SATELLITE AHA DEVELOPMENT, INC. AND SUBSIDIARIES A California Nonprofit Public Benefit Corporation

Transcription

1 SATELLITE AHA DEVELOPMENT, INC. AND SUBSIDIARIES A California Nonprofit Public Benefit Corporation CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT December 31, 2016 and 2015

2 FINANCIAL STATEMENTS December 31, 2016 and 2015 TABLE OF CONTENTS Page INDEPENDENT AUDITOR S REPORT 3 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position 5 Consolidated Statements of Activities 6 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements 9 SUPPLEMENTARY INFORMATION 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 19 Independent Auditor s Report on Compliance for Each Major Program and on Internal Control Over Compliance Required By The Uniform Guidance 21 Schedule of Expenditures of Federal Awards 23 Schedule of Findings and Questioned Costs 24

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors Satellite AHA Development Inc. and Subsidiaries Report on the Financial Statements We have audited the accompanying consolidated financial statements of Satellite AHA Development Inc., a California nonprofit public benefit corporation, and Subsidiaries which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Satellite AHA Development Inc. and Subsidiaries, as of December 31, 2016 and 2015, and the changes in their net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

4 INDEPENDENT AUDITOR S REPORT (Continued) Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information is presented for purposes of additional analysis and is not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated July 26, 2017 on our consideration of Satellite AHA Development Inc. and Subsidiaries 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Satellite AHA Development Inc. and Subsidiaries internal control over financial reporting and compliance. Moraga, California July 26, 2017

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, 2016 and 2015 ASSETS Current assets Cash and cash equivalents $ 5,697,245 $ 6,687,723 Grants receivable 45,484 45,484 Tenant rents and other receivables 1,170,217 1,347,537 Prepaid expenses 4,472,645 2,218,947 Total current assets 11,385,591 10,299,691 Other assets Restricted cash and deposits (Note B) 17,835,033 16,855,475 Property and equipment, net (Note C) 391,051, ,420,477 Development in progress (Note D) 24,872,540 16,245,170 TCAC fees, net 845, ,782 Deposits - 4,368 Total assets $ 445,990,426 $ 410,690,963 LIABILITIES AND NET ASSETS Current liabilities Accounts payable and accrued expenses $ 4,151,432 $ 2,872,070 Development costs payable 3,375,389 3,723,543 Partnership management fees payable, current 477, ,336 Accrued interest payable, current portion 1,362, ,979 Current maturities of long-term obligations (Note E) 5,420,603 2,225,699 Total current liabilities 14,787,232 9,340,627 Long-term obligations Tenant security deposits 863, ,695 Deferred rent 546, ,228 Developer fee payable 4,367,273 6,225,931 Partnership management fee payable, net of current portion 3,592,472 3,200,260 Mortgages and notes payable, net of current portion (Note E) 254,656, ,021,840 Accrued interest payable, net of current portion 29,836,910 26,435,190 Total liabilities 308,651, ,400,771 Net assets Controlling interest 7,667,236 6,096,533 Non-controlling interest 129,671, ,193,659 Total net assets 137,339, ,290,192 Total liabilities and net assets $ 445,990,426 $ 410,690,963 The accompanying notes are an integral part of these consolidated financial statements. 5

6 CONSOLIDATED STATEMENTS OF ACTIVITIES Years Ended December 31, 2016 and Support and Revenue Support Individual and corporate contributions $ 2,806,249 $ 241,438 Total support 2,806, ,438 Revenue Rental property income 25,262,109 22,513,040 Interest and miscellaneous income 77, ,095 Total revenue 25,339,661 22,691,135 Total support and revenue 28,145,910 22,932,573 Expenses (page 7) Program services Housing development expenses 557, ,009 Rental properties expenses 38,086,427 35,620,267 Management and general 19,955 16,833 Total expenses 38,664,131 35,895,109 Change in net assets (10,518,221) (12,962,536) Net assets, beginning of year 118,290, ,749,941 Capital contributions 30,098,518 21,622,289 Distributions (250,991) (62,282) Syndication costs (280,303) (57,220) Net assets, end of year $ 137,339,195 $ 118,290,192 Reconciliation of net assets: Controlling interest Beginning of year $ 6,096,533 $ 6,746,036 Syndication costs 4 (7) Change in net assets 1,570,699 (649,496) End of year 7,667,236 6,096,533 Non-controlling interest Beginning of year 112,193, ,003,905 Capital contributions 30,098,518 21,622,289 Distributions (250,991) (62,282) Syndication costs (280,307) (57,213) Non-controlling interest in limited partnership earnings (12,088,920) (12,313,040) End of year 129,671, ,193,659 Net assets, end of year $ 137,339,195 $ 118,290,192 The accompanying notes are an integral part of these consolidated financial statements. 6

