EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012. Financial Statements and Supplemental Information

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1 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Financial Statements and Supplemental Information For the Year Ended September 30, 2017

2 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Table of Contents For the Year Ended September 30, 2017 Independent Auditor's Report 1-2 Statement of Financial Position 3 Statement of Activities 4-5 Statement of Cash Flows 6 Notes to Financial Statements 7-10 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 with Requirements for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Expenditures of Federal Awards 15 Schedule of Findings and Questioned Costs 16 Supplemental Information with Detailed Index 17-37

3 To the Board of Directors of Episcopal Housing of Birmingham, Inc. Report on the Financial Statements INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of Episcopal Housing of Birmingham, Inc., which comprise the statement of financial position as of September 30, 2017, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Episcopal Housing of Birmingham, Inc., as of September 30, 2017, and the changes in its net position and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. 1

4 Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information shown on pages 17 to 37 is presented for purposes of additional analysis as required by the Uniform Financial Reporting Standards issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General, and is not a required part of the financial statements. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is also 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 December 27, 2017 on our consideration of Episcopal Housing of Birmingham, 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 that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Episcopal Housing of Birmingham Inc. s internal control over financial reporting and compliance. Borland Benefield, P.C. Birmingham, Alabama December 27,

5 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Statement of Financial Position For the Year Ended September 30, 2017 Assets Current assets Cash - operations $ 1,416 Prepaid expenses 2,991 Total Current Assets 4,407 Property and Equipment Land 97,597 Buildings, furnishings and equipment 2,308,160 Total Property and Equipment 2,405,757 Accumulated depreciation (1,229,584) Property and Equipment, net 1,176,173 Restricted Deposits Tenant/patient deposits held in trust 14,612 Mortgage escrow deposits 41,953 Replacement reserve 152,415 Total Restricted Deposits 208,980 Total Assets $ 1,389,560 Liabilities and Net Assets Liabilities Accounts payable $ 6,768 Accrued wages payable 3,346 Accrued payroll taxes payable 256 Prepaid revenue 1,561 Total Current Liabilities 11,931 Tenant/patient deposits held in trust 14,612 Total Liabilities 26,543 Net Assets Unrestricted (892,683) Temporarily restricted 2,255,700 Total Net Assets 1,363,017 Total Liabilities and Net Assets $ 1,389,560 See accompanying notes to financial statements. 3

6 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Statement of Activities For the Year Ended September 30, 2017 Rent Revenue Rent revenue - gross potential $ 161,199 Tenant assistance payments 214,469 Special claims revenue 4,037 Total Rent Revenue 379,705 Financial Revenue Financial revenue - project operations $ 28 Revenue from investments - replacement reserve 127 Total Financial Revenue $ 155 Other Revenue Laundry and vending revenue $ 3,890 Tenant charges 290 Miscellaneous revenue 12 Total Other Revenue 4,192 Total Revenue $ 384,052 Administrative Expenses Conventions and meetings $ 316 Advertising and marketing 216 Other renting expenses 487 Office salaries 18,776 Office expenses 16,196 Management fee 15,207 Manager or superintendent salaries 41,578 Legal expense - project 33 Audit expense 7,750 Bookkeeping fees/accounting services 1,968 Total Administrative Expenses $ 102,527 Utilities Expenses Electricity $ 42,910 Water 12,316 Gas 1,519 Sewer 26,018 Total Utilities Expenses $ 82,763 See accompanying notes to financial statements. 4

7 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Statement of Activities (continued) For the Year Ended September 30, 2017 Operating and Maintenance Expenses Payroll $ 15,769 Supplies 9,376 Contracts 38,420 Garbage and trash removal 1,668 Heating/cooling repairs and maintenance 17,651 Vehicle and maintenance equipment operation and repairs 1,406 Total Operating and Maintenance Expenses $ 84,290 Taxes and Insurance Expenses Payroll taxes $ 5,571 Property & liability insurance 9,695 Workmen's compensation 2,074 Health insurance and other employee benefits 9,314 Miscellaneous taxes, licenses, permits, and insurance 6,516 Total Taxes and Insurance Expenses $ 33, Expenses Nursing homes/assisted living/board & care/other elderly care $ 26,054 Total 6900 Expenses $ 26,054 Operating Results Total cost of operations before depreciation $ 328,804 Profit before depreciation 55,248 Depreciation expense (59,880) Change in Unrestricted Net Assets (4,632) Unrestricted Net Assets, Beginning of Year (888,051) Unrestricted Net Assets, End of Year $ (892,683) Change in Temporarily Restricted Net Assets $ - Temporarily Restricted Net Assets, Beginning of Year 2,255,700 Temporarily Restricted Net Assets, End of Year $ 2,255,700 See accompanying notes to financial statements. 5

