Consolidated Financial Statements December 31, 2016 and 2015 Longmont Housing Development Corporation and Subsidiaries

Transcription

1 Consolidated Financial Statements December 31, 2016 and 2015 Longmont Housing Development Corporation and Subsidiaries

2 Table of Contents December 31, 2016 and 2015 Independent Auditor s Report... 1 Financial Statements Consolidated Statements of Financial Position... 3 Consolidated Statements of Activities... 4 Consolidated Statements of Cash Flows... 5 Notes to Consolidated Financial Statements... 6 Supplementary Information Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 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 Independent Auditor s Report on Compliance for the Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs... 20

3 Independent Auditor s Report The Board of Directors Longmont, Colorado Report on the Financial Statements We have audited the accompanying consolidated financial statements of Longmont Housing Development Corporation and Subsidiaries, which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, and the related consolidated statements of activities and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion th Ave. S. P.O. Box 2545 Fargo, ND T F EOE

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), and is not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated 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 of Expenditures of Federal Awards is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Other Reporting Information Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated April 18, 2017 on our consideration of internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering internal control over financial reporting and compliance. Bismarck, North Dakota April 18,

5 Consolidated Statements of Financial Position December 31, 2016 and Assets Cash and cash equivalents $ 1,846,962 $ 902,177 Accounts receivable - tenants - 61 Accounts receivable - other Prepaid expenses 5,297 5,896 Tenant security deposits - 9,045 Accounts receivable - developer fees 967,256 - Interest receivable 147,469 7,505 Notes receivable 5,336,125 3,814,271 Investment in future developments 213,965 31,385 Investment in tax credit partnerships 143, ,060 Property and equipment, at cost, less accumulated depreciation 1,659,460 1,847,131 Total assets $ 10,319,864 $ 6,760,531 Liabilities and Net Assets Liabilities Accounts payable $ 121,794 $ 62,024 Accrued expenses Interest 29,333 14,445 Other 1,858 1,350 Tenant security deposits payable - 9,045 Long-term debt 4,700,000 3,795,075 Total liabilities 4,852,985 3,881,939 Net Assets Unrestricted 5,466,879 2,878,592 Total liabilities and net assets $ 10,319,864 $ 6,760,531 See Notes to Consolidated Financial Statements 3

6 Consolidated Statements of Activities Years Ended December 31, 2016 and Revenue, Support and Gains Rental income $ 90,998 $ 156,442 Developer fee income 967, ,744 Gain on sale of property and equipment 1,837,292 60,000 Interest revenue 212,539 48,173 Income from Spring Creek - 44,511 Other revenue 5,412 9,753 Total revenue, support and gains 3,113, ,623 Expenses Management fees 159, ,925 Payroll and benefits 184, ,766 Repairs and maintenance 33,743 53,585 Depreciation 9,475 14,582 Utilities 16,984 20,283 Grant expense ,774 Interest 27,043 30,717 Other administrative 40,003 26,095 Office rent 26,000 16,000 Audit and accounting 18,883 16,024 Insurance 7,219 9,734 Legal 1, Total expenses 525, ,200 Change in Net Assets 2,588, ,423 Net Assets, Beginning of Year 2,878,592 2,767,169 Net Assets, End of Year $ 5,466,879 $ 2,878,592 See Notes to Consolidated Financial Statements 4

7 Consolidated Statements of Cash Flows Years Ended December 31, 2016 and Cash Flows from Operating Activities Change in net assets $ 2,588,287 $ 111,423 Adjustments to reconcile change in net assets to net cash (used for) from operating activities Depreciation 9,475 14,582 Gain on sale of property and equipment (1,837,292) (60,000) Interest added to notes receivable (71,311) (39,795) Change in assets and liabilities Accounts receivable - tenants 61 (29) Accounts receivable - other (270) - Prepaid expenses 599 (5,896) Tenant security deposits 9,045 (995) Accounts receivable - developer fees (967,256) - Interest receivable (139,964) (7,505) Accounts payable 59,770 35,031 Accrued expenses 15,396 13,048 Tenant security deposit liability (9,045) 995 Net Cash (used for) from Operating Activities (342,505) 60,859 Investing Activities Net proceeds from the sale of property and equipment 2,015, ,481 Purchase of property and equipment - (819,460) Issuance of notes receivable (1,460,928) (3,330,777) Payments received on notes receivable 10, ,361 Payments for future developments (182,580) (31,385) Receipts from future developments - 369,334 Net Cash from (used for) Investing Activities 382,365 (2,766,446) Financing Activities Proceeds from issuance of long-term debt 1,460,928 3,239,072 Principal payments on long-term debt (556,003) (271,101) Net Cash from Financing Activities 904,925 2,967,971 Net Change in Cash and Cash Equivalents 944, ,384 Cash and Cash Equivalents, Beginning of Year 902, ,793 Cash and Cash Equivalents, End of Year $ 1,846,962 $ 902,177 Supplemental Disclosure of Cash Flow Information Cash payments for interest $ 12,155 $ 17,729 See Notes to Consolidated Financial Statements 5

