REBA BROWN SENIOR RESIDENCE, INC. HUD PROJECT NO. 034-EE141

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1 REBA BROWN SENIOR RESIDENCE, INC. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION DECEMBER 31, 2016 AND 2015

2 DECEMBER 31, 2016 AND 2015 CONTENTS Independent Auditors Report Financial Statements: Statements of Financial Position Statements of Activities and Changes in Net Assets Statements of Cash Flows Page Notes to Financial Statements Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Supplementary Information Required by HUD Independent Auditors 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 Auditors Report on Compliance for the Major Federal Program and on Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Certification of Officers Management Agent s Certification... 29

3 CERTIFIED PUBLIC ACCOUNTANTS & ADVISORS 293 Eisenhower Parkway Livingston, NJ Office: Fax: INDEPENDENT AUDITORS REPORT To the Owner Board Reba Brown Senior Residence, Inc. Philadelphia, Pennsylvania Report on the Financial Statements We have audited the accompanying financial statements of HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. ( Project ), which comprise the statements of financial position, as of December 31, 2016 and 2015, and the related statements of activities and changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Project 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 Project s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. as of December 31, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information: schedule of reserve for replacements; schedule of residual receipts; schedule of changes in fixed assets; and computation of surplus cash (deficiency). as shown on pages 17 through 19, is presented for purposes of additional analysis as required by the United States Department of Housing and Urban Development ( HUD ), Office of the Inspector General, and is not a required part of the financial statements. The accompanying schedule of expenditures of federal awards shown on page 15, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for 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 March 21, 2017, on our consideration of HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. 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 this 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 HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. s internal control over financial reporting and compliance. Livingston, New Jersey March 21, 2017 Certified Public Accountants

5 STATEMENTS OF FINANCIAL POSITION ASSETS December 31, CURRENT ASSETS: 1120 Cash - operations $ 12 $ 33, Cash - construction 1,593 1, Tenant accounts receivable 5,489 2, Allowance for doubtful accounts (3,391) (2,415) 1135 Accounts receivable - HUD 1,559 1, T Total Current Assets 5,262 36, TENANT DEPOSITS HELD IN TRUST 29,408 28,795 RESTRICTED DEPOSITS: 1320 Replacement reserve 409, , Minimum capital investment account 10,415 10, Residual receipts reserve 14,596 14, T Total Restricted Deposits 434, ,067 FIXED ASSETS: 1410 Land 450, , Building and improvements 12,302,195 12,302, Furniture and equipment 16,792 16, T Total Fixed Assets 12,768,987 12,768, Less: Accumulated depreciation 2,492,411 2,182, N Net Fixed Assets 10,276,576 10,586, T Total Assets $ 10,745,558 $ 11,042,796 The accompanying notes are an integral part of these financial statements. 3

6 STATEMENTS OF FINANCIAL POSITION (Continued) LIABILITIES AND NET ASSETS December 31, CURRENT LIABILITIES: 2110 Accounts payable - operations $ 53,391 $ 36, Advances from related party 77,732 40, Accrued wages payable 4, T Total Current Liabilities 135,765 77, TENANT DEPOSITS HELD IN TRUST 29,408 28, T Total Liabilities 165, ,250 COMMITMENTS AND CONTINGENCIES 3131 NET ASSETS - UNRESTRICTED 10,580,385 10,936, T Total Liabilities and Net Assets $ 10,745,558 $ 11,042,796 The accompanying notes are an integral part of these financial statements. 4

7 STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS REVENUES AND SUPPORT Year Ended December 31, RENT REVENUE: 5120 Rent revenue - gross potential $ 241,326 $ 242, Tenant assistance payments 355, , T Total Rent Revenue 597, ,097 VACANCIES: 5220 Apartments 6, T Total Vacancies 6, N Net Rental Revenue 590, ,292 FINANCIAL REVENUE: 5440 Revenue from investments - replacement reserve 1,177 1, T Total Financial Revenue 1,177 1,016 OTHER REVENUE: 5990 Miscellaneous revenue 1, T Total Other Revenue 1, T Total Revenues and Support 592, ,231 EXPENSES ADMINISTRATIVE EXPENSES: 6210 Advertising and marketing Office salaries 31,472 20, Office expenses 25,021 28, Management fee 37,800 37, Management and superintendent salaries 52,019 58, Administrative rent-free unit 8,052 8, Legal expenses 1, Audit expense 10,846 10, Miscellaneous administrative expenses 6,070 20, T Total Administrative Expenses 173, ,551 The accompanying notes are an integral part of these financial statements. 5