7 CONSOLIDATED STATEMENTS OF ACTIVITIES (Continued) Years Ended December 31, 2016 and 2015 Housing Development Program Services Management Rental Properties and General Comparative Totals Salaries $ - $ 4,171,580 $ 11,992 $ 4,183,572 $ 4,293,771 Payroll taxes and employee benefits - 1,074,323-1,074,323 1,058,478 Management fees - 1,610,654-1,610,654 1,520,320 Professional fees 20, ,044 2, , ,819 Advertising - 15,606-15,606 9,649 Consulting services - 729, , ,201 Data processing - 117, ,304 98,888 Office supplies, postage and printing - 67,290 2,419 69,709 68,545 Membership dues, licenses and fees - 28,004-28,004 10,095 Bad debt expense - 170, ,237 53,089 Telephone - 344,775 2, , ,624 Travel and training - 60,959-60,959 74,525 Equipment rental - 47,519-47,519 48,474 Taxes and insurance - 1,498,895-1,498,895 1,537,021 Maintenance expenses - 3,511,686-3,511,686 3,158,897 Utilities - 2,315,885-2,315,885 1,899,492 Interest - 8,442,154-8,442,154 8,228,012 Miscellaneous financial expenses - 59,596-59,596 52,480 Donations 271, ,998 2,843 Depreciation and amortization - 12,157,916-12,157,916 11,119,501 Partnership management fees 265, , , ,904 Incentive management fees - 22,279-22,279 36,595 Asset management fees - 149, , ,822 Miscellaneous - 678, , ,064 Total expenses $ 557,749 $ 38,086,427 $ 19,955 $ 38,664,131 $ 35,895,109 Total The accompanying notes are an integral part of these consolidated financial statements. 7

8 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2016 and CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets from operations $ (10,518,221) $ (12,962,536) Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Depreciation and amortization 14,237,902 11,119,501 Amortization of debt issuance costs expensed as interest 212, ,799 Increase (decrease) in: Grants receivable - (493) Tenant and other receivables 177,320 (355,495) Prepaid expenses (2,253,698) (1,168,674) Deposits 4,368 4,705 (Increase) decrease in: Accounts payable and accrued expenses 1,279,362 (2,832,034) Deferred rent 158,500 52,609 Partnership management fee payable 636, ,074 Accrued interest 4,487,401 4,037,428 Net cash provided (used) by operating activities 8,421,657 (1,185,116) CASH FLOWS FROM INVESTING ACTIVITIES Disbursements from restricted cash and deposits, net (904,417) (1,235,405) Additions to development in progress, net of removals (10,843,602) 47,073,291 Additions to property and equipment (38,759,096) (65,115,209) Net cash used by investing activities (50,507,115) (19,277,323) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgages and notes payable 37,396,370 38,308,794 Principal payments on mortgages and notes payable (25,384,687) (36,751,265) Payment of debt issuance costs (394,118) (749,689) Payment of TCAC fees (89,809) (241,227) LP capital contributions 30,098,518 21,622,289 Distributions (250,991) (62,282) Syndication costs (280,303) (57,220) Net cash provided by financing activities 41,094,980 22,069,400 Increase (decrease) in cash (990,478) 1,606,961 Cash - beginning of period 6,687,723 5,080,762 Cash - end of period $ 5,697,245 $ 6,687,723 The accompanying notes are an integral part of these consolidated financial statements. 8

