The Phase 2 Kona Coast Resort Owners Association

Transcription

1 Financial Statements and Supplementary Information Year Ended December 31, 2012

2 Contents Independent Auditor s Report 3 4 Financial Statements Balance Sheet 5 Statement of Revenues, Expenses and Changes in Fund Balances 6 Statement of Cash Flows Supplementary Information Supplementary Information on Future Major Repairs and Replacements 20 2

3 Independent Auditor s Report Board of Directors The Phase 2 Kona Coast We have audited the accompanying financial statements of The Phase 2 Kona Coast (the Association ), which comprise the balance sheet as of December 31, 2012, and the related statements of revenues, expenses and changes in fund balances 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. 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 Phase 2 Kona Coast as of December 31, 2012, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the supplementary information on future major repairs and replacements, on page 20, be presented to supplement the basic financial statements. Such information, although not a required part of the basic financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. This required 201 S. Orange Avenue, Suite 800 Orlando, FL Fax: Lakeland Tampa Winter Haven

4 supplementary information is the responsibility of management. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America. These limited procedures consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. May 9, 2013 Certified Public Accountants 4

5 Balance Sheet December 31, 2012 Operating Fund Replacement Fund Replacement Fund Penthouse I, II and III Total Assets Cash and cash equivalents $6,340,957 $ 809,712 $165,804 $ 7,316,473 Investments (Note 2) 300,051 3,259,220 3,559,271 Assessments receivable, net (Note 3) 2,808,499 2,808,499 Other receivables 124, ,543 Due from SVC-Management Hawaii LLC (Note 4) 66,238 66,238 Due from Association of Apartment Owners of The Phase 2 Keauhou Gardens (Note 5) 16,133 16,133 Due from related parties other, net Prepaid expenses and other assets 67,512 28,313 95,825 Due from operating fund 40,308 40,308 Due from replacement fund 160, ,609 Liabilities and Fund Balances $9,884,691 $4,097,245 $206,112 $14,188,048 Liabilities: Accounts payable and accrued expenses $ 415,411 $ $ $ 415,411 Income tax payable 208, ,047 Due to Shell Vacations Club, L.P. (Note 4) 88,781 88,781 Due to operating fund 160, ,609 Due to replacement fund penthouse 40,308 40,308 Assessments billed in advance 8,927,914 8,927,914 Total liabilities 9,680, ,609 9,841,070 Fund balances 204,230 3,936, ,112 4,346,978 $9,884,691 $4,097,245 $206,112 $14,188,048 See accompanying notes to financial statements. 5

6 Statement of Revenues, Expenses and Changes in Fund Balances Year ended December 31, 2012 Operating Fund Replacement Fund Replacement Fund Penthouse I, II and III Total Revenues: Maintenance fee assessments $7,723,839 $1,219,338 $ 38,767 $ 8,981,944 Late fees 36,172 36,172 Rental room revenue 1,173,643 1,173,643 Shop revenue, net 99,216 99,216 Interest income 7,456 29, ,103 Other income 40,396 40,396 Total revenues 9,080,722 1,248,829 38,923 10,368,474 Expenses: Condominium fees (Note 5) 2,673,395 2,673,395 Housekeeping (Note 4) 1,648,939 1,648,939 Utilities 707, ,464 General and administrative (Notes 1 and 4) 697, ,498 Front desk and reservations (Note 4) 601, ,102 Property taxes 570, ,516 Management fees (Note 4) 540, ,762 Maintenance and repairs (Note 4) 535, ,427 Provision for doubtful accounts 395, ,088 Excise taxes 247,795 1, ,981 Activities and owner services (Note 4) 230, ,541 Professional fees 34,502 34,502 Insurance 28,154 28,154 Loss on acquisition of timeshare unit weeks 11,721 11,721 Interest (Note 1) (29,344) (29,344) Major repairs and replacements 1,096, ,096,844 Total expenses 8,893,560 1,097, ,991,590 Excess of revenues over expenses before income tax benefit 187, ,110 38, ,884 Income tax benefit 67,529 67,529 Excess of revenues over expenses 254, ,110 38, ,413 Fund balances, beginning of year (50,461) 3,785, ,500 3,902,565 Fund balances, end of year $ 204,230 $3,936,636 $206,112 $ 4,346,978 See accompanying notes to financial statements. 6