8 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Note 1 - Principal Business Activity and Significant Accounting Policies Organization (Corporation) was formed April 27, 1993, as a not-for-profit organization to provide and develop affordable housing for elderly, handicapped, and low-income individuals of Longmont, Colorado. Substantially all of the Corporation s revenue is currently derived from rental operations, developer fees, and grants. Principles of Consolidation The consolidated financial statements include the accounts of Longmont Housing Development Corporation, Longmont Housing Management Inc. (LHMI) and Prairie Village Management, LLC (PVM), because the Corporation has both control and an economic interest in LHMI and PVM. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, these consolidated entities are hereinafter referred to as Longmont Housing Development. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of 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. Cash and Cash Equivalents Cash consists of highly liquid investments with an original maturity of three months or less, and which are neither held for nor restricted by donors for long-term purposes. Cash restricted for security deposits are excluded from this definition. Concentrations of Credit Risk The Corporation maintains its cash accounts in various deposit accounts, the balances of which are periodically in excess of federally insured limits. Developer Fees Receivable Developer fees are uncollateralized obligations due from related and un-related entities with payments due based on the development agreements and subject to cash flow of the projects. The Organization evaluates the collectability of the balance based upon specific circumstances of the agreement and an allowance for uncollectible amounts being recorded if necessary. As of December 31, 2016 and 2015, the Corporation considered all developer fees to be fully collectable. Notes and Interest Receivable Notes and interest receivables are carried at amounts advanced, net of a reserve for uncollectable accounts, if any. As of December 31, 2016 and 2015, the Corporation considered all notes to be fully collectable. 6

9 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Property and Equipment Property and equipment is recorded at cost. Additions, renewals and betterments are capitalized, whereas expenditures for maintenance and repairs are charged to expense. The Corporation s policy has set the capitalization threshold for reporting capital assets at $5,000, except for certain items specifically identified in the policy. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the accounts and the resultant gain or loss is reflected in income. Depreciation is computed principally by the straight-line method over the following estimated useful lives: Building and improvements Equipment and furnishings 5-20 years 7-10 years The Corporation reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment at December 31, 2016 and Investment in Tax Credit Partnerships and Future Developments Investments in tax credit partnerships are accounted for under the equity method. Investments are stated at cost, plus (minus) the Corporation s equity in net earnings (losses) since acquisition, less any distributions received. Investments in future developments represent costs incurred by the Corporation for future developments and are recorded at cost until a project is established. Net Assets The Corporation reports information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Unrestricted net assets Net assets that are currently available at the discretion of the Board of Directors for use in the Corporation s operations. Temporarily restricted net assets Net assets restricted by donors specifically for certain time periods, purposes, or programs. At December 31, 2016 and 2015, the Corporation did not have any temporarily restricted net assets. Permanently restricted net assets Net assets subject to donor restrictions that stipulate the original principal of the gift to be held and invested by the Corporation and the purpose for which the income from the fund is to be used. At December 31, 2016 and 2015, the Corporation did not have any permanently restricted net assets. All of the Corporation s net assets are considered unrestricted. 7