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF ACCOUNTING POLICIES Satellite AHA Development, Inc. (SADI), a California nonprofit public benefit corporation, and Subsidiaries, identified below (collectively, the Organization), purpose is to provide affordable, decent, and safe housing and related services for low income persons in the San Francisco Bay Area. The consolidated financial statements also include the accounts and activity of the following: Limited liability companies which provide housing for low- and moderate-income individuals and families in which SADI is the sole member: Amistad House, LLC Grayson Street, LLC (1) Robin Lane, LLC Satellite St. Patrick s Terrace, LLC Single member limited liability companies, in which SADI is the sole or managing member, holding a controlling general partner interest in their respective low income housing tax credit limited partnerships providing affordable housing: LLC's 9 Limited Partnerships 1550 Third, LLC 1550 Third, L.P. Kenneth Henry Court, LLC Kenneth Henry Court, L.P. Lakeside Senior Apartments, LLC Lakeside Senior Apartments, L.P. Satellite First Communities, LLC Satellite First Communities, L.P. Tabora Gardens, LLC Tabora Gardens, LP Tower Park, LLC Tower Park, L.P. Trinity Avenue Apartments, LLC Trinity Avenue Apartments, L.P. UNA Housing, LLC UNA Associates, L.P. University Avenue Senior Housing, LLC University Avenue Senior Housing, L.P. Valley View Senior Homes LLC Valley View Senior Homes, L.P. Low-income housing tax credit limited partnerships (LIHTC properties) which provide housing for low- and moderate-income individuals and families in which SADI is the General Partner: 2719 Foothill, L.P Carmen, L.P. 401 Fairmount, L.P. 6th & Oak Associates, L.P. Adeline Lofts Associates Allston House Associates, L.P. Ashby Lofts Associates, L.P. Calaveras Housing Partners Casa Montego, LP Harmon Gardens, L.P. Harper Crossing, L.P. Hookston Senior Homes Associates, L.P. Jefferson Oaks, L.P. Madison Street Lofts, L.P. Oak Street Housing, L.P. Petaluma Avenue Homes, L.P. Sacramento Senior Homes, L.P. Shattuck Senior Homes Associates, L.P. Strawberry Creek Lodge, L.P. Valley Oaks, L.P. (1) Grayson Street, LLC was formed for the purpose of developing and owning a low income housing tax credit project providing affordable housing. As of December 31, 2016, predevelopment costs for this project have not yet transferred to the LLC.

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF ACCOUNTING POLICIES (Continued) A summary of the significant accounting policies applied in the preparation of the accompanying financial statements is as follows: 1. Principles of Consolidation The accounts of the Organization have been consolidated in the accompanying financial statements. All material inter-organization transactions have been eliminated. 2. Basis of Presentation and Accounting The accompanying consolidated financial statements have been prepared on the accrual basis in accordance with accounting principles generally accepted in the United States of America (GAAP). Support and revenues are recorded in the period when earned and expenses when incurred, regardless of the timing of payments. In addition, the financial position and activities are presented on the basis of unrestricted, temporarily restricted and permanently restricted net assets depending on the nature of any donor imposed restrictions. As of December 31, 2016, all of the Organization s net assets are unrestricted. 3. Cash and Cash Equivalents and Concentrations of Credit Risk Cash is defined as cash in demand deposits and cash on hand. Not included as cash for purposes of the statement of cash flows are funds restricted as to their use, regardless of liquidity, such as tenant security deposits, reserve for replacements, and operating reserves. As of December 31, 2016 and 2015, the Organization has deposits of approximately $2,100,000 and $2,650,000, respectively, in excess of federally insured limits. The Organization has not experienced losses in such accounts and believes it is not exposed to any significant risk of loss. 4. Tenant Rents and Other Receivables The Organization elects to record bad debt for tenant rents receivables and all other receivables using the direct write-off method. GAAP require that the allowance method be used to reflect bad debts. However, the effect of the use of the direct write-off method is not materially different from the result that would be obtained had the allowance method been followed. 5. Development in Progress Development in progress includes the cost of acquisition, construction or rehabilitation of housing projects that have not been completed. The Organization incurs costs during the predevelopment phase of each affordable housing project undertaken. Property holding costs, including interest costs incurred on rehabilitation-related debt, net of interest earned on investment of the borrowed funds, are also capitalized. Any funds expended on a project that does not pass beyond the development stage are recorded as expenses when further activity on the project ceases. 10