7 Statement of Cash Flows Year ended December 31, 2012 Operating Fund Replacement Fund Replacement Fund Penthouse I, II and III Total Cash flows from operating activities: Excess of revenues over expenses $ 254,691 $ 151,110 $ 38,612 $ 444,413 Adjustments to reconcile excess of revenues over expenses to net cash provided by operating activities: Change in allowance for doubtful accounts 26,558 26,558 Change in unrecognized tax benefits (264,191) (264,191) Cash provided by (used for): Assessments receivable 47,889 47,889 Other receivables (18,270) (18,270) Due from SVC-Management Hawaii LLC (9,465) (9,465) Due from Association of Apartment Owners of The Phase 2 Keauhou Gardens (16,133) (16,133) Due from/to related parties other, net Prepaid expenses and other assets 8,693 (7,386) 1,307 Accounts payable and accrued expenses 29,021 29,021 Income tax payable 13,307 13,307 Due to Shell Vacation Club, L.P. 60,069 60,069 Assessments billed in advance (94,539) (94,539) Net cash provided by operating activities 38, ,724 38, ,344 Cash flows from investing activities: Proceeds from maturities of investments 5,600,000 5,600,000 Purchases of investments (300,051) (6,320,495) (6,620,546) Net cash used for investing activities (300,051) (720,495) (1,020,546) Cash flows from financing activities: Interfund borrowings 71,781 (44,287) (27,494) Net increase (decrease) in cash and cash equivalents (190,262) (621,058) 11,118 (800,202) Cash and cash equivalents, beginning of year 6,531,219 1,430, ,686 8,116,675 Cash and cash equivalents, end of year $6,340,957 $ 809,712 $165,804 $ 7,316,473 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 105,470 $ $ $ 105,470 See accompanying notes to financial statements. 7

8 Note 1. Nature of Operations and Significant Accounting Policies Nature of Operations The Phase 2 Kona Coast (the Association ) represents the interval ownership portion of the property regime known as AOAO Phase 2 Keauhou Gardens (the Property ) located on the island of Hawaii. Each unit week represented is entitled to one vote in voting by the membership. The Association s primary source of revenue is maintenance fee assessments. The affairs of the Association are managed and conducted by the Board of Directors, in accordance with the Association by-laws. Directors are elected to the Board by the membership, in accordance with the Association s by-laws. The Property is a phased residential timeshare facility. Individual unit types include onebedroom and two-bedroom configurations along with certain common elements and amenities. SVC-Hawaii, L.P. (the Developer ), formerly the Kona Coast Resort Limited Partnership which was merged with SVC-Hawaii, L.P., has reserved the right to declare, incorporate and withdraw additional units into/from the Association, as provided for in its governing documents. Pursuant to these rights, the Merger Declarations of the Phase 2 Keauhou Gardens were amended during June 1999 to add two additional apartment units ( Penthouse I and II Units ) and in March 2008 ( Penthouse III Unit ) which were developed by an unrelated party and are located on the second floor of Building 22. The interval ownership portion of the Property now consists of 200 individual units representing 10,147 unit weeks. Each unit in the Property (except for the Penthouse I units) is subdivided into 51 use weeks and one maintenance week. The two Penthouse I units are subdivided into 50 use weeks and two maintenance weeks. Under certain circumstances, either the Developer or an owner can convert a fixed-use week into a floating-use plan. Once converted to a floating-use plan, such commitment is irrevocable. In September 2012, the Developer, its parent company and related affiliates were purchased by Wyndham Vacation Resorts, Inc. This change in ownership did not have any impact on the Association s contracts and operating agreements with these entities as of and for the year ended December 31,

9 Liquidity Assets are presented in the accompanying Balance Sheet according to their nearness of conversion to cash and liabilities according to their nearness of maturity and resulting use of cash. Fund Accounting To ensure and facilitate the fiduciary responsibility required of the Association regarding restrictions placed on the use of resources available to it, the accounts are maintained in accordance with the principles of fund accounting. The purposes of the various funds and the restrictions on the use of their assets are as follows: Operating Fund All revenues not allocable to the replacement fund are recorded in this fund and are available for normal operating expenditures. Replacement Fund This fund represents funds collected by the Association from the members to fund future replacement, major repairs and purchases of additional commonly owned assets. Expenditures from this fund are restricted to those items for which assessments were paid. Replacement Fund Penthouse I, II and III This fund represents funds collected by the Association from the members to fund future replacement, major repairs and purchases of additional commonly owned assets related to Penthouse Units I, II and III. Expenditures from this fund are restricted to those items for which assessments were paid. Cash Equivalents and Concentration of Credit Risk The Association considers highly liquid investments with an initial maturity of three months or less at date of purchase to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Association has never experienced any losses related to these balances. All of the Association s non-interest bearing cash balances were fully insured at December 31, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Association s non-interest bearing cash balances may again 9