8 STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS (Continued) Year Ended December 31, UTILITIES EXPENSE: 6450 Electricity 34,852 33, Water and sewer 28,327 24, Gas 20,611 25, T Total Utilities Expense 83,790 83,682 OPERATING AND MAINTENANCE EXPENSES: 6510 Payroll 39,927 26, Supplies 10,299 14, Contracts 28,155 36, Garbage removal 6,950 5, Security contract 117, , Snow removal 2,550 5, Miscellaneous operating and maintenance expenses 32,973 34, T Total Operating and Maintenance Expenses 238, ,226 TAXES AND INSURANCE: 6711 Payroll taxes 11,435 9, Property and liability insurance 83,187 43, Health insurance and other employee benefits 45,078 16, Miscellaneous taxes, licenses and permits 3,750 5, T Total Taxes and Insurance 143,450 76, T Total Cost of Operations Before Depreciation 639, , T (Loss) Profit Before Depreciation (46,470) 23, Depreciation 309, , Changes in Net Assets (356,161) (285,933) NET ASSETS - UNRESTRICTED: S Beginning of year 10,936,546 11,222, End of year $ 10,580,385 $ 10,936,546 The accompanying notes are an integral part of these financial statements. 6

9 STATEMENTS OF CASH FLOWS CASH FLOWS PROVIDED BY (USED FOR): OPERATING ACTIVITIES: Year Ended December 31, S Rental receipts $ 580,638 $ 588,201 S Interest receipts 1,177 1,016 S Other operating receipts 1, S Total receipts 583, ,140 S Administrative expenses (89,396) (99,413) S Management fee (3,150) (51,146) S Utilities expense (80,173) (84,629) S Salaries and wages (111,835) (64,079) S Operating and maintenance expenses (190,022) (190,907) S Miscellaneous taxes and insurance (98,372) (59,074) S Total disbursements (572,948) (549,248) S Net Cash Provided by Operating Activities 10,116 40,892 INVESTING ACTIVITIES: S Net deposits to replacement reserves (43,170) (56,282) S Net deposits to minimum capital investment account (31) (31) S Net deposits to residual receipts account (44) (14,552) S Net purchase of fixed assets - (10,493) S Net Cash Used for Investing Activities (43,245) (81,358) S NET DECREASE IN CASH (33,129) (40,466) S Cash, Beginning of Year 34,734 75,200 S1200T Cash, End of Year $ 1,605 $ 34,734 The accompanying notes are an integral part of these financial statements. 7

10 STATEMENTS OF CASH FLOWS (Continued) Year Ended December 31, Reconciliation of Changes in Net Assets to Net Cash Provided by Operating Activities: 3250 Changes in net assets $ (356,161) $ (285,933) Adjustments to reconcile changes in net assets to net cash provided by operating activities: 6600 Depreciation 309, ,691 Changes in certain assets and liabilities: S Tenant accounts receivable (1,865) 457 S Accounts receivable HUD 141 (1,496) S Cash restricted for tenant security deposits (613) (132) S Accounts payable 21,540 (446) S Advances from related party 36,770 18,619 S Tenant security deposits held in trust S Net Cash Provided by Operating Activities $ 10,116 $ 40,892 The accompanying notes are an integral part of these financial statements. 8