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF ACCOUNTING POLICIES (Continued) 6. Property and Equipment Property and equipment is stated at cost as of the date of acquisition, or at fair market value if donated. The cost of maintenance and repairs are charged to operations when incurred. All major replacements and betterments are capitalized. Depreciation is provided in amounts sufficient to relate the cost or fair market value of depreciable assets to operations over their estimated useful lives using the straight-line method, forty years for rental housing buildings and improvements and three to ten years for office furniture and equipment. The Organization reviews its investment in real estate for impairment whenever events or changes in circumstances indicate that the carrying value of such property may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the real estate to the future net undiscounted cash flow expected to be generated by the rental property including any estimated proceeds from the eventual disposition of the real estate. If the real estate is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the real estate exceeds the fair value of such property. There was no impairment losses recognized in the year ended December 31, Tax Credit Fees and Amortization Tax credit fees and market study costs are amortized over ten years using the straight-line method. As of December 31, 2016 and 2015, TCAC fees are net of accumulated amortization of $595,836 and $483,184, respectively. 8. Fair Value of Financial Instruments The carrying amounts of fair value based on prevailing borrowing rates currently available for notes receivable with similar terms and maturities. The carrying value of long-term debt approximates fair value based on prevailing borrowing rates currently available for loans with similar terms and maturities. 9. Grant and Contract Revenue The Organization receives grants from governments, agencies, and others, which are conditioned upon incurring certain qualifying costs or meeting other conditions. The grants are recognized as revenue when the qualifying costs are incurred and the possibilities of not meeting the conditions are remote. 10. Recognition of Donor Restricted Contributions Support that is restricted by the donor is reported as an increase in unrestricted net assets if the restriction is satisfied in the period in which the support is recognized. All other donor-restricted support is reported as an increase in temporarily restricted or permanently restricted net assets depending on the existence and/or nature of any donor restrictions. As of December 31, 2016 and 2015, all of the Organization s net assets are unrestricted. 11

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF ACCOUNTING POLICIES (Continued) 11. Rental Housing Revenue Rental housing revenue is recognized as rent becomes due. Rental payments received in advance are deferred until earned. All leases between the Organization and tenants are operating leases. Lease terms are usually one year or less. 12. Advertising Costs Advertising costs are charged to operations when incurred. 13. Functional Allocation of Expenses The costs of providing the various programs and activities have been summarized on a functional basis in the statement of activities. A portion of costs for supporting services such as the management fee, office expenses, auditing, telephone, bookkeeping and accounting are allocated to general and administrative expenses. 14. Risks and Uncertainties The Organization is subject to various risks and uncertainties in the ordinary course of business that could have adverse impacts on its operating results and financial condition. Future operations could be affected by changes in the economy or other conditions in the geographical area where the corporation is located or by changes in federal, state and/or local low-income housing subsidies or the demand for such housing. 15. Income Taxes and Tax Exempt Status SADI has received tax exempt status under IRC Section 501(c)(3) and the California Franchise Tax Board under the Revenue and Taxation Code 23701(d). SADI believes that it does not have any uncertain tax positions that are material to the financial statements. The federal and state information returns for the years ending December 31, 2015, 2014, 2013 and 2012 are subject to examination by regulatory agencies, generally for three years and four years after they were filed for the federal and state returns, respectively. The income or loss from the consolidated limited liability companies is reported by SADI (as sole owner) on its tax return and accordingly, no provision for income taxes has been made in the financial statements. 16. Use of Estimates The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures. Accordingly, actual results could differ from those estimates. 12