10 exceed federally insured limits. The Association does not believe it is exposed to any significant credit risk on cash and cash equivalents. Investments Investments consist of certificates of deposit and a U.S. Treasury note, which are carried at amortized cost. The Association intends to hold these securities to maturity. Assessments Receivable Receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts and historical collection experience. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to assessments receivable. Inventory of Timeshare Unit Weeks The Association may periodically acquire and sell timeshare unit weeks which have been deeded back to the Association either as a result of foreclosure due to the unit owners failure to pay past due maintenance fees or in lieu of foreclosure. Inventory of timeshare unit weeks is carried at fair value less estimated costs to sell. Gains or losses upon acquisition of timeshare unit weeks are recognized on the difference between the total of delinquent assessments receivable at the acquisition date and other costs of acquisition compared to the value of the inventory acquired. The Association evaluates the recoverability of the carrying amount of its inventory of timeshare unit weeks in accordance with Generally Accepted Accounting Principles. Inventory held by the Association at December 31, 2012 was determined to have no value based upon information available to management regarding amounts to be recovered upon future sales of the unit weeks. 10

11 Property and Equipment Real property acquired from the Developer and related improvements to such property are not recorded in the Association s financial statements because these properties are owned by the individual unit week owners in common and not by the Association. Additions and improvements to real property are accounted for as major repairs and replacements by the replacement funds. Assessments Billed in Advance Assessments billed in advance represent the annual assessments billed for 2013 maintenance fees as of December 31, Replacement Funds Hawaii statutes and the Declaration of Covenants, Conditions and Restrictions for the Phase II Kona Coast Resort Interval Ownership Program require that the Association accumulate funds for future major repairs and replacements. Therefore, a portion of the annual maintenance fee is assessed for these purposes. Accumulated funds are held in separate interest-bearing bank and investment accounts and are not available to expend for normal operations. The Board of Directors annually approves the budgeted amounts needed to fund the major repairs and replacement components of common property. The Association is funding for major repairs and replacements over the estimated remaining useful lives of the components based on a study, performed by an independent consulting firm during 2010 and updated internally in 2012, of the components estimated current replacement costs and consideration of amounts previously accumulated in the replacement funds. Actual expenditures may vary from the estimated future expenditures and variations may be material. Therefore, amounts accumulated in the replacement funds may not be adequate to meet all future needs for major repairs and replacements. If additional funds are needed, the Association has the right, subject to Board approval, to increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available. Revenue Recognition The Association derives revenue principally through owner assessments. Assessments are billed to owners annually. Assessments are approved by the Association based upon budgeted expenditures and unit week owners are assessed accordingly. In the event that assessments 11

12 exceed the related expenditures in any one year, the excess may be deferred and used to reduce assessments in the subsequent year. Taxes on Income The Association is subject to federal and state income taxes. In determining the amount of income tax liability, the Association must annually decide between two methods of taxation. Under the first method (Form 1120), the excess of revenues from members over related expenses is subject to taxation unless the excess of revenues over expenses is either refunded to members, applied against future assessments or transferred to the replacement fund. Under the second method (Form 1120H), taxation is based on non-exempt function income, which generally consists of income from sources other than member assessments. Under either method, the Association may be subject to taxation on investment and other non-exempt income, but at different tax rates. For the year ended December 31, 2012, the Association filed Form 1120H. The Association also files a Hawaii corporate income tax return. The Association s federal and state income tax returns remain subject to examination by the Internal Revenue Service for three years from the date of filing. The Association identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Association has recorded a liability for unrecognized tax benefits of $117,906 at December 31, 2012, which is included in income tax payable on the accompanying Balance Sheet. The Association recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses. During the year ended December 31, 2012, the Association recognized approximately $16,000 in interest and penalties. The Association has cumulatively accrued approximately $55,000 for payment of interest and penalties at December 31, 2012, which is included in income tax payable on the accompanying Balance Sheet, along with the unrecognized tax benefit discussed above. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, including accrued penalties and interest, is as follows: 12