11 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 1 - ORGANIZATION: HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. ( Project ) is an approved U.S. Department of Housing and Urban Development ( HUD ) project located in the Kingsessing Section of West Philadelphia, Pennsylvania. The Project, a not-for-profit corporation, operates a 75-unit housing project for the elderly. Reba Brown Senior Residence, Inc. is a joint venture and was co-sponsored by Mount Zion Community Development Corporation ( MZCDC ), which is supported by Mount Zion Baptist Church, and Deer Meadows Retirement Community ( DMRC ). DMRC has delivered housing and care for over 140 years and manages senior housing in Philadelphia, Pennsylvania. The Project s major program is the capital advance received for the purchase and construction of the facility and the rent subsidies received under HUD s Section 202 Project Rental Assistance Contract ( PRAC ) that expired in November The Project is continuing to work with its Project Officer to renew this contract. The PRAC supplements rents collected from tenants within the housing units. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Accounting: The financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Financial Statement Presentation: Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Project and changes therein are classified and reported as follows: Unrestricted Net Assets Net assets not subject to donor-imposed stipulations and currently available for use by the Project s Owner Board. Temporarily Restricted Net Assets Net assets subject to donor-imposed stipulations that may or will be met, either by actions of the Project and/or the passage of time. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. 9

12 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued) Financial Statement Presentation: (Continued) Permanently Restricted Net Assets Net assets subject to donor-imposed stipulations that they be maintained permanently by the Project. Generally, the donors of these assets permit the Project to use all or part of the income earned on any related investments for general or specific purposes. The Project currently has only unrestricted net assets. Cash: Cash includes cash on hand and in the bank. Cash does not include amounts held in trust, such as required and funded reserves or tenant security deposits. Accounts Receivable: The Project utilizes the reserve method of accounting for doubtful accounts. The reserves are based on historical experience and management s evaluation of outstanding accounts receivable at the end of each year. The allowance for doubtful accounts amounted to $3,391 and $2,415 for the years ended December 31, 2016 and Fixed Assets: Fixed assets are carried at cost. Depreciation is computed using the straight-line method over a life of 7 to 40 years. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments greater than $1,000 that extend the useful lives of assets are capitalized. Revenue Recognition: Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. All leases between the Project and the tenants of the property are operating leases. Federally Subsidized Rent Income: The Project is subject to Section 202 of the National Affordable Housing Act of 1991 Agreement with HUD, and a significant portion of the Project s rental income is received from HUD. The Project is not allowed to increase the rent without prior approval from HUD. Revenue from the Section 202/PRAC agreement has been accounted for as an exchange transaction and, as a result, is not considered temporarily restricted. 10

13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued) Functional Expenses: Certain expenses have been allocated between program and administrative expenses based on management s best estimates. Income Taxes: The Project is exempt from federal and state income taxes, under Section 501(c)(3) of the Internal Revenue Code. The Project follows standards that provide clarification on accounting for uncertainty in income taxes recognized in the Project s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken, or expected to be taken, in a tax return, and also provides guidance on derecognition, classification, interest and penalties, disclosure and transition. The Project s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense. No interest and penalties were recorded during 2016 and At December 31, 2016 and 2015, there were no significant income tax uncertainties. 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 Project has evaluated its subsequent events and transactions occurring after December 31, 2016 through March 21, 2017, the date that the financial statements were available to be issued. 11

14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 3 - RESTRICTED CASH: A minimum capital investment account and a reserve for replacements account have been established in accordance with the terms of the capital advance agreement between HUD and the Project. The minimum capital investment account was established prior to the commencement of construction in order to fund potential operating deficits. Under the terms of the agreement, the minimum capital investment account funds must be held during the construction period and for a three-year period beginning at initial occupancy, after which time the portion of the remaining initial deposit, plus any accrued interest not used for operating expenses or deficits, shall be returned to the Project. The Project is required to maintain a reserve for replacements account which is to be funded with monthly payments of $4,251. As of December 31, 2016, the reserve has been fully funded in an interest-bearing account. The Project is also required to establish an account to maintain residual receipts based on cash surpluses. These funds will be released only upon HUD approval. At December 31, 2016, the Project did not experience surplus cash. During 2015, HUD started an initiative to recapture residual receipts on expiring PRACs. Excess project funds that are held in residual receipts accounts for any project subject to a Section 202 or 811 project rental assistance contract, upon termination of such contract, that are in excess of $250 per unit, such shall be remitted to HUD s Central Accounting Center. At December 31, 2016, the Project does not have any excess residual receipts, therefore, no return of funds is necessary. NOTE 4 - TENANT SECURITY DEPOSITS HELD IN TRUST: Tenant security deposits are held in a separate, interest-bearing bank account. Under certain circumstances, tenant security deposits may be applied to unpaid rent or other tenant obligations. NOTE 5 - ADVANCES FROM RELATED PARTIES: Periodically, BHP Services, Inc., an affiliate of DMRC, advances monies to the Project to fund operations. These advances amounted to $77,732 and $40,962 as of December 31, 2016 and 2015, respectively. 12