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF ACCOUNTING POLICIES (Continued) 17. Subsequent Events Subsequent events were evaluated through July 26, 2017, which is the date the financial statements were available to be issued. 18. Recently Adopted Accounting Standards In April 2015, the Financial Accounting Standards Board (the FASB ) issued Accounting Standards Update ( ASU ) No , Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in a reporting entity s financial statements. Under this new guidance, debt issuance costs will be presented as a direct deduction from the related liability instead of an asset. Amortization of debt issuance costs will be reported as interest expense in the statement of operations. This accounting update does not affect the current accounting guidance for the recognition and measurement of debt issuance costs. Amortization of the debt issuance costs is calculated using the straight-line method and is included as a component of interest expense. The adoption of this guidance did not have a material impact on the financial statements. Certain amounts in the 2015 financial statements have been reclassified to conform with current year presentation which had no impact on net income for NOTE B RESTRICTED CASH AND DEPOSITS Tenant security deposits are not available for operating purposes and are maintained in separate interest bearing accounts. In addition, certain loans require the maintenance of reserve accounts, which are to be funded periodically from net cash flows and utilized for improvements to the housing units. Tenant security deposits and reserves consist of the following as of December 31: Tenant security deposits $ 872,807 $ 781,727 Operating and replacement reserves 16,962,226 16,073,748 Total tenant security deposits and reserves $ 17,835,033 $ 16,855,475 NOTE C PROPERTY AND EQUIPMENT As of December 31, property and equipment and accumulated depreciation consist of the following: Land $ 37,911,676 $ 37,062,558 Building and improvements 415,447, ,428,912 Furniture and equipment 11,039,091 10,148,042 Total property and equipment 464,398, ,639,512 Less: accumulated depreciation (73,346,982) (59,219,035) Property and equipment, net $ 391,051,626 $ 366,420,477 13

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE D DEVELOPMENT IN PROGRESS As of December 31, development in progress consists of the following projects: Harper Crossing $ 11,431,939 $ 1,849,479 Redwood Hills 489, ,924 Casa Montego 1,983,904 - Tabora Gardens 8,889,123 - Tower Park - 12,557,871 Grayson Street 2,077,844 1,731,896 Total development in progress $ 24,872,540 $ 16,245,170 NOTE E - MORTGAGES AND NOTES PAYABLE Notes payable are secured by the Property unless otherwise noted and summarized as follows: Mortgages payable to banks, secured by deeds of trust on the related properties, are payable in monthly installments including interest at rates ranging from 3.00% to 7.65% based on amortization terms ranging from 10 to 30 years with varying maturity dates through As of December 31, 2016 and 2015, accrued interest totaled $172,760 and $181,613, respectively. $ 61,152,325 $ 61,155,794 Construction mortgages payable to banks, secured by construction deeds of trust on the related properties, bear interest at variables rates ranging from 1.5% to 1.89% at December 31, 2016 and with varying maturity dates through During the construction period, all interest shall be added to the outstanding principal balance. As of December 31, 2016 and 2015, accrued construction interest totaled $3,779 and $14,386, respectively. 14,215,976 23,430,679 Deferred mortgages payable to various government agencies and affiliated nonprofits; secured by deeds of trust on the related properties are non-interest bearing, bear simple interest at rates ranging from 0.5% to 6%, or bear compounding interest at rates ranging from 3.32% to 3.4% and have varying maturity dates through Payments are either payable from available residual receipts or surplus cash or are deferred until maturity. As of December 31, 2016 and 2015, accrued deferred interest totaled $30,040,189 and $26,452,170, respectively. 184,959, ,729,435 14

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE E - MORTGAGES AND NOTES PAYABLE (Continued) Predevelopment loans payable to various government agencies and partnerships are secured by the related property in development, are either non-interest bearing or bear simple interest at a rate of 3%, and have varying maturity dates through Payments are either payable from residual receipts or surplus cash or are deferred until maturity. These loans are expected to be paid upon close of construction financing or transferred to the ultimate entity organized to be the owner of the property. As of December 31, 2016 and 2015, accrued deferred interest totaled $113,822 and $73,000, respectively. $ 2,629,955 $ 2,629,955 Total mortgages and notes payable 262,957, ,945,863 Less: Current maturities (5,420,603) (2,225,699) Less: Unamortized debt issuance costs (2,880,163) (2,698,324) Total long term portion of notes payable, net $ 254,656,780 $ 246,021,840 Principal payments toward deferred mortgages and notes payable for the next five years are subject to changes in net cash flow which is a contingency that cannot be reasonably estimated. The construction mortgages are anticipated to be converted to permanent financing upon maturity and are excluded from the current portion of long-term obligations. The minimum required payments are estimated as follows for the years ending December 31: Debt-Service Mortgages Construction Mortgages Deferred Mortgages Predevelopment Notes Total 2017 $ 2,184,773 $ 3,235,830 $ - $ - $ 5,420, ,052,751 10,980, ,000 13,282, ,109, ,000-2,342, ,226, ,226, ,338, ,338,265 15