13 Balance at January 1, 2012 $ 436,720 Increase in benefit due to penalties and interest on tax positions taken in a prior year 15,788 Decrease in benefit due to lapse of statute of limitations (279,979) Balance at December 31, 2012 $ 172,529 During the next 12 months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Association in prior tax returns, which could reduce the liability for uncertain tax positions, including accrued penalties and interest, by approximately $173,000. Fair Value of Financial Instruments The Association measures and reports its financial assets and liabilities using a three-tier hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to adjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 Valuation based on quoted market prices in active markets for identical assets and liabilities. Level 2 Valuation based on quoted market prices for similar assets and liabilities in active markets. Level 3 Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management s best estimate of what market participants would use as fair value. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, The Association uses the market approach to measure fair value for its Level 1 financial assets, which include cash equivalents and its U.S. Treasury note. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include 13

14 cash, assessments and other receivables, accounts payable and accrued expenses, income tax payable, and due to/from related parties. Use of 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events The Association has evaluated events and transactions occurring subsequent to December 31, 2012 as of May 9, 2013, which is the date the financial statements were available to be issued. Subsequent events occurring after May 9, 2013 have not been evaluated by management. No material events have occurred since December 31, 2012 that require recognition or disclosure in the financial statements. Note 2. Investments The Association invests cash balances in certificates of deposit held at various banks which are insured by the FDIC up to $250,000 and may from time to time exceed insured limits. The Association also holds a U.S. Treasury note. These investments are maintained to manage the short-term cash requirements of the Association, as well as to provide funds needed to execute the Association s asset replacement programs. Investments held to maturity as of December 31, 2012 are as follows: Maturity Date Market Value Unrealized Gain Amortized Cost of Investment U.S. Treasury note 1/15/14 $ 1,033,607 $ 222,073 $ 811,534 Certificates of deposit 1/9/13 10/13/13 2,747,737 2,747,737 Total investments $ 3,781,344 $ 222,073 $ 3,559,271 14

15 Note 3. Maintenance Fee Assessments and Assessments Receivable Annual maintenance fees assessed to unit week owners are based on five unit types. For 2012, types I through V were assessed $817, $1,073, $1,482, $1,021 and $1,117, respectively, of which $105, $155, $268, $228 and $269 were designated for the replacement funds, respectively. These annual assessments were approved by the Board of Directors on behalf of the Association. These assessments were developed based upon anticipated levels of service and related expenses to be incurred, using costs assumed to be incurred for each unit declared. Shell Owners Association Hawaii ( SOA-Hawaii ) is a member of the Association and is assessed for maintenance fees. SOA-Hawaii was assessed $2,817,193, net of cash discount, for 2012 maintenance fees, none of which remain outstanding at December 31, During 2012, SOA-Hawaii was billed $3,168,534 for 2013 maintenance fee assessments, of which $1,766,568 remain outstanding at December 31, 2012 and are included in assessments receivable, net in the accompanying Balance Sheet. Receivables are valued at management s estimate of the total amount that will ultimately be collected. The allowance for doubtful accounts is based on specific identification of uncollectible accounts and the Association s historical collection experience. The Association has the right to place a lien against any unit week to secure the payment of maintenance fee assessments and other charges levied against the unit week owner. Failure of a unit week owner to make these payments may result in foreclosure of the lien. A lien against any owner of unit weeks in a unit committed to interval ownership shall be limited to the unit weeks owned by such owner and shall not encumber the property, real or personal, of any other owner of unit weeks in the unit. Assessments receivable as of December 31, 2012 consist of the following: December 31, 2012 Maintenance fee assessments 2013 $ 2,747,094 Maintenance fee assessments 2012 and prior 547,541 Allowance for doubtful accounts (486,136) $ 2,808,499 15