8 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Statement of Cash Flows For the Year Ended September 30, 2017 Cash Flows From Operating Activities Rental receipts $ 379,649 Interest receipts 155 Other operating receipts 4,192 Total Receipts 383,996 Administrative (68,545) Management fees (15,207) Utilities (82,764) Salaries and wages (60,471) Operating and maintenance (65,618) Property insurance (9,516) Miscellaneous taxes and insurance (23,476) Total Disbursements (325,597) Net Cash Provided By Operating Activities 58,399 Cash Flows From Investing Activities Acquisition of property and equipment (12,898) Net deposits from insurance escrow 1,581 Net deposits to reserve replacement (48,127) Net Cash (Used) by Investing Activities (59,444) Net Increase in Cash (1,045) Cash, Beginning of Period 2,461 Cash, End of Period $ 1,416 Reconciliation of Change in Net Assets to Net Cash Flows From Operating Activities Change in total net assets $ (4,632) Adjustments to reconcile net loss to net cash from operating activities: Depreciation 59,880 Changes in operating assets and operating liabilities: Decrease in prepaid expenses 180 (Increase) in cash restricted for tenant security (250) Increase in accounts payable 2,899 Increase in accrued liabilities 128 Increase in tenant security deposits held in trust 250 (Decrease) in prepaid revenue (56) Net Cash Provided By Operating Activities $ 58,399 See accompanying notes to financial statements. 6

9 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Notes to Financial Statements For the Year Ended September 30, 2017 Note 1 Organization and Summary of Significant Accounting Policies Episcopal Housing of Birmingham, Inc. (the Project) is a 41 unit apartment complex that provides housing for the elderly in Birmingham, Alabama. Legal title to the Project is held by Episcopal Housing of Birmingham, Inc., a nonprofit corporation. The financial statements include only those accounts and transactions of the Project and represent the financial statements of the owner. The Project operates under Section 202 of the National Housing Act and is regulated by the U.S. Department of Housing and Urban Development (HUD) with respect to rental charges and operating methods. The Section 202 loan is a major program. The Project also receives rental assistance payments from HUD on behalf of eligible families pursuant to Section 202 of the National Housing Act. During the period October 1, 2016 through September 30, 2017, rental revenue from HUD totaled $218,506, which represents 57% of total revenue. Method of Accounting The accrual method of accounting is used for financial statement purposes. Basis of Presentation The Project is required to report information regarding its financial position and activities according to two classes of net assets: unrestricted net assets and temporarily restricted net assets. Cash and Cash Equivalents Cash is defined as cash in demand deposit accounts, as well as cash on hand. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts for cash and investments that are so near their maturity that the risk of changes in value due to changes in interest rates is negligible. For purposes of the Statement of Cash Flows, the Project considers all unrestricted investment instruments with original maturities of three months or less to be cash equivalents. At September 30, 2017, the cash balances, including restricted deposits, were $210,396, of which all but $1,416 was restricted for project purposes. Of the restricted balance, $152,415 is restricted by HUD under the regulatory agreement, which requires the Project to set aside amounts in for the replacement of property and other Project expenditures approved by HUD. The restricted balances are held in separate accounts and are generally not available for operating purposes. Accounts Receivable The Project considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is included in the financial statements. Property, Plant, and Equipment Items of property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. Maintenance and repairs are charged to income, and betterments are capitalized in excess of $5,000. When fixed assets are retired or otherwise disposed of, the cost and related accumulated depreciation is removed from the accounts and the resulting gain or loss is recorded as income. Compensated Absences Employees of the Project are entitled to paid vacation and paid sick days, depending on job classification, length of service and other factors. It is impracticable to estimate the amount of compensation for future absences and, accordingly, no liability has been recorded in the accompanying financial statements. The Project s policy is to recognize the costs of compensated absences when actually paid to employees. See independent auditor's report. 7