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE F - RELATED PARTY TRANSACTIONS Property Management Fees The rental properties are managed by SAHA PM. For the years ending December 31, 2016 and 2015, fees earned by SAHA PM amounted to approximately $1,738,000 and $1,678,000, respectively. As of December 31, 2016 and 2015, accounts payable includes amounts due SAHA PM for fees and reimbursement of operating expenses totaling approximately $785,000 and $831,000, respectively. As of December 31, 2016 and 2015, accounts payable includes amounts due to SAHA for reimbursement of operating expenses totaling approximately $1,066,000 and $1,132,000, respectively. Partnership and Asset Management Fees The Organization is entitled to annual partnership management fees from the LIHTC partnerships. The services are performed by SAHA and the fees are passed through to SAHA accordingly. For certain LIHTC properties, the fees are earned directly by SAHA. The fees shall be paid from net cash flow, as defined in various agreements. Unpaid fees shall accrue. For the years ended December 31, 2016 and 2015, fees earned by SAHA amounted to approximately $628,000 and $593,000, respectively. As of December 31, 2016 and 2015, the partnership management fees payable to SAHA amount to approximately $3,907,000 and $3,275,000, respectively. The Limited Partners in the LIHTC properties are entitled to an annual asset management / investor services fee. For the year ended December 31, 2016 and 2015, fees earned by the Limited Partners amounted to approximately $92,100 and $92,100, respectively. As of December 31, 2016 and 2015, fees payable amounted to approximately $163,200 and $159,100, respectively Resident Services Fees The rental properties have contracted with SAHA to receive specified resident services. For the years ended December 31, 2016 and 2015, payments made to SAHA under the resident services agreements totaled $991,197 and $643,661, respectively. Development Fee Payable SAHA has earned development fees in connection with the development of the LIHTC properties. The fees are generally paid from development sources. However, in certain instances the unpaid fees are to be paid from net cash flow as defined in various agreements. As of December 31, 2016 and 2015, the development fee payable amounted to $4,367,273 and $6,225,931, respectively. NOTE G COMMERCIAL PROPERTY LEASES Certain of the LIHTC partnerships lease commercial space to SAHA under a non-cancellable lease agreements that expire between December 31, 2043 and December 31, For the first years of the lease terms, annual rents varying from $24,000 to $46,554 are due; thereafter, annual rent of $1 are due in advance on January 1 of each year. 16

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015 NOTE G COMMERCIAL PROPERTY LEASES (Continued) GAAP requires that the aggregate annual lease payments be recognized ratably over the lease term. Therefore, the Organization recognizes revenue from the lease on a straight-line basis over the life of the leases in the amount of $79,022 per year. The difference between the rent payments received of approximately $120,000 and the rent income recognized is the deferred commercial rent which will be recognized over the latter years of the lease when the rent payments are $1. As of December 31, 2016 and 2015, the deferred commercial rent liability is $546,728 and $388,228, respectively. The Organization has also entered into a non-cancellable rooftop lease agreement with a cellular network carried. The agreement grants the cellular network carrier the right to install network antennae on the roof of one of the properties. The lease grants the cellular network carried 5 options to extend the lease term for an additional 5 year period of 5 years each. The lease has been automatically renewed for a 5 year term that expires December Estimated future cash receipts under non-cancellable lease agreements for the next five years ending December 31 are as follows: $ 183, $ 136, $ 184, $ 137, $ 181,018 NOTE H - SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 2016 and 2015, cash paid for interest amounted to $5,044,899 and $5,018,183, respectively and interest capitalized to construction in progress amounted to $551,215 and $458,938, respectively. 17

