WAH) Profit and Loss Data (Continued) For the Year Ended September 30, 2017 OPERATING AND MAINTENANCE EXPENSES 6510 Payroll 6515 Supplies 6520 Contracts 6521 Operating free rent 6525 Garbage and trash removal 6546 Heating/cooling repairs and maintenance 6570 Vehicle maintenance 6500T Total operating and maintenance expenses 62,367 11, ,278 15,672 3,257 4, ,291 TAXES AND INSURANCE 6710 Real estate taxes 6711 Payroll taxes (project's share) 6720 Property and liability insurance (Hazard) 6722 Worker's Compensation 6723 Heath insurance and other employee benefits 6790 Miscellaneous taxes, licenses, permits and insurance 6700T Total taxes and insurance 11 7,799 34,032 5,264 24, , T Total cost of operations before depreciation 648, T Change in net assets before depreciation 6600 Depreciation 5060N Change in net assets 170, ,136 $ (16,685) 3247 Change in unrestricted net assets 3248 Change in temporarily restricted net assets 3250 Change in total net assets $ 77,494 (94,179) $ (16,685) -14-

18 (Project No. Project No. 121-EE112-NP-WAH) Statement of Cash Flows For the Year Ended September 30, 2017 (With HUD Chart of Accounts) CASH FLOWS FROM OPERA TING ACTIVITIES: Sl Rental revenue Sl Interest income Sl Gifts Sl Other income Sl Total receipts $ 544, ,000 3, ,089 Sl Administration Sl Management fees Sl Utilities Sl Salaries and wages Sl200-l 10 Operating Sl Property insurance Sl Miscellaneous taxes and insurance Sl Tenant security deposits Sl Sl Total disbursements Net cash provided by (used in) operating activities (55,031) (89,233) (105,171) (105, 146) (186,881) (78,192) (7,810) 492 (626,972) 176,117 CASH FLOWS FROM INVESTING ACTIVITIES: Sl Net deposits to replacement reserve Net deposits to the residual receipts account Sl Net purchase of fixed assets Sl Net cash used in investing activities (47,037) 64,954 (101,827) (83,910) Sl Net increase (decrease) in cash and cash equivalents 92,207 Sl Beginning of period cash 37,537 Sl200T End of period cash $ 129,

19 (Project No. Project No. Project No. 121-EE112-NP-WAH) Statement of Cash Flows For the Year Ended September 30, 2017 (With HUD Chart of Accounts) RECONCILIATION OF NET ASSETS TO CASH PROVIDED BY OPERATING ACTIVITIES: 3250 Change in net assets Adjustments to reconcile change in net asset To net cash provided by operating activities: 6600 Depreciation and amortization $ (16,685) 187,136 Sl (Increase) decrease in: Accounts receivable Sl Sl s Sl Increase (decrease) in: Accounts payable Accrued liabilities Security deposits held in trust Prepaid revenue 15,745 (10,231) 492 (340) Sl Net cash provided by operating activities $ 176,

20 (Project No. Project No. 121-EE112-NP-WAH) Supplemental Data Required by HUD September 30, 2017 SCHEDULE OF RESERVE FUNDS In accordance with the provisions of the regulatory agreement, reserve funds are to be used for repair and replacement of property with the approval of HUD. The reserves are as follows: Balance at September 30, 2016 Deposits: Monthly deposits required by HUD Investment income Repairs & Residual Replacement Receipt Reserve Reserve $ 214,418 $ 85,037 66, Total $ 299,455 66, Authorized withdrawals (19,685) (65,037) (84,722) Balance at September 30, 2017 $ 261,455 $ 20,083 $281,538 S Total mortgage principal payments required during the audit year (12 monthly payments). This applies to all direct loans and HUDheld and fully insured mortgages. Any HUD approved second mortgages are included in the figures. $ Sl Total of 12 monthly deposits in the audit year into the replacement reserve account, as required by the regulatory agreement, even if payments may be temporarily suspended or reduced. $ 66,000 S Replacement reserves, or residual receipts and releases which are included as expense items on this statement of activities. $ 11,876 Sl Project improvement reserve releases under the flexible subsidy program that are included as expense items on this statement of activities. $ -17-