10 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Notes to Financial Statements (continued) For the Year Ended September 30, 2017 Note 1 Organization and Summary of Significant Accounting Policies (continued) Rental Income The Project considers rental income 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. Under the regulatory agreement, the Project may not increase rents charged to the tenants without HUD approval. Advertising The Project expenses advertising costs as they are incurred. Functional Expenses Expenditures incurred in connection with Project operation and expenditures made for corporate (mortgagor entity) purposes, if applicable, have been summarized on a functional basis in the Statement of Activities. Income Taxes No income tax provision has been included in these financial statements, since the entity is exempt from Federal income taxes under Section 501(a) of the Internal Revenue Code as an organization described in Section 501(c)(3). As of September 30, 2017, the Project had no uncertain tax positions that qualified for disclosure in the financial statements. The Project files an annual Form 990 with the Internal Revenue Service, and its tax returns for the year 2013 and subsequent years remain subject to examination by tax authorities. Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and disclosures. Recent Pronouncements - On August 18, 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new guidance simplifies and improves how not-for-profit entities classify net assets as well as the information presented in financial statements and notes about liquidity, financial performance and cash flows. The provisions of the update are effective for annual financial statements issued for fiscal years beginning after December 15, In February 2016, the Financial Accounting Standards Board ( FASB or the Board ) issued a new leasing standard in ASU ( Topic 842 or the new standard ) for both lessees and lessors. Under its core principle, a lessee will recognize right-of-use ( ROU ) assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. The pattern of expense recognition in the income statement will depend on a lease s classification. The provision of this update is effective for fiscal years beginning after December 15, Management is evaluating the new accounting pronouncements and its applicability to the Organization. Note 2 Capital Advance Episcopal Housing of Birmingham, Inc. has a capital advance agreement of $2,255,700 with the Federal Housing Administration (FHA) that is collateralized by a deed of trust on the rental property. The advance bears interest at the rate of 6.62% per annum. The liability is not recorded in the accompanying financial statements since it is only payable if the Project does not comply with regulations set forth by the agreement. Upon sale or conversion of property prior to the expiration of the 40 year commitment in October 2035, principal and interest are payable in full by the Project. See independent auditor's report. 8

11 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Notes to Financial Statements (continued) For the Year Ended September 30, 2017 Note 2 Capital Advance (continued) Accrued interest through September 30, 2017, is not recorded as a liability in the accompanying financial statements, since it is only payable as a penalty in the event of default. The Project is required to make monthly deposits of $4,000 to a reserve for replacement account for use in funding future maintenance and replacement costs. During the next five (5) years, $240,000 will be deposited to the reserve for replacement accounts. Note 3 403(b) Plan A 403(b) plan is offered in accordance with the Employee Retirement Income Security Act (ERISA) for the exclusive benefit of eligible employees and their beneficiaries. Contributions are 5% of an eligible employee s salary after one year of employment. Total 403(b) expense was $2,605 for the year ended September 30, Note 4 Net Assets The Project s net assets subject to donor-imposed restrictions in the amount of $2,255,700 are temporarily restricted. Net assets are restricted due to the capital advance described in Note 2. Accordingly, the remaining net assets are accounted for as unrestricted net assets. Note 5 Related Party The Project is a member of Supportive Services of the United Appeal Fund, a non-profit entity related to the Project through common board of directors. Also, members of management of the Project are current board members of the Fund. During the period ending September 30, 2017, no expenses were paid to the related entity for services rendered. Note 6 Management Fee The Project is managed by SPM, LLC pursuant to an agreement that provides for a management fee of 4% of monthly collectibles, as defined. The current management agreement originated December 1, 2013, and will continue thereafter for like terms unless either party elects to terminate the agreement. Note 7 Current Vulnerability to Certain Concentrations The Project s sole asset is the apartment complex and its contents. The operations are concentrated in the multi-family 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 cost, including the additional administrative burden, to comply with a change. The Project maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. Management has not experienced any losses in such accounts. Management believes the Project is not exposed to any significant credit risk on cash and cash equivalents. See independent auditor's report. 9