18 SUPPLEMENTARY INFORMATION

19 SPITERI, NARASKY & DALEY, LLP Certified Public Accountants 1024 Country Club Drive, Moraga, California (925) 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 Satellite AHA Development Inc. and Subsidiaries We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the consolidated financial statements of Satellite AHA Development Inc., a California nonprofit public benefit corporation, and Subsidiaries which comprise the consolidated statement of financial position as of December 31, 2016, and the related consolidated statement of activities and cash flows for the year then ended, and the related notes to the consolidated financial statement, and have issued our report thereon dated July 26, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Satellite AHA Development 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 Satellite AHA Development Inc. s internal control. Accordingly, we do not express an opinion on the effectiveness of Satellite AHA Development Inc. 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 combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of Satellite AHA Development Inc. 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 Satellite AHA Development Inc. 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. 19

20 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 (Continued) 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 Satellite AHA Development Inc. s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Satellite AHA Development Inc. s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Moraga, California July 26,

21 SPITERI, NARASKY & DALEY, LLP Certified Public Accountants 1024 Country Club Drive, Moraga, California (925) 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 Satellite AHA Development Inc. and Subsidiaries Report on Compliance for Each Major Program We have audited Satellite AHA Development 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 Satellite AHA Development Inc. s major federal programs for the year ended December 31, Satellite AHA Development 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 for Compliance 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 Satellite AHA Development 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 (CFR) 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 Satellite AHA Development 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 Satellite AHA Development Inc. s compliance. Opinion on Each Major Federal Program In our opinion, Satellite AHA Development 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 December 31,

22 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE (Continued) Report on Internal Control Over Compliance Management of Satellite AHA Development 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 Satellite AHA Development 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 Satellite AHA Development 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, as defined above. 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. Moraga, California July 26,

23 SATELLITE AFFORDABLE HOUSING ASSOCIATES AND SUBSIDIARIES SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS December 31, 2016 Federal Grantor/Pass-through Grantor/Program Title Federal CFDA Number Agency or Pass- Through Number Federal Expenditures Department of Housing and Urban Development Community Development Block Grant Program Loans Pass-through the City of Berkeley (CDBG - Entitlement Grants Cluster) Unknown $ 1,029,955 Housing Opportunities for Persons with AIDS (HOPWA) Pass-through the County of Alameda Unknown 350,000 Total Federal Expenditures $ 1,379,955 NOTE TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying schedule of expenditures of federal awards includes the federal award activity of Satellite AHA Development Inc. and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S.Code of Federal 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 Satellite AHA Development Inc., it is not intended to and does not present the financial position, changes in net assets, or cash flows of Satellite AHA Development Inc. Satellite AHA Development Inc. has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. NOTE B U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT LOAN PROGRAM Satellite AHA Development Inc. has received U.S. Department of Housing and Urban Development passthrough loans. The loan balances outstanding at the end of the year are as follows: CDBG Loan $1,029,955 HOPWA Loan $ 350,000 23

24 SATELLITE AFFORDABLE HOUSING ASSOCIATES AND SUBSIDIARIES SCHEDULE OF FINDINGS AND QUESTIONED COSTS December 31, 2016 SECTION I - SUMMARY OF AUDITOR'S RESULTS Financial Statements Type of auditor's report issued Internal control over financing reporting: Material weakness(es) identified Significant deficiency(ies) identified Noncompliance material to financial statements Unmodified No None reported No Federal Awards Internal control over major programs: Material weakness(es) identified Significant deficiency(ies) identified Type of auditor's report issued on compliance for major programs Audit findings disclosed that are required to be reported in accordance with 2 CFR section (a) No None reported Unmodified No Identification of major programs CFDA# Community Development Block Grant Dollar threshold used to distinguish between type A and $750,000 type B programs Auditee qualified as low-risk auditee No SECTION II - FINANCIAL STATEMENT FINDINGS No findings reported. SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS No findings reported. 24