10 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Rental Income Housing units are rented under operating lease agreements with terms of one year or less. Rent income from tenants is recognized in the month in which it is earned rather than received. Tenant rent represents gross rent for all units in the project. Vacancy loss is recorded for any unrented units to arrive at net rental income. Developer Fee Income The Corporation receives income for development activities from related and un-related entities, pursuant to the development agreements. The financial statements reflect the recognition of development fee income based on the development agreement for each entity. Advertising Costs Advertising costs are expensed as incurred. Functional Allocation of Expenses The costs of program and supporting services activities have been summarized on a functional basis in Note 7. The footnote presents the natural classification detail of expenses by function. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Income Taxes The Corporation is organized as a Colorado nonprofit corporation and has been recognized by the Internal Revenue Service (IRS) as exempt from federal income taxes under Section 501(a) of the Internal Revenue Code as an organization described in Section 501(c)(3). The Corporation is required to file an annual Return of Organization Exempt from Income Tax (Form 990) with the IRS. In addition, the Corporation is subject to income tax on net income that is derived from business activities that are unrelated to their exempt purposes. The Corporation has determined it is not subject to unrelated business income tax and has not filed an Exempt Organization Business Income Tax Return (Form 990-T) with the IRS. The Corporation believes that it has appropriate support for any tax positions taken affecting its annual filing requirements, and as such, does not have any uncertain tax positions that are material to the financial statements. The entity would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred. Subsequent Events The Corporation has evaluated subsequent events through April 18, 2017, the date which the financial statements were available to be issued. 8

11 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Note 2 - Investment in Future Developments As of December 31, 2016, the investment in future developments consists mainly of architecture costs, application fees, and for a market study incurred by the Organization for the Fall River project, which is expected to be a future low income housing tax credit project. The Organization expects to be reimbursed for these costs upon the project receiving a tax credit allocation from CHFA and the equity closing. Note 3 - Notes Receivable Notes receivable at December 31, 2016 and 2015 consist of the following: % notes due from various landlords within the City of Longmont, due in various payments including interest over a seven year period, secured by properties $ 10,299 $ 20, %, $375,000 note receivable from Aspen Meadows Neighborhood, LLLP, due from available cash flows as permitted, due in full November 2039, secured by a deed of trust (a) 431, , %, $3,900,000 note receivable from Spring Creek Apartments, LLLP, beginning September 2017, quarterly payments of $25,658, including interest due plus additional cash flow payments as allowed, due in full June 2055, secured by a deed of trust 3,900,000 2,439,072 7%, $900,000 note receivable from Spring Creek Apartments, LLLP, due from available cash flows as permitted, due in full June 2055, secured by a deed of trust (a) 994, ,500 (a) Annual interest payments have been added to the principal balance on notes receivable. $ 5,336,125 $ 3,814,271 9

12 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Note 4 - Property and Equipment Property and equipment at December 31, 2016 and 2015 consist of the following: Land $ 1,659,460 $ 1,833,460 Building and improvements - 521,705 Equipment and furnishings 3,068 9,082 1,662,528 2,364,247 Accumulated depreciation (3,068) (517,116) $ 1,659,460 $ 1,847,131 During 2016, the Organization sold the Terry Street property to an unrelated party for $2,150,000, which resulted in a gain on sale of $1,837,292. Note 5 - Long-Term Debt Long-term debt as of December 31, 2016 and 2015 consists of: %, $750,000 mortgage note payable to Longmont Housing Authority, due in monthly installments of $3,221, including interest, beginning March 2004 through February 2019, secured by a deed of trust (a) $ - $ 556,003 2%, $800,000 loan payable to City of Longmont, with interest only payments due annually beginning in March 2016 through March 2020, at which time all unpaid principal and accrued interest is due, secured by a deed of trust 800, ,000 0%, $3,900,000 loan payable to State of Colorado, due in quarterly installments of $25,658, beginning in October 2017 through July 2055, secured by a deed of trust 3,900,000 2,439,072 (a) The loan was paid off from the proceeds from the sale of Terry Street Apartments. $ 4,700,000 $ 3,795,075 10