12 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Notes to Financial Statements (continued) For the Year Ended September 30, 2017 Note 8 Allowable Distributions The regulatory agreement provides that the Project will not make distributions of assets of income because Episcopal Housing of Birmingham, Inc. is a nonprofit organization. All surplus cash must be deposited into a residual receipts account. Use of the residual receipts account is contingent upon HUD s prior approval. For the year ended September 30, 2017, no contributions were made from surplus cash. Note 9 Ownership There were no changes in the ownership of Episcopal Housing of Birmingham, Inc. during the year ended September 30, Note 10 Subsequent Event The Project has evaluated subsequent events through December 27, 2017, the date the financial statements were available to be issued. See independent auditor's report. 10

13 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 To the Board of Directors of Episcopal Housing of Birmingham, Inc. We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Episcopal Housing of Birmingham, Inc. (a nonprofit organization), which comprise the statement of financial position as of September 30, 2017, and the related statements of activities, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated December 27, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Episcopal Housing of Birmingham, Inc. s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Episcopal Housing of Birmingham Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Episcopal Housing of Birmingham Inc. s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 11

14 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the organization s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the organization s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Borland Benefield, P.C. Birmingham, Alabama December 27,

15 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors of Episcopal Housing of Birmingham, Inc. Report on Compliance for Each Major Federal Program We have audited Episcopal Housing of Birmingham Inc. s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Episcopal Housing of Birmingham Inc. s major federal programs for the year ended September 30, Episcopal Housing of Birmingham, Inc. s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of Episcopal Housing of Birmingham, Inc. s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Episcopal Housing of Birmingham, Inc. s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Episcopal Housing of Birmingham, Inc. s compliance. Opinion on Each Major Federal Program In our opinion, Episcopal Housing of Birmingham, Inc. complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended September 30,

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

17 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Schedule of Expenditures of Federal Awards For the Year Ended September 30, 2017 Federal CFDA Federal Federal Grantor/Program Title Number Expenditures U.S. Department of Housing and Urban Development Section 202 Capital Advance $ 2,255,700 Section 202 PRAC ,506 Total U.S Department of Housing and Urban Development $ 2,474,206 Note A Basis of Presentation The accompanying schedule of expenditures of federal awards (the Schedule) includes the federal award activity of Episcopal Housing of Birmingham, Inc. (the Project) under programs of the federal government for the year ended September 30, The information in this Schedule is presented in accordance with 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). Because the Schedule presents only a selected portion of the operations of the Housing Authority, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the Housing Authority. Note B Summary of Significant Accounting Policies (1) Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. (2) The Project has elected not to use the 10% de minimis indirect cost rate allowed under Uniform Guidance. Note C Federal Loan Programs The federal loan program, HUD-insured Section 202 Capital Advance, listed subsequently is administered directly by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development. Balances and transactions relating to these programs are included in Episcopal Housing of Birmingham Inc. s basic financial statements. Loans outstanding at the beginning of the year and loans received during the year are included in the federal expenditures presented in the Schedule. The balance of loans outstanding at September 30, 2017 consists of: CFDA Number Program Name Outstanding Balance September 30, Section 202 Capital Advance $ 2,255,700 15

18 Section I - Summary of Auditor's Results Financial Statements EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Schedule of Findings and Questioned Costs For the Year Ended September 30, 2017 Type of auditor's report issued: unmodified Internal control over financial reporting: Material weakness(es) identified? yes X no Significant deficiencies identified that are not considered to be material weaknesses? yes X no Noncompliance material to financial statements noted? yes X no Federal Awards Internal control over major programs: Material weakness(es) identified? yes X no Significant deficiencies identified that are not considered to be material weaknesses? yes X no Type of auditor's report issued on compliance for major programs: unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR section (a) of the Uniform Guidance? yes X no Identification of major programs: U.S. Department of Housing and Urban Development CFDA # Section 202 Capital Advance CFDA # Section 202 PRAC Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as low-risk auditee? X yes no Section II - Financial Statement Findings None Reported Section III - Federal Award Findings and Questioned Costs None Reported Section IV - Summary of Prior Year Audit Findings None Reported 16