21 (Project No. Project No. 121-EE112-NP-WAH) Supplemental Data Required by HUD September 30, 2017 SCHEDULE OF CHANGES IN FIXED ASSETS AND DEPRECIATION ALLOWANCE Description Land Building Building equipment - portable Furnishings Maintenance equipment Total Fixed Assets Balance 9/30/2016 Additions Deductions $ 220,000 $ - $ 7,014, ,827 4,266 55,265 1,401 $ 7,295,466 $ 101,827 $ Balance 9/30/ $ 220,000 7,116,361 4,266 55,265 1,401 - $ 7,397,293 Description Building Building equipment - portable Furnishings Maintenance equipment Total Depreciation Allowance Balance 9/30/2016 Additions Deductions $ 2,519,885 $ 183,007 $ 4,266 50,107 4,129 1,401 $ 2,575,659 $ 187,136 $ Balance 9/30/ $ 2,702,892 4,266 54,236 1,401 - $ 2,762,

22 (Project No. Project No. 121-EE112-NP-WAH) Supplemental Data Required by HUD For the Year Ended September 30, 2017 COMPUTATION OF SURPLUS CASH Sl ADD CASH: Cash $ 73,596 Sl Total Cash 73,596 Sl Sl LESS CURRENT LIABILITIES: Accounts payable - 30 days Accrued expenses Prepaid revenue Tenant deposits held in trust 69,562 17, ,997 Sl Total current obligations 108,213 Sl Cash surplus (deficiency) $ (34,617) S Deposit due to residual receipts $ Lead auditor: E. Frederick Freeman, C.P.A. Firm name: Freeman & Freeman Certified Public Accountants Firm Address 2808 E. Katella A venue, Suite 200 Orange, CA Telephone: (714) Federal ID Number:

23 (Project No. 121-EE112-NP-WAH) Schedule of Expenditures of Federal Awards September 30, 2017 Federal Grantor/Pass-Through Grantor/Program Title U.S. Department of Housing And Urban Development: Section 202 Capital Advance* Project Rental Assistance Payments Contract* Federal CFDA Number Federal Expenditures $ 6,474, ,459 $ 6,747,659 Note 1 - Basis of presentation The accompanying schedule of expenditures of federal awards the federal award activity of The Salvation Army Turlock Residences, Inc., HUD Project 121-EEl 12-NP-WAH and is prepared on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and audit Requirements for Federal Awards. (Uniform Guidance) Because the Schedule presents only a selected portion of the operations of the Project, it is not intended to and does not present the financial position, changes in net assets or cash flows of the Project. Note 2 - Summary of significant accounting policies Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following, as applicable, the cost principles contained in the Uniform Guidance, where in certain types of expenditures are not allowable or are limited as to reimbursement. Note 3 - Federally Funded and Insured Mortgages The capital advance at the beginning of the year and advances made during the year are included in the federal expenditures presented in the Schedule. The balance of the outstanding capital advance at September 30, 2017 is $6,474,200. Note 4 - Indirect Costs The project has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. * Major program -20-

24 FREEMAN & FREEMAN Certified Public Accountants 2808 E. Katella Avenue, Suite 200 Orange, CA (714) Fax (714) E. Frederick Freeman, C.P.A. Mark J. Freeman, C.P.A. 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 Board of Directors The Salvation Army Turlock Residences, Inc. Turlock, California 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 The Salvation Army Turlock Residences, Inc. (Project No. 121-EEl 12-NP-WAH) (A California Non-Profit Corporation), which comprise the statement of financial position as of September 30, 2017, and the related statements of activities, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 9, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered The Salvation Army Turlock Residences, 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 The Salvation Army Turlock Residences, Inc.'s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization'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 the entity'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. -21-