16 Note 4. Related Party Transactions Developer The Developer is required to pay maintenance fees on all unsold intervals. As of December 31, 2012, the Developer owned 11.5 intervals. The Developer was assessed $54,987 for 2012 maintenance fees, none of which is outstanding at December 31, During 2012, the Developer was billed $10,852 for 2013 maintenance fee assessments, none of which is outstanding at December 31, Shell Vacations Club, L.P. Shell Vacations Club, L.P. ( Vacations Club ), an entity related through common ownership with the Developer, has the right to use and transact any unit weeks held by SOA-Hawaii. SOA- Hawaii represents members who either purchased points in the Vacations Club or have converted their fixed-use or floating-use week to points in the Vacations Club. In accordance with an agreement entered into between the members of SOA-Hawaii and the Vacations Club, the Vacations Club has the right to rent and retain the rental income of unoccupied units of its members. Such units are combined with the units that the Association has the right to rent and retain the income from such rental. As a result of combining the units, the Association and the Vacations Club have to allocate net rental income on a pro rata basis on rentable units held by the Vacations Club and the Association. For the year ended December 31, 2012, total net revenue earned by the Vacations Club amounted to $533,895 and as of December 31, 2012, $88,781 was due to the Vacations Club. Shell Vacations LLC Shell Vacations LLC ( Shell Vacations ), the parent company of the Developer, provides assistance to the Association in arranging for insurance coverage. During 2012, allocated insurance premiums amounted to $81,980, of which $58,890 of workers compensation insurance is included in front desk and reservations, housekeeping, activities and owner services, maintenance and repairs and general and administrative expenses and the remainder is included in insurance expense in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. At December 31, 2012, no amount was due to Shell Vacations. 16

17 SVC-Management Hawaii LLC The Association entered into a management agreement with Shell Management Hawaii, Inc., which was later assigned to SVC-Management Hawaii LLC (the Manager ), an entity related through common ownership with the Developer. The agreement automatically renews itself for periods of one year each, commencing May 1, until terminated by written notice. The management agreement may be terminated by either party under certain specific conditions. The Manager has the authority to provide all services, through employees and experts retained by it, incidental to management and operation of the Association s property. Additional services provided by the Manager include administrative and accounting services. The management fee under the agreement is adjusted annually based upon changes in the Consumer Price Index. During 2012, management fees totaled $540,762 and administrative and accounting services totaled $281,521. Certain, but not all, operating expenses common to the Association and the resort hotel operations have been allocated to the Association on a pro rata basis according to the number of unit weeks represented. These expenses include, but are not limited to, general and administrative expenses, building interior maintenance and repairs, housekeeping and activities. Taxes and utilities, which are separately metered, are charged directly to the Association. Additionally, revenues received at the front desk for the Association are processed through SVC- Management Hawaii LLC and are paid to the Association. During 2012, rental revenue collected on behalf of the Association and operating expenses allocated to the Association amounted to $2,840,012 and $2,773,774, respectively. The Manager provides all personnel required to operate the resort. During 2012, payroll, employee benefit costs and payroll taxes related to these personnel totaled $2,786,753 and are included in front desk and reservations, housekeeping, activities and owner services, security, maintenance and repairs, and general and administrative expenses in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. As of December 31, 2012, $66,238 was due from the Manager. 17

18 SVC-Hospitality, LLC SVC-Hospitality, LLC ( Hospitality ), an entity related through common control with the Developer, provides centralized training and IT services required to operate the resort. The costs include payroll, rent, travel and other costs related to these services. During 2012, Hospitality allocated training and IT costs to the Association in the amount of $6,756 and $52,456, respectively. These costs are included in general and administrative expenses in the accompanying Statement of Revenues, Expenses and Changes in Fund Balances. As of December 31, 2012, no amounts were due to Hospitality. Note 5. Condominium Fees The Association remits condominium fees to the Association of Apartment Owners of The Phase 2 Keauhou Gardens ( AOAO ) for expenses incurred relative to the common area maintenance, insurance, security and replacement reserves. In addition, during 2012, the Association paid for certain property improvements on behalf of the AOAO. For the year ended December 31, 2012, condominium fees were $2,673,395. As of December 31, 2012, $16,133 was due from the AOAO for reimbursement of amounts paid for the property improvements. 18

19 Supplementary Information

20 Supplementary Information on Future Major Repairs and Replacements A study was conducted by an independent consulting firm in 2010 which was internally updated by the Manager in 2012 to estimate the remaining useful lives and the replacement costs of the components of common property. The estimates were based on current replacement costs. Funding requirements consider an annual inflation rate of 1.4% and an interest rate of.75% on accounts funded for future major repairs and replacements. The Board of Directors does not designate funds for specific components of common property. The following information is based on the study and presents significant information about the components of common property: Component Estimated Remaining Useful Lives (Years) Estimated Current Replacement Costs 2013 Funding Requirements Replacement Fund Balance at December 31, 2012 Replacement Fund: Unit furnishings, equipment and other capital expenditures items 0-19 $6,521,559 $1,219,338 $3,936,636 Replacement Fund Penthouse I, II and III: Unit furnishings, equipment and other capital expenditures items 0-22 $ 463,204 $ 38,767 $ 206,112 20