13 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Aggregate maturities of long-term debt are as follows: Year Ended December 31, Amount 2017 $ 25, , , , ,632 Thereafter 3,463,814 $ 4,700,000 Note 6 - Related Party Transactions Investment in Tax Credit Partnerships LHMI is the managing general partner with a.005% ownership interest in Village Place Associates, LLLP (VPA LLLP) and Aspen Meadows Associates LLLP (AMA LLLP). As of December 31, 2016 and 2015, LHMI had an investment deficit of $2,199 in VPA LLLP. As of December 31, 2016 and 2015, LHMI had an investment balance of $145,259 in AMA LLLP. PVM is the managing general partner with a.005% ownership interest in Spring Creek Apartments, LLLP (SCA LLLP). As of December 31, 2016 and 2015, PVM had an investment balance of $0 in SCA LLLP. As part of the partnership agreement with AMA LLLP, LHMI is required to fund replacement reserve deposits up to approximately $10,000 annually, if cash flows are insufficient to meet the requirements set forth in the partnership agreement. Developer Fees The Corporation entered into a development agreement with Spring Creek Apartments, LLLP to oversee the construction of the apartment housing rehabilitation until all construction work was completed and certain other services in exchange for a developer fee in an amount up to $1,250,000. During 2016 and 2015, the Corporation earned $967,256 and $282,744, respectively, on the developer fees. As of December 31, 2016 and 2015, the Corporation was owed $967,256 and $0, respectively, for developer fees. The Organization is expected to collect a significant portion of the developer fees in 2017, and any remaining amounts to be paid from the Partnership cash flows as allowed. Notes Receivable The Corporation loaned a total of $3,900,000 to SCA LLLP (Note 2) for the construction of the project. During 2016 and 2015, the Corporation earned $139,964 and $7,505, respectively, of interest on the note. As of December 31, 2016 and 2015, the Corporation was owed $147,469 and $7,505, respectively, for interest. During 2015, the Corporation loaned $900,000 to SCA LLLP (Note 2), for the purchase of land. During 2016 and 2015, the Corporation earned interest of $63,000 and $31,500, respectively, on the note receivable, which was added to the principal balance. 11

14 Notes to Consolidated Financial Statements December 31, 2016 and 2015 The condensed financial information from the individual financial statements of AMA LLLP as of and for the years ended December 31, 2016 and 2015 is as follows: Aspen Meadows Associates LLLP Balance Sheets (a) Assets Rental property, net $ 3,058,158 $ 3,173,768 Other 83,247 85,734 $ 3,141,405 $ 3,259,502 Liabilities and Deficit Liabilities $ 3,458,088 $ 3,437,454 Deficit (316,683) (177,952) Statements of Operations $ 3,141,405 $ 3,259,502 Revenues $ 439,559 $ 430,350 Expenses 573, ,295 Net Loss $ (134,231) $ (107,945) (a) As of January 1, 2016, the Partnership adopted the provisions of Accounting Standards Update (ASU) , Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. Adoption of this accounting standard update requires retroactive application by restating the financial statements of all prior periods presented. Partnership Fees Pursuant to the partnership agreements with VPA LLLP and AMA LLLP, LHMI is to be paid certain fees for managing the operations of the project. There were no partnership fees received or earned during 2016 and Pursuant to the partnership agreement with SCA LLLP, PVM is to be paid certain fees for managing the operations of the project. There were no partnership fees received or earned during 2016 and Contributions During 2015, the Corporation made contributions of $24,923 to The Hearthstone at Hover Crossing, a non-profit that shares the same Board of Directors. 12

15 Notes to Consolidated Financial Statements December 31, 2016 and 2015 Income from Spring Creek During 2015, the Corporation was reimbursed $44,511 from Spring Creek Apartments, LLLP for costs that the corporation incurred in a prior year relating to the development of the project. Note 7 - Management Fees Property Management Fees The Corporation has entered into an agreement with the Longmont Housing Authority to provide property management services. Under the terms of the agreement, Longmont Housing Authority is to receive management fees of 10% of gross rental income. During 2016 and 2015, the Corporation incurred property management fees of $9,310 and $15,925, respectively. Corporate Management Fee The Corporation has entered into an agreement with the Longmont Housing Authority to provide developer services and to manage business affairs. Under the terms of the agreement, the management company is to receive an annual fee that is determined each year based on the Corporation s budget. During 2016 and 2015, the Corporation incurred and paid a fee of $150,000 and $100,000, respectively, to Longmont Housing Authority. Note 8 - Functional Expenses Total expenses by function were as follows for the years ended December 31, 2016 and 2015: Program $ 163,012 $ 209,669 General and administrative 362, ,531 $ 525,210 $ 490,200 13