15 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 6 - COMMITMENTS AND CONTINGENCIES: The Project received capital advances from HUD in order to construct a 75-unit housing complex for the elderly amounting to $10,210,600 in prior years. The Project has agreed to make this housing complex available to eligible, elderly, very lowincome households for a period of 40 years and in accordance with HUD Section 202 requirements. Failure by the Project to meet these requirements would cause the Project to be required to repay the advances plus any interest which would have accrued between the date of the advances and the date of repayment. In addition, and in accordance with normal practices, HUD holds a mortgage on the land, building and improvements. The mortgage will be satisfied upon the passage of the operational period noted above. MZCDC entered into a HUD Section 202 Demonstration Planning Grant authorized and approved by the Consolidated Appropriation Resolution of 2004 (Public Law 108-7). The agreement authorized MZCDC to utilize a maximum amount of $400,000 for predevelopment costs of the Project and required the Project to obtain approval for the receipt of HUD Section 202 Capital Advance funding within 18 months of the first draw-down of these funds and to comply with all reporting requirements specified within the grant agreement. All amounts available under this grant were received and passed through to the Project by MZCDC. All requirements as specified in the grant agreement have been satisfied. In 2007, the Project entered into HOME Loan and Housing Trust Fund agreements with the City of Philadelphia in the amounts of $1,125,000 and $1,000,000, respectively. The HOME Loan and Housing Trust Fund mortgages are subordinated to the HUD Capital Advance and are secured by the property and improvements of the Project. The HOME Loan and Housing Trust Fund grants bear no interest and are not required to be repaid as long as the housing remains available to eligible, elderly, very low-income households or disabled individuals for a period of 20 years and continues to be operated in accordance with the HUD capital advance agreement. NOTE 7 - MANAGEMENT AGREEMENT: The Project entered into a management agreement with BHP Services, Inc., an affiliate of DMRC, to manage the Project. The agreement allows for a management fee of up to 6.91% of residential income collected. The Project has been charged management fees amounting to $37,800 for each of the years ended December 31, 2016 and

16 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 8 - FUNCTIONAL EXPENSES: The expenses of the Project on a functional basis are as follows: Year Ended December 31, Program - Section 202 $ 775,735 $ 700,613 Administrative 173, ,551 $ 949,001 $ 885,164 NOTE 9 - CONCENTRATIONS: The Project has funds held at financial institutions that, at times, may exceed federally insured limits. Approximately 60% and 59% of the Project s net rental revenues is from the Section 202/PRAC contract with HUD for the years ended December 31, 2016 and 2015, respectively. The Project s sole asset is a multi-unit housing project. The Project s operations are concentrated in the 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 of federal, state and local regulatory agencies, including, but not limited to, HUD. Such administrative directives, rules and regulations are subject to change by an act of Congress or an administrative change mandated by HUD. Such changes may occur with little notice or inadequate funding to pay for the related costs, including the additional administrative burden, to comply with a change. NOTE 10 - TAX RETURNS: At December 31, 2016, all required tax returns have been filed. 14

17 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS DECEMBER 31, 2016 Federal Expenditures U. S. Department of Housing and Urban Development: CFDA Number Grant Period Loans Outstanding at Beginning of Period Current Year Total Major Program: Section Capital Advances N/A $ 10,210,600 $ - $ 10,210,600 Section Project Rental Assistance Payments /1/16-12/31/16 N/A 355, ,798 $ 10,210,600 $ 355,798 $ 10,566,398 See independent auditors report and notes to schedule of expenditures of federal awards. 15