19 SUPPLEMENTAL INFORMATION

20 EPISCOPAL HOUSING OF BIRMINGHAM, INC. HUD Project No. 062-EE012 Index to Supplemental Information Required by HUD For the Year Ended September 30, 2017 Annual Financial Statement Submission Computation of Surplus Cash Annual 31 Schedule of Changes in Fixed Asset Accounts 32 Other Required HUD Information 33 Mortgagor s Certification 34 Management Agent s Certification 35 Independent Accountant s Report on Applying Agreed-Upon Procedures 36-37

21 Owner: Episcopal Housing of Birmingham, Inc. TIN: Reporting From: 10/01/2016 Reporting To: 09/30/2017 FHA/Contract Number(s): 062EE012 Submission Type: AUD-OMB Assets 1120 Cash - Operations $ 1, Prepaid Expenses $ 2, T Total Current Assets $ 4, Tenant/Patient Deposits Held in Trust $ 14, Escrow Deposits $ 41, Replacement Reserve $ 152, T Total Deposits $ 194, Land $ 97, Buildings $ 2,308, T Total Fixed Assets $ 2,405, Accumulated Depreciation $ 1,229, N Net Fixed Assets $ 1,176, T Total Assets $ 1,389,560 Liabilities 2110 Accounts Payable - Operations $ 6, Accrued Wages Payable $ 3, Accrued Payroll Taxes Payable $ Prepaid Revenue $ 1, T Total Current Liabilities $ 11, Tenant/Patient Deposits Held In Trust (Contra) $ 14, T Total Liabilities $ 26,543 Net Assets 3131 Unrestricted Net Assets $- 892, Temporarily Restricted Net Assets $ 2,255, Total Net Assets $ 1,363, T Total Liabilities and $ 1,389,560 Equity/Net Assets Rent Revenue 17

22 5120 Rent Revenue - Gross $ 161,199 Potential 5121 Tenant Assistance Payments $ 214, Special Claims Revenue $ 4, T Total Rent Revenue $ 379,705 Vacancies 5152N Net Rental Revenue (Rent Revenue Less Vacancies) $ 379,705 Financial Revenue 5410 Financial Revenue - Project Operations $ Revenue from Investments - Replacement Reserve $ T Total Financial Revenue $ 155 Other Revenue 5910 Laundry and Vending Revenue $ 3, Tenant Charges $ Miscellaneous Revenue $ 12 Details - Miscellaneous Revenue Description Miscellaneous Revenue Amount $ T Total Other Revenue $ 4, T Total Revenue $ 384,052 Administrative Expenses 6203 Conventions and Meetings $ Advertising and Marketing $ Other Renting Expenses $ Office Salaries $ 18, Office Expenses $ 16, Management Fee $ 15, Manager or Superintendent Salaries $ 41, Legal Expense - Project $ Audit Expense $ 7, Bookkeeping Fees/Accounting Services $ 1, T Total Administrative Expenses $ 102,527 Utilities Expenses 6450 Electricity $ 42, Water $ 12, Gas $ 1, Sewer $ 26,018 18

23 6400T Total Utilities Expense $ 82,763 Operating & Maintenance Expenses 6510 Payroll $ 15, Supplies $ 9, Contracts $ 38, Garbage and Trash Removal $ 1, Heating/Cooling Repairs and Maintenance $ 17, Vehicle and Maintenance Equipment Operation and $ 1,406 Repairs 6500T Total Operating and Maintenance Expenses $ 84,290 Taxes & Insurance 6711 Payroll Taxes (Project's Share) $ 5, Property & Liability Insurance (Hazard) $ 9, Workmen's Compensation $ 2, Health Insurance and Other Employee Benefits $ 9, Miscellaneous Taxes, Licenses, Permits and $ 6,516 Insurance Details - Miscellaneous Taxes, Licenses, Permits and Insurance Description Misc. Taxes, Licenses, & Permits Amount $ Description Other Insurance Amount $ 2, Description Umbrella Insurance Amount $ 3, T Total Taxes and Insurance $ 33, Expenses 6900 Nursing Homes/Assisted Living/ Board & Care/Other Elderly Care Expenses $ 26,054 Operating Results 6000T Total Cost of Operations before Depreciation $ 328, T Profit (Loss) before Depreciation $ 55, Depreciation Expenses $ 59, N Operating Profit or (Loss) $- 4,632 Change in Net Assets from Operations 19

24 3247 Change in Unrestricted Net Assets from Operations 3248 Change in Temporarily Restricted Net Assets from Operations 3250 Change in Total Net Assets from Operations $- 4,632 $ 0 $- 4,632 Part II S The total of all monthly reserve for replacement deposits (usually 12 months) required during the audit period even if deposits have been temporarily waived or suspended. S Replacement Reserves, or Residual Receipts and Releases which are included as expense items on this Profit and Loss statement. $ 48,000 Equity Data S Previous Year Unrestricted Net Assets $- 888, Change in Unrestricted Net Assets from Operations $- 4, Unrestricted Net Assets $- 892,683 S Previous Year Temporarily Restricted Net Assets $ 2,255, Change in Temporarily Restricted Net Assets from $ 0 Operations 3132 Temporarily Restricted Net Assets $ 2,255,700 S Previous Year Total Net Assets $ 1,367, Change in Total Net Assets from Operations $- 4, Total Net Assets $ 1,363,017 Cash Flow from Operating Activities S Rental Receipts $ 379,649 S Interest Receipts $ 155 S Other Operating Receipts $ 4,192 S Total Receipts $ 383,996 S Administrative $- 68,545 S Management Fee $- 15,207 S Utilities $- 82,764 $ 0 20

25 S Salaries and Wages $- 60,471 S Operating and Maintenance $- 65,618 S Property Insurance $- 9,516 S Miscellaneous Taxes and Insurance $- 23,476 S Tenant Security Deposits $ 0 S Total Disbursements $- 325,597 S Net Cash provided by (used in) Operating Activities $ 58,399 Cash Flow from Investing Activities S Net Deposits to the Mortgage Escrow account $ 1,581 S Net Deposits to the Reserve for Replacement account $- 48,127 S Net Purchase of Fixed Assets $- 12,898 S Net Cash used in Investing Activities $- 59,444 Cash Flow from Financing Activities S Net increase (decrease) in Cash and Cash Equivalents $- 1,045 Cash and Cash Equivalents S Beginning of Period Cash $ 2,461 S1200T End of Period Cash $ 1,416 Reconciliation of Net Profit (Loss) to Net Cash Provided by (Used in) Operating Activities 3250 Change in Total Net Assets from Operations $- 4,632 Adjustments to Reconcile Net Profit (Loss) to Net Cash Provided by (Used in) Operating Activities 6600 Depreciation Expenses $ 59,880 S Decrease (increase) in Prepaid Expenses $ 180 S Decrease (increase) in Cash Restricted for Tenant Security $- 250 Deposits S Increase (decrease) in Accounts Payable $ 2,899 S Increase (decrease) in Accrued Liabilities $ 128 S Increase (decrease) in Tenant Security Deposits held in trust $ 250 S Increase (decrease) in Prepaid Revenue $- 56 Net Cash provided by (used in) Operating Activities 21

26 S Net Cash provided by (used $ 58,399 in) Operating Activities Notes S Organization and Episcopal Housing of Birmingham, Inc. (the Presentation Note Project) is a 41 unit apartment complex that provides housing for the elderly in Birmingham, Alabama. Legal title to the Project is held by Episcopal Housing of Birmingham, Inc., a nonprofit corporation. The financial statements include only those accounts and transactions of the Project and represent the financial statements of the owner. The Project operates under Section 202 of the National Housing Act and is regulated by the U.S. Department of Housing and Urban Development (HUD) with respect to rental charges and operating methods. The Section 202 loan is a major program. The Project also receives rental assistance payments from HUD on behalf of eligible families pursuant to Section 202 of the National Housing Act. During the period October 1, 2016 through September 30, 2017, rental revenue from HUD totaled $215,506, which represents 56% of total revenue. Method of Accounting - The accrual method of accounting is used for financial statement purposes. Basis of Presentation - The Project is required to report information regarding its financial position and activities according to two classes of net assets: unrestricted net assets and temporarily S Summary of Significant Accounting Policies Note restricted net assets. Cash and Cash Equivalents - Cash is defined as cash in demand deposit accounts, as well as cash on hand. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts for cash and investments that are so near their maturity that the risk of changes in value due to changes in interest rates is negligible. For purposes of the Statement of Cash Flows, the Project considers all unrestricted investment instruments with original maturities of three months or less to be cash equivalents. At September 30, 2017, the cash balances, including restricted deposits, were $210,396, of which all but $1,416 was restricted for project purposes. Of the restricted balance, $152,415 is restricted by HUD under 22

27 the regulatory agreement, which requires the Project to set aside amounts in for the replacement of property and other Project expenditures approved by HUD. The restricted balances are held in separate accounts and are generally not available for operating purposes. Accounts Receivable - The Project considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is included in the financial statements. Property, Plant, and Equipment - Items of property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight line method. Maintenance and repairs are charged to income, and betterments are capitalized in excess of $5,000. When fixed assets are retired or otherwise disposed of, the cost and related accumulated depreciation is removed from the accounts and the resulting gain or loss is recorded as income. Compensated Absences - Employees of the Project are entitled to paid vacation and paid sick days, depending on job classification, length of service and other factors. It is impracticable to estimate the amount of compensation for future absences and, accordingly, no liability has been recorded in the accompanying financial statements. The Project's policy is to recognize the costs of compensated absences when actually paid to employees. Rental Income - The Project considers rental income 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. Under the regulatory agreement, the Project may not increase rents charged to the tenants without HUD approval. Advertising - The Project expenses advertising costs as they are incurred. Functional Expenses - Expenditures incurred in connection with Project operation and expenditures made for corporate (mortgagor entity) purposes, if applicable, have been summarized on a functional basis in the Statement of Activities. Income Taxes - No income tax provision has been included in these financial statements, since the entity is exempt from Federal income taxes under Section 501(a) of the Internal 23

28 S Related Party Transactions Note Revenue Code as an organization described in Section 501(c)(3). As of September 30, 2017, the Project had no uncertain tax positions that qualify for disclosure in the financial statements. The Project files an annual Form 990 with the Internal Revenue Service, and its tax returns for the year 2013 and subsequent years remain subject to examination by tax authorities. Estimates - The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and disclosures. The Project is a member of Supportive Services of the United Appeal Fund, a non-profit entity related to the Project through common board of directors. Also, members of management of the Project are current board members of the Fund. During the period ending September 30, 2017, no expenses were paid to the related entity for services rendered. Details - Related Party Transactions S Company Name Supportive Services of the United Appeal Fund S Amount $ 0 Received S Management Fee Note The Project is managed by SPM, LLC pursuant to an agreement that provides for a management fee of 4% of monthly collectibles, as defined. The current management agreement originated December 1, 2013, and will continue thereafter for like terms unless either party elects to terminate the agreement. S Additional Note Capital Advance Episcopal Housing of Birmingham, Inc. has a capital advance agreement of $2,255,700 with the Federal Housing administration (FHA) that is collateralized by a deed of trust on the rental property. The advance bears interest at the rate of 6.62% per annum. The liability is not recorded in the accompanying financial statements since it is only payable if the Project does not comply with regulations set forth by the agreement. Upon sale or conversion of property 24

29 prior to the expiration of the 40 year commitment in October 2035, principal and interest are payable in full by the Project. Accrued interest through September 30, 2017, is not recorded as a liability in the accompanying financial statements, since it is only payable as a penalty in the event of default. The Project is required to make monthly deposits of $4,000 to a reserve for replacement account for use in funding future maintenance and replacement costs. During the next five (5) years, $240,000 will be deposited to the reserve for replacement accounts. S Additional Note 403(b) Plan A 403(b) plan is offered in accordance with the Employee Retirement Income Security Act (ERISA) for the exclusive benefit of eligible employees and their beneficiaries. Contributions are 5% of an eligible employee's salary after one year of employment. Total 403(b) expense was $2,605 for the year ended September 30, S Additional Note Current Vulnerability to Certain Concentrations The Project's sole asset is the apartment complex and its contents. The operations are concentrated in the multi-family 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 cost, including the additional administrative burden, to comply with a change. The Project maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. Management has not experienced any losses in such accounts. Management believes the Project is not exposed to any significant credit risk on cash and cash equivalents. S Additional Note Allowable Distributions The regulatory agreement provides that the Project will not make distributions of assets of income because Episcopal Housing of Birmingham, Inc. is a nonprofit organization. All surplus cash must be 25