16 Supplementary Information December 31, 2016 Longmont Housing Development Corporation and Subsidiaries

17 Schedule of Expenditures of Federal Awards Year Ended December 31, 2016 Pass-through Federal Entity Federal Agency/Pass-Through CFDA Identifying Federal Grantor Program Title Number Number Expenditures U.S. Department of Housing and Urban Development Passed through the State of Colorado, Department of Local Affairs Hurricane Sandy Community Development Block Grant Disaster Recovery Grants H5CDR15012 $ 1,460,928 Total Federal Expenditures $ 1,460,928 14

18 Notes to Schedule of Expenditures of Federal Awards Year Ended December 31, 2016 Note A Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of Longmont Housing Development Corporation and Subsidiaries and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulation (CFR) Part 200, Uniform Administrative Requirements, Costs Principles, and Audit Requirements for Federal Awards (Uniform Guidance). received federal awards indirectly through pass-through entities. No federal financial assistance has been provide to a subrecipient. Note B Significant Accounting Policies Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Subpart E Cost Principles of the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. The Longmont Housing Development Corporation and Subsidiaries summary of significant accounting policies is presented in Note 1 in the consolidated financial statements. The Corporation has not elected to use the 10% de minimis cost rate and does not draw for indirect administrative expenses. Note C Loan Balance Expenditures reported in this schedule only consist of advances made on the loan during the year due to there being no material continuing compliance requirements on the loan other than repayment. The balance and transactions related to the CDBG-DR loan program, CFDA Number , is included in the Longmont Housing Development Corporation and Subsidiaries basic financial statements. The outstanding balance as of December 31, 2016, is $3,900,

19 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 The Board of Directors Longmont, Colorado We have audited, 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, the consolidated financial statements of (the Corporation) which comprise the consolidated statement of financial position as of December 31, 2016, and the related consolidated statements of activities and cash flows for the year then ended, and the notes to the consolidated financial statements, and have issued our report thereon dated April 18, Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Corporation'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 consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Corporation s internal control. Accordingly, we do not express an opinion on the effectiveness of the Corporation 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 over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control 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 th Ave. S. P.O. Box 2545 Fargo, ND T F EOE

20 Compliance and Other Matters As part of obtaining reasonable assurance about whether Corporation's consolidated 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 consolidated 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 result of that testing, and not to provide an opinion on the effectiveness of the entity 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 entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Bismarck, North Dakota April 18,

21 Independent Auditor s Report on Compliance for the Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance The Board of Directors Longmont, Colorado Report on Compliance for The Major Federal Program We have audited compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Corporation s major federal program for the year ended December 31, The Corporation s major federal program is 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 federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal program. Auditor s Responsibility Our responsibility is to express an opinion on the compliance of the Corporation s major federal program 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 Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the 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 Corporation 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 the major federal program. However, our audit does not provide a legal determination of the Corporation s compliance th Ave. S. P.O. Box 2545 Fargo, ND T F EOE

22 Opinion on the Major Federal Program In our opinion, the Corporation complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major Federal program for the year ended December 31, Report on Internal Control over Compliance Management of the Corporation is responsible for establishing and maintaining effective internal control over compliance with the compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Corporation s internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with 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 Corporation 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 compliance requirement 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 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 the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Bismarck, North Dakota April 18,

23 Schedule of Findings and Questioned Costs Year Ended December 31, 2016 Section I Summary of Auditor s Results FINANCIAL STATEMENTS Type of auditor's report issued: Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(ies) identified? Noncompliance material to financial statements noted? Unmodified No None Reported No FEDERAL AWARDS Internal control over major programs: Material weakness(es) identified? Significant deficiency(ies) identified? Type of auditor's report issued on compliance for major programs: Any audit findings disclosed that are required to be reported in accordance with Uniform Guidance 2 CFR : No None Reported Unmodified No Identification of major programs: Name of Federal Program CFDA Number Hurricane Sandy Community Development Block Grant Disaster Recovery Grants Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee? $ 750,000 No 20

24 Schedule of Findings and Questioned Costs Year Ended December 31, 2016 Section II Financial Statement Findings None reported Section III Federal Award Findings and Questioned Costs None reported 21