25 Compliance and Other Matters As part of obtaining reasonable assurance about whether The Salvation Army Turlock Residences, 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 the organization's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Freeman & Freeman Certified Public Accountants Orange, California November 9,

26 FREEMAN & FREEMAN Certified Public Accountants 2808 E. Katella Avenue, Suite 200 Orange, CA (714) Fax (714) E. Frederick Freeman, C.P.A. Mark J. Freeman, C.P.A. INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Directors The Salvation Army Turlock Residences, Inc. Turlock, California Report on Compliance for Each Major Federal Program We have audited The Salvation Army Turlock Residences, lnc.'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 The Salvation Army Turlock Residences, Inc.'s major federal programs for the year ended September 30, The Salvation Army Turlock Residences, Inc.'s major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of The Salvation Army Turlock Residences, 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 The Salvation Army Turlock Residences 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 The Salvation Army Turlock Residences Inc.'s compliance. Opinion on Each Major Federal Program In our opinion, The Salvation Army Turlock Residences, 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 September 30,

27 Report on Internal Control Over Compliance Management of The Salvation Army Turlock Residence, Inc. is responsible for establishing and maintammg effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered The Salvation Army Turlock Residences, Inc. 's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of The Salvation Army Turlock Residences, Inc.'s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Freeman & Freeman Certified Public Accountants Orange, California November 9,

28 (Project No. 121-EE112-NP-WAH) Schedule of Findings and Questioned Costs September 30, 2017 A. SUMMARY OF AUDIT RESULTS: 1. The auditor's report expresses an unmodified opinion on the financial statements of The Salvation Army Turlock Residences, Inc. 2. No material weaknesses were identified during the audit of the financial statements. 3. No instances of noncompliance material to the financial statements of The Salvation Army Turlock Residences, Inc. were disclosed during the audit. 4. No material weaknesses were identified during the audit of the major federal award programs. 5. The auditor's report on compliance for the major federal award programs for The Salvation Army Turlock Residences, Inc. expresses an unmodified opinion. 6. There were no audit findings relative to major federal award programs for The Salvation Army Turlock Residences, Inc. 7. The programs tested as major programs include: Program Title U.S. Department of Housing and Urban Development: Section 202 Capital Advance Project Rental Assistance Payments Contract CFDA Number The threshold for distinguishing Types A and B programs was $750, The Salvation Army Turlock Residences, Inc. is determined to be a low-risk auditee. B. FINDINGS -FINANCIAL STATEMENTS AUDIT: None C. FINDINGS AND QUESTIONED COSTS - MAJOR FEDERAL A WARD PROGRAMS AUDIT: None D. SCHEDULE OF PRIOR YEAR FINDINGS: None -25-

29 (Project No. 121-EE112-NP-W AB) MANAGING AGENT'S CERTIFICATION September 30, 2017 We hereby certify that we have examined the accompanying financial statements and supplemental data of The Salvati-On Anny Turlock Residences, Inc. (Project No. 121-EEl 12-NP-WAH) for the year ended September 30, 2017 and to the best of our know ledge and belief, the same is complete and accurate. ~~~ i\tanaging Agent Date November The Salvation Anny Silvercrest Management 180 E. Ocean Blvd Floor Long Beach, CA Federal Identification No

30 (Project No.121-EE112-NP-W AH) CERTIFICATION OF BOARD OF DIRECTORS September 30, 2017 We hereby certify that we have examined the accompanying financial statements and supplemental data of The Salvation Army Turlock Residences, Inc. (Project No. 121-EEl 12-NP-WAH) for the year ended September 30, 2017 and, to the best of our knowledge and beliet: e same is comp ete. accurate J:l'ovemb~r l _._ Date: By: Douglas Tollerud ~ ~"-"""""-- - "-- Title: Trca:-.urer Date: November 9, 20 l 7 Federal Identification Number

31 E. Frederick Freeman, C.P.A. Mark J. Freeman, C.P.A. FREEMAN & FREEMAN Certified Public Accountants 2808 E. Katella Avenue, Suite 200 Orange, CA (714) Fax (714) November 9, 2017 Board of Directors The Salvation Army Turlock Residences, Inc. Turlock, California INDEPENDENT ACCOUNT ANT'S REPORT ON APPLYING AGREED-UPON PROCEDURE We have performed the procedure described in the second paragraph of this report, which was agreed to by The Salvation Army Turlock Residences, Inc. and the U.S. Department of Housing and Urban Development, Public Indian Housing-Real Estate Assessment Center (PIH-REAC), on whether the electronic submission of certain information agrees with the related hard copy documents included within the OMB Uniform Administrative Guidance reporting package. The Salvation Army Turlock Residences, Inc. is responsible for the accuracy and completeness of the electronic submission. The sufficiency of the procedure is solely the responsibility of The Salvation Army Turlock Residences, Inc., and the U.S. Department of Housing and Urban Development, PIH-REAC. Consequently, we make no representation regarding the sufficiency of the procedure described below either for the purpose for which this report has been requested or for any other purpose. We compared the electronic submission of the items listed in the "UFRS Rule Information" column with the corresponding printed documents listed in the "Hard Copy Documents" column. The associated findings from the performance of our agreedupon procedure indicate agreement or non-agreement of the electronically submitted information and hard copy documents as shown in the attached chart. This agreed-upon procedure engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and the standards applicable to the attestation engagements contained in Government Auditing Standards issued by the Comptroller General of the United States. We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on whether the electronic submission of the items listed in the "UFRS Rule Information" column agrees with the related hard copy documents within the audit reporting package. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. We were engaged to perform an audit in accordance with the audit requirements ofomb Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), for The Salvation Army Turlock Residences, Inc. as of and for the year ended September 30, 2017, and have issued our reports thereon dated November 9, The information in the "Hard Copy Documents" column was included within the scope, or was a by-product of that audit. Further, our opinion on the fair presentation of the supplementary information dated November 9, 2017, was expressed in relation to the basic financial statements of The Salvation Army Turlock Residences, Inc. taken as a whole. A copy of the reporting package required by the OMB Uniform Administrative Requirements, which includes the auditor's reports, is available in its entirety from The Salvation Army Turlock Residences, Inc. We have not performed any additional auditing procedures since the date of the aforementioned audit reports. Further, we take no responsibility for the security of the information transmitted electronically to the U.S. Department of Housing and Urban Development, PIH-REAC. The purpose of this report on applying the agreed-upon procedure is solely to describe the procedure performed on the electronic submission of the items listed in the "UFRS Rule Information" column and the associated findings, and not provide an opinion or conclusion. Accordingly, this report is not suitable for any other purposes. ~;1~ FREEMAN & FREEMAN Certified Public Accountants Orange, California November 9,

32 Attachment To Independent Accountant's Report On Applying Agreed-Upon Procedure UFRS RULE INFORMATION HARD COPY DOCUMENTS(S) FINDINGS Balance Sheet, Revenue and Financial Data Templates (i.e., Agrees Expense and Cash Flow Data Supplemental Schedules) (account numbers 1120 to 7100T and the Sl200 series) Surplus Cash (Sl300 series of Financial Data Templates i.e., Agrees accounts) Computation of Surplus Cash, Distributions and Residual Receipts (Annual) Footnotes (S3 100 series of Notes to Audited Basic Financial Agrees accounts) Statements Type of Opinion on the Financial Auditor's Reports on the Financial Agrees Statements and Auditor Reports Statements, Compliance and (S3400, S3500 and S3600 series of Internal Control accounts) Type of Opinion on Financial Data Auditor's Supplemental Report on Agrees Templates (i.e., Supplemental Financial Data Templates Data) (Account S ) Audit Findings Narrative (S3800 Schedule of Findings and Agrees series of accounts) Questioned Costs General information (S3300, Schedule of Findings and Agrees S3700 and S4000 series of Questioned Costs and Federal accounts) Awards Data -29-