18 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS DECEMBER 31, 2016 NOTE 1 - BASIS OF PRESENTATION: The accompanying schedule of expenditures of federal awards includes the federal grant activity of Reba Brown Senior Residence, Inc. and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. NOTE 2 - SUBRECIPIENTS: For the year ended December 31, 2016, Reba Brown Senior Residence, Inc. did not provide any funds relating to its federal program to subrecipients. NOTE 3 - INDIRECT COSTS: For the year ended December 31, 2016, Reba Brown Senior Residence, Inc. did not elect to use the de minimis cost rate when allocating indirect costs to its federal program. NOTE 4 - LOAN AND LOAN GUARANTEE PROGRAMS: As of December 31, 2016, $10,210,600 was outstanding on its federal capital advance. See independent auditors report. 16

19 SUPPLEMENTARY INFORMATION REQUIRED BY HUD YEAR ENDED DECEMBER 31, 2016 SCHEDULE OF RESERVE FOR REPLACEMENTS: Balance at beginning of year $ 366,131 Total monthly deposits during ,015 Interest income 1,177 Unauthorized withdrawals (9,022) Balance at end of year $ 409,301 SCHEDULE OF RESIDUAL RECEIPTS: Balance at beginning of year $ 14,552 Interest income 44 Balance at end of year $ 14,596 See independent auditors' report. 17

20 SUPPLEMENTARY INFORMATION REQUIRED BY HUD YEAR ENDED DECEMBER 31, 2016 SCHEDULE OF CHANGES IN FIXED ASSETS: Beginning Ending Balance Additions Deductions Balance Land $ 450,000 $ - $ - $ 450,000 Building and improvements 12,302, ,302,195 Furniture and equipment 16, ,792 Total $ 12,768,987 $ - $ - $ 12,768,987 Accumulated Depreciation $ 2,182,720 $ 309,691 $ - $ 2,492,411 See independent auditors' report. 18

21 SUPPLEMENTARY INFORMATION REQUIRED BY HUD DECEMBER 31, 2016 COMPUTATION OF SURPLUS CASH (DEFICIENCY): Cash $ 1,605 Accounts receivable - HUD 1,559 Tenant deposits held in trust 29,408 Total Cash 32,572 Current Obligations: Accounts payable - 30 days 53,391 Accrued wages payable 4,642 Tenants' security deposits 29,408 Advances from related party 77,732 Total Current Obligations 165,173 Cash Deficiency $ (132,601) See independent auditors' report. 19

22 CERTIFIED PUBLIC ACCOUNTANTS & ADVISORS 293 Eisenhower Parkway Livingston, NJ Office: Fax: INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Owner Board Reba Brown Senior Residence, Inc. Philadelphia, Pennsylvania 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 financial statements of HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. ( Project ), which comprise the statement of financial position as of December 31, 2016, and the related statements of activities and changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated March 21, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Project 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 opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Project s internal control. Accordingly, we do not express an opinion on the effectiveness of the Project s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and, therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified a certain deficiency in internal control that we consider to be a material weakness. 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 Project s financial statements will not be prevented, or detected and corrected, on a timely basis. We consider the deficiency described in the accompanying schedule of findings and questioned costs to be a material weakness: Finding

23 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. There were no significant deficiencies identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Project s financial statements are free of 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. The Project s Response to the Finding The Project s response to the findings identified in our audit is described in the accompanying schedule of findings and questioned costs. The Project s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. 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 Project 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 Project s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Livingston, New Jersey March 21, 2017 Certified Public Accountants 21

24 CERTIFIED PUBLIC ACCOUNTANTS & ADVISORS 293 Eisenhower Parkway Livingston, NJ Office: Fax: INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND ON CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Owner Board Reba Brown Senior Residence, Inc. Philadelphia, Pennsylvania Report on Compliance for the Major Federal Program We have audited HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. s ( Project ) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget ( OMB ) Compliance Supplement that could have a direct and material effect on the Project s major federal program for the year ended December 31, The Project s major federal program is identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal program. Auditors Responsibility Our responsibility is to express an opinion on compliance for the Project 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 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 Project 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 Project s compliance. 22

25 Other Matters The results of our auditing procedures disclosed an instance of noncompliance, which is required to be reported in accordance with the Uniform Guidance and which is described in the accompanying schedule of findings and questioned costs as Item Our opinion on the major federal program is not modified with respect to this matter. The Project s response to the noncompliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The Project s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of the Project is responsible for establishing and maintaining 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 Project 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 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 Project 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. 23

26 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. Livingston, New Jersey March 21, 2017 Certified Public Accountants 24

27 SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED DECEMBER 31, 2016 I. Summary of Auditors Results The auditors report issued on the financial statements of Reba Brown Senior Residence, Inc. was an unmodified opinion. Internal control over financial reporting: Material weaknesses identified? X Yes No Significant deficiencies identified? Yes X No Noncompliance material to financial statements noted? Yes X No Federal Award Internal control over the major program: Material weaknesses identified? Yes X No Significant deficiencies identified? Yes X No Type of auditors report issued on compliance for the major program: Unmodified Any audit findings disclosed that are required to be reported in accordance with the Uniform Guidance? X Yes No Identification of the major program: Section 202 Capital Advances and Section 8/202 Project Rental Assistance Payments Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low-risk auditee? X Yes No 25

28 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) YEAR ENDED DECEMBER 31, 2016 II. Financial Statement Findings Item Condition: Criteria: Cause: Effect: Recommendation: Auditee Response and Action Plan: Material Weakness in Internal Controls at the Financial Statement Level The Project is not capable of preparing accurate, complete financial statements. Multiple adjustments were proposed to ensure that financial statements were accurate. Management of the Project is responsible for ensuring that financial information provided is materially accurate. Management does not have a process in place to review the financial information provided by its management company, and the management company does not follow its checklist to ensure that financial information provided is accurate. Numerous adjusting journal entries were proposed to ensure that financial statements were accurate. We recommend that management follow a checklist while reviewing draft financial information to ensure that all significant information is posted accurately. Accounting management changed during New management is in the process of implementing a system to prepare accurate financial information for this Project. In addition, a review process will be implemented to ensure that financial information is reviewed internally on a periodic basis with the board of directors. 26

29 SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) YEAR ENDED DECEMBER 31, 2016 III. Compliance Finding Item Condition: Criteria: Cause: Effect: Improper Request of Funds from Repairs and Replacement Reserve In November and December 2016, the Project transferred funds totaling $9,022 from the Replacement Reserve account to the operating account for operations without obtaining the proper approval from HUD. Management of the Project is responsible for ensuring that the proper protocol is followed before funds are withdrawn from its repair and replacements reserve. The Director of Finance failed to recognize the need to submit a request to HUD and, as noted in Finding , the internal controls in place at the management company did not function properly to catch this error. The Project pulled funds totaling $9,022 from its repairs and replacements reserve in November and December 2016 for operating costs. Recommendation: We recommend that management review transactions that occur within the repairs and replacements account to ensure that these are properly accounted for. Auditee Response and Action Plan: Accounting management changed during 2016, and new management is developing a process to ensure that proper authorization is requested from HUD prior to withdrawing funds from the repairs and replacement account. Management will contact its Project Officer to discuss and resolve the current year withdrawal. IV. Follow-up of Prior-year Audit Finding NONE 27

30 CERTIFICATION OF OFFICERS DECEMBER 31, 2016 We hereby certify that we have examined the accompanying financial statements and supplementary information of HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. and, to the best of our knowledge and belief, the same are accurate and complete. Jerry Sanders Date President Lisa Sofia Date Secretary FEIN:

31 MANAGEMENT AGENT S CERTIFICATION DECEMBER 31, 2016 I hereby certify that I have examined the accompanying financial statements and supplementary information of HUD Project No. 034-EE141 of Reba Brown Senior Residence, Inc. and, to the best of my knowledge and belief, the same are accurate and complete. Signature of Management Agent s Representative Title Management Agent s Name Date BHP Services, Inc. FEIN: