Pontiac ILF Limited Dividend Housing Association Limited Partnership HUD Project No

Transcription

1 Pontiac ILF Limited Dividend Housing Association Financial Report with Supplemental Information December 31, 2011

2 Certificate of Partners We certify that we have examined the attached financial statements and supplemental information of, Pontiac ILF Limited Dividend Housing Association, and to the best of our knowledge and belief, the same is a true statement of the financial condition as of December 31, Brian W. Carnaghi Presbyterian Villages of Michigan, Managing General Partner February 20, 2012 Date General Partner February 20, 2012 Date ID# Employer Identification Number

3 Management Agent's Certification We certify that we have examined the attached financial statements and supplemental information of, Pontiac ILF Limited Dividend Housing Association, and to the best of our knowledge and belief, the same is a true statement of the financial condition as of December 31, Brian W. Carnaghi Presbyterian Villages of Michigan February 20, 2012 Date (248) Telephone Number ID# Management Company Employer Identification Number Heike Scott Property Manager

4 Contents Report Letter 1 Financial Statements Balance Sheet 2-3 Statement of Profit and Loss 4-6 Statement of Partners Equity 7 Statement of Cash Flows 8-9 Notes to Financial Statements Supplemental Information 19 Report Letter 20 Balance Sheet Data Statement of Profit and Loss Data Statement of Partners Equity Data 26 Statement of Cash Flows Data Supplemental Information Schedule of Changes in Fixed Asset Accounts 31 Computation of Surplus Cash 32 Schedule of Net Operating Cash Flows - Partnership 33 Report on Internal Control Report on Compliance with Specific Requirements That Could Have a Direct and Material Effect on Major HUD Programs Report on Compliance with Specific Requirements Applicable to Fair Housing and Nondiscrimination Schedule of Findings and Questioned Costs 42-44

5 Independent Auditor's Report To the Partners Pontiac ILF Limited Dividend Housing Association We have audited the accompanying balance sheet of, Pontiac ILF Limited Dividend Housing Association (the "Partnership"), as of December 31, 2011 and 2010 and the related statement of profit and loss, partners equity, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of, Pontiac ILF Limited Dividend Housing Association, as of December 31, 2011 and 2010 and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated February 20, 2012 on our consideration of Pontiac ILF Limited Dividend Housing Association 's internal control over financial reporting. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and the results of that testing and not to provide an opinion on the effectiveness of internal control over financial reporting. In accordance with Government Auditing Standards, we have also issued a report dated February 20, 2012 on the Partnership's compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters that could have a direct and material effect on a major HUD-assisted program. Those reports are an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audits. February 20, 2012 By: Linda A. Yudasz, CPA Engagement Partner 2601 Cambridge Court, Suite 500 Auburn Hills, MI Federal ID Number: Phone Number: (248)

6 Balance Sheet Assets December 31, 2011 December 31, 2010 Current Assets Cash - Operations (Note 2) $ 256,082 $ 205,956 Tenant accounts receivable 10,664 8,776 Accounts receivable - HUD 29,397 34,310 Short-term investments - Operations (Note 2) 343, ,437 Prepaid expenses 24,352 35,396 Total current assets 663, ,875 Deposits - Held in Trust Tenant deposits held in trust 52,001 70,025 Deposits - Funded Escrow deposits 101,275 78,094 Replacement reserve 148, ,434 Other reserves 86,217 86,339 Total deposits - Funded 335, ,867 Fixed Assets Land and land improvements 1,461,652 1,441,941 Buildings and building improvements 13,563,666 13,554,942 Building equipment (portable) 601, ,832 Total fixed assets 15,627,214 15,524,715 Accumulated depreciation (3,724,866) (3,295,380) Net fixed assets 11,902,348 12,229,335 Other Assets Deferred financing costs - Net 65, ,470 Total assets $ 13,019,333 $ 13,543,572 See Notes to Financial Statements. 2

7 Balance Sheet (Continued) Liabilities and Partners Equity December 31, 2011 December 31, 2010 Current Liabilities Accounts payable - Operations (Note 4) $ 35,293 $ 20,741 Accounts payable - Entity (Note 4) 8,787 8,615 Accrued wages payable (Note 4) 13,018 9,712 Accrued payroll taxes payable (Note 4) 951 1,047 Accrued interest payable - First mortgage 16,354 28,034 Accrued interest payable - Other loans and notes (Note 4) - 4,365 Accrued property taxes 39,596 39,435 Mortgage payable - First mortgage 82,903 43,555 Other loans and notes (Note 4) - 100,816 Total current liabilities 196, ,320 Tenant deposits held in trust (contra) 42,452 42,630 Long-term Liabilities Accounts payable - Entity (Note 4) 77,627 79,000 Mortgage payable - First mortgage (Note 3) 5,150,343 5,034,549 Other loans and notes payable (Note 4) 643, ,719 Total long-term liabilities 5,871,555 5,781,268 Total liabilities 6,110,909 6,080,218 Partners Equity 6,908,424 7,463,354 Total liabilities and partners equity $ 13,019,333 $ 13,543,572 See Notes to Financial Statements. 3

8 Statement of Profit and Loss December 31, 2011 Year Ended December 31, 2010 Rent Revenue Rent revenue - Gross potential $ 394,188 $ 401,342 Tenant assistance payments 1,037,430 1,009,874 Miscellaneous rent revenue Total rent revenue (potential at 100% occupancy) 1,431,958 1,411,713 Vacancies Apartments (33,115) (18,401) Total vacancies (33,115) (18,401) Net rent revenue (rent revenue less vacancies) 1,398,843 1,393,312 Financial Revenue Project operations Investments - Replacement reserve Investments - Miscellaneous Total financial revenue Other Revenue Laundry and vending revenue Gifts - 3,591 Miscellaneous revenue Total other revenue 746 4,883 Total revenue 1,400,571 1,399,064 See Notes to Financial Statements. 4

9 Statement of Profit and Loss (Continued) December 31, 2011 Year Ended December 31, 2010 Administrative Expenses Conventions and meetings $ 803 $ 1,287 Advertising and marketing 5,041 1,630 Other renting expenses 1,367 1,829 Office salaries (Note 4) 78,517 86,073 Office expenses 19,550 21,301 Management fee (Note 4) 69,983 69,641 Manager or superintendent salaries (Note 4) 48,489 41,821 Legal expenses Auditing expenses 14,900 16,277 Bad debts 178 1,472 Miscellaneous administrative expenses 2,730 2,279 Total administrative expenses 241, ,885 Utilities Expense Electricity 19,879 22,304 Water 47,953 44,218 Gas 10,808 11,783 Total utilities expense 78,640 78,305 Operating and Maintenance Expenses Payroll (Note 4) 112, ,117 Supplies 63,841 49,349 Contracts 91,536 67,629 Garbage and trash removal 6,940 6,045 Security payroll/contract 30,187 30,143 Snow removal 23,811 8,667 Vehicle and maintenance equipment operation and repairs 3,712 4,136 Miscellaneous operating and maintenance expenses 13,679 6,322 Total operating and maintenance expenses 345, ,408 Taxes and Insurance Real estate taxes 39,611 48,529 Payroll taxes (FICA) (Note 4) 19,555 18,823 Property and liability insurance (hazard) 50,653 50,233 Workers' compensation 3,064 2,728 Health insurance and other employee benefits 29,794 25,700 Total taxes and insurance 142, ,013 See Notes to Financial Statements. 5

10 Statement of Profit and Loss (Continued) December 31, 2011 Year Ended December 31, 2010 Financial Expenses Interest on first mortgage payable $ 211,786 $ 331,289 Interest on notes payable (Note 4) - 4,365 Mortgage insurance premium/service charge 21,722 27,766 Miscellaneous financial expenses 130, Total financial expenses 363, ,768 Total Costs of Operations Before Depreciation and Amortization 1,172,890 1,114,379 Profit Before Depreciation and Amortization 227, ,685 Depreciation Expense 429, ,065 Amortization Expense 286,396 23,747 Corporate or Mortgagor Entity Expenses Legal expenses 63 - Other expenses (Note 4) 8,787 8,615 Net entity expenses 8,850 8,615 Net Loss $ (497,051) $ (164,742) See Notes to Financial Statements. 6

11 Statement of Partners Equity General Partners Limited Partners Total Balance - January 1, 2010 $ 357,602 $ 7,297,884 $ 7,655,486 Net loss (165) (164,577) (164,742) Distributions to partners - (27,390) (27,390) Balance - December 31, ,437 7,105,917 7,463,354 Net loss (497) (496,554) (497,051) Distributions to partners (1,320) (56,559) (57,879) Balance - December 31, 2011 $ 355,620 $ 6,552,804 $ 6,908,424 See Notes to Financial Statements. 7

12 Statement of Cash Flows December 31, 2011 Year Ended December 31, 2010 Cash Flows from Operating Activities Receipts: Rental $ 1,396,955 $ 1,386,882 Interest Gifts - 3,591 Other cash receipts 5,659 1,292 Total receipts 1,403,596 1,392,634 Disbursements: Administrative (30,254) (49,799) Management fee (69,983) (69,641) Utilities (78,640) (78,305) Salaries and wages (235,966) (236,677) Operating and maintenance (233,706) (172,291) Real estate taxes (39,450) (47,638) Property insurance (50,178) (50,233) Miscellaneous taxes and insurance (52,509) (37,658) Tenant security deposits 17,846 (5,065) Interest payments - First mortgage (223,466) (335,879) Mortgage insurance premium (11,153) (10,691) Miscellaneous financial (130,298) (348) Entity/Construction disbursements (10,051) (8,446) Total disbursements (1,147,808) (1,102,671) Net cash provided by operating activities 255, ,963 Cash Flows from Investing Activities Net deposit to from the mortgage escrow account (23,181) (46,064) Net deposit to from the reserve for replacement account (1,911) (13,632) Net withdrawal (deposit) to other reserve 122 (16,305) Net purchase of fixed assets (102,499) (11,538) Net cash used in investing activities (127,469) (87,539) Cash Flows from Financing Activities Principal payments - First mortgage (5,144,858) (40,836) Proceeds from refinanced mortgage 5,300,000 - Payments on other loans payable (24,134) - Distributions (57,879) (27,390) Other financing activities (150,739) (59,544) Net cash used in financing activities (77,610) (127,770) Net Increase in Cash 50,709 74,654 Cash - Beginning of year 548, ,739 Cash - End of year $ 599,102 $ 548,393 See Notes to Financial Statements. 8

13 Statement of Cash Flows (Continued) A reconciliation of net loss to net cash from operating activities is as follows: Year Ended December 31, 2011 December 31, 2010 Net loss $ (497,051) $ (164,742) Adjustments to reconcile net loss to net cash from operating activities: Depreciation 429, ,065 Amortization 286,396 23,747 (Increase) decrease in assets: Tenant accounts receivable (1,888) (1,704) Accounts receivable - Other 4,913 (4,726) Prepaid expenses 11,044 26,938 Cash restricted for tenant security deposits 18,024 (5,385) Increase (decrease) in liabilities: Accounts payable - Operations 14,552 (3,449) Accounts payabe - Entity (1,373) - Accrued liabilities 3,371 1,955 Accrued interest payable (11,680) (225) Tenant security deposits held in trust (178) 320 Asset management fee Net cash provided by operating activities $ 255,788 $ 289,963 See Notes to Financial Statements. 9

14 Notes to Financial Statements December 31, 2011 and 2010 Note 1 - Nature of Business and Significant Accounting Policies Pontiac ILF Limited Dividend Housing Association (the "Partnership") was formed on June 30, 2001 under the Michigan Uniform Limited Partnership Act for the purpose of acquiring, owning, constructing, and operating a 150- unit apartment complex located in Pontiac, Michigan, financed in part with the proceeds of a mortgage insured by the U.S. Department of Housing and Urban Development (HUD) under Section 221(d)(4) of the National Housing Act. The Partnership purchased the project on September 20, Operations of the Partnership are limited to the rental of apartment units owned by the Partnership. Under the terms of the Regulatory Agreement executed in connection with obtaining the mortgage loan, HUD regulates rents and distributions to partners. Significant accounting policies are as follows: Basis of Accounting - The Partnership maintains its accounting records and prepares its financial statements on an accrual basis, which is in accordance with accounting principles generally accepted in the United States of America. Accounts Receivable - Tenant accounts receivable are stated at net rent amounts. The subsidy receivable is stated at the invoiced amount. The Partnership believes all accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If amounts are determined to be uncollectible, they are charged to operations at that time. Fixed Assets - Land, buildings, and other depreciable assets are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of assets ranging from 5 to 40 years. Depreciation expense was $429,486 and $417,065 for the years ended December 31, 2011 and 2010, respectively. For income tax purposes, accelerated lives and methods are used. Maintenance, repairs, and renewals that do not involve any substantial betterments are charged to expense when incurred. Expenditures that increase the useful life of the property are capitalized. Impairment of Assets - The Partnership recognizes impairment of long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment of the Partnership's rental property has occurred. 10

15 Notes to Financial Statements December 31, 2011 and 2010 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Deferred Financing Costs - Deferred financing costs at December 31, 2011 consist of $45,559 in loan financing costs incurred with the refinancing of the HUD-insured mortgage in January, 2011 and $158,025 in tax credit fees, which are amortized over the life of the loan and the tax credit period, respectively. In conjuction with the refinancing of the mortgage, $269,460 of remaining financing costs on the original mortgage were fully amortized during Remaining amortization in 2011 of $16,936 was related to the new loan costs and tax credit fees. Amortization expense for 2010 was $23,747. Accumulated amortization at December 31, 2011 and 2010 was $169,348 and $137,952. Partner Contributions and Distributions - The Partnership has one general partner, Pathway of Pontiac, Inc. (the "General Partner"), with a.049 percent interest, one managing general partner, PV North LLC (the "Managing General Partner"), with a.051 percent interest, and one limited partner, SunAmerica Housing Fund 1050 (the "Limited Partner"),with a 99.9 percent interest. The Limited Partner has made all required capital contributions totaling $9,745,137 as adjusted for additional tax credits and payment of legal fees. In accordance with the partnership agreement, the General Partner has contributed the required $100 in capital. Partner Allocation of Profits and Losses - Profits or losses from operations of the Partnership are allocated annually between the General Partners and Limited Partner in the ratio of.1 percent and 99.9 percent, respectively. Profits and losses arising from the sale, refinancing, or other disposition of all or substantially all of the Partnership's assets will be specially allocated as prioritized in the partnership agreement. Additionally, the partnership agreement provides for other instances in which special allocation of profits, losses, and distributions may be required. Net cash flows, as more completely described in the partnership agreement, are mainly comprised of all cash received from rents, lease payments, and certain other sources, minus all cash expenditures, all expenses unpaid and properly accrued which have been incurred in the operation of the Partnership's business, payments on loans, and payments to increase reserves. Net cash flow, as defined by the partnership agreement, as amended by the Fifth Amendment dated January 27, 2011, is distributed as follows: (1) First, to the payment of any tax credit shortfall to the Limited Partner; (2) Second, to the payment of the annual asset management fee to an affiliate of the Limited Partner; 11

16 Notes to Financial Statements December 31, 2011 and 2010 Note 1 - Nature of Business and Significant Accounting Policies (Continued) (3) Third, to the payment of any outstanding excess Limited Partner loan amount and then to the payment of any remaining Limited Partner loans and General Partner loans pro rata; (4) Fourth, until the development fee is paid in full, 70 percent to the developer as payment of development fee and 30 percent to the investment partnership as a cash distribution; (5) Fifth, if any operating deficit loans from a General Partner exist, 70 percent to such General Partner with no interest accrual as repayment of such operating deficit loans, and 30 percent to the investment partnership as a cash distribution; (6) Sixth, out of a maximum of 63 percent of net cash flow, in the following priorities: (a) First, to PV North LLC as repayment of the GP-AHP Loan, an annual amount equal to 7 percent of the original principal balance of such GP-AHP Loan, until such GP-AHP Loan is repaid in full, (b) Second, to the repayment of the PVM Loans until such PVM Loans are repaid in full, (c) Third, to the General Partners as a distribution in an amount which will, with the distribution defined under Section 11.01(a)(vii) of the partnership agreement, fully repay the General Partners capital accounts in the Partnership, and (d) Fourth, to Pathway Senior Living of Michigan, LLC (aka Gibson Avenue, LLC) as an Incentive Management Fee, an amount equal to 7 percent of gross income, with any such amounts payable to Pathway Senior Living of Michigan, LLC not paid in any year to cumulate and be payable solely from net cash flow in future years; and (7) Seventh, any remaining cash thereafter shall go (a) 9.69 percent to the repayment of the PVM Loans until such loans are repaid in full and thereafter, to PV North LLC; (b) 9.31 percent to Pontiac, and (c) 81 percent to the Limited Partner as a distribution. Rental Income - The Partnership records apartment rentals at gross potential rent as adjusted for vacancy loss. Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. All leases between the Partnership and the tenants of the property are operating leases. 12

17 Notes to Financial Statements December 31, 2011 and 2010 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Units that are designated for occupancy by eligible low-income tenants under a Section 8 housing assistance payment (HAP) contract require tenants to contribute a portion of the contract rent based on formulas prescribed by the U.S. Department of Housing and Urban Development. Housing assistance payments are received for the balance of contract rent from HUD. The current contract expires January 30, Approximately 74 and 72 percent of rental revenue was received pursuant to the HAP contracts for 2011 and 2010, respectively. Income Taxes - No income tax provision has been recorded in the financial statements since income or loss of the Partnership is required to be reported by the respective partners on their individual income tax returns. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Deposits - Funded - The funds held by the mortgagee represent escrows and restricted funds for taxes, insurance, and a replacement reserve. The taxes and insurance escrows and the replacement reserve consist of deposits by the Partnership to offset specific expenses and to replace structural elements and mechanical equipment upon consent of HUD. According to the Regulatory Agreement, the required monthly deposit to the replacement reserve is $1,766. When the mortgage was refinanced a replacement reserve deposit totaling $2,491 was made in lieu of the February payment. Effective July 1, 2011 this amount increased to $1,796 per month as authorized by HUD. The partnership agreement requires an additional monthly contribution of $1,358 to an additional partnership replacement reserve account. This reserve is reported as other reserves on the balance sheet. Deposits Held in Trust - In accordance with the Regulatory Agreement with HUD, the Partnership is required to maintain a tenant security deposit trust account. The amount must at all times be equal to or exceed the aggregate of all outstanding obligations to tenants for refundable security deposits. The tenant security deposits fund consists of cash. 13

18 Notes to Financial Statements December 31, 2011 and 2010 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Regulatory Agreement - Regulatory Agreements with HUD and MSHDA were signed in connection with the HUD-insured mortgage note and the allocation of low-income housing tax credits by MSHDA. No violations were reported for the years ended December 31, 2011 and Subsequent Events - The financial statements and related disclosures include evaluation of events up through and including February 20, 2012, which is the date the financial statements were available to be issued. Note 2 - Cash and Short-term Investments The Partnership maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Partnership has not experienced any losses in such accounts. Management believes the Partnership is not exposed to any significant credit risk on cash. The short-term investment account is made up of operating reserves held by the Partnership as required by the partnership agreement. These reserves were funded at the time of the initial closing to cover operating deficits of the Partnership. Note 3 - Mortgage Payable The Partnership had a commercial mortgage dated January 8, 2003 in the original amount of $5,300,000 held by Berkadia. The note bore interest at 6.50 percent. and was payable in monthly installments of principal and interest of $31,029. The loan was scheduled to mature on July 1, The mortgage was insured by HUD under Section 221(d)(4) under the National Housing Act. The note was collateralized by real estate held for lease and an assignment of rents and leases. The Partnership refinanced its HUD-insured commercial mortgage with Berkadia on January 27, 2011 in the amount of $5,300,000. The Partnership incurred a net prepayment penalty of $130,129 reported as a miscellaneous finanicial expense in 2011 related to the early payoff of the original mortgage note. The new mortgage note bears interest at 3.75 percent. An interest-only payment was due on February 1, Beginning March 1, 2011 through maturity on September 1, 2044, the note is payable in monthly principal and interest installments of $23,145. The mortgage is insured by HUD under Section 223(a)(7) under the National Housing Act. The note is collateralized by real estate held for lease and an assignment of rents and leases. 14

19 Notes to Financial Statements December 31, 2011 and 2010 Note 3 - Mortgage Payable (Continued) Minimum principal payments to maturity as of December 31, 2010 are as follows: Note 4 - Related Party Transactions 2012 $ 82, , , , ,297 Thereafter 4,785,871 Total $ 5,233,246 Accounts and Notes Receivable/Payable - Operations - The salaries and wages and the related payroll taxes and benefits for the employees of the Partnership are paid by Presbyterian Villages of Michigan (PVM) as the management agent. The Partnership reimburses PVM for these expenses. During 2011 and 2010, the Partnership paid PVM $255,300 and $255,500, respectively, for reimbursable payroll costs. The management company utilizes a centralized disbursement subsidiary payroll account held to pay certain payroll-related costs. The balance in this account related to payroll costs and reported in accounts payable was $17,234 and $11,753 at December 31, 2011 and 2010, respectively. Related Party Payables and Loans - Advances payable to PVM of $77,627 and $79,000 at December 31, 2011 and 2010 represent construction costs funded by PVM on behalf of the Partnership and are classified as long term. PVM also advanced $247,500 to the Partnership to fund capital improvement, recorded in other long term loans and notes payable, which remains outstanding at December 31, 2011 and These amounts are anticipated to be repaid from net cash flow or proceeds upon the sale of the project or dissolution of the Partnership and are unsecured and noninterestbearing. Affordable Housing Program Loan (AHP Loan) - The Managing General Partner loaned the Partnership $500,000 in The loan was funded from the proceeds of a grant from the Federal Home Loan Bank (FHLB) under the Affordable Housing Program. The loan term is 15 years and bears no interest. Annual installments are payable from net cash flow. The loan balance was $396,085 and $420,219 at December 31, 2011 and 2010, respectively. 15

20 Notes to Financial Statements December 31, 2011 and 2010 Note 4 - Related Party Transactions (Continued) Developer Fees - Developer fees are payable to an affiliate of the General Partner for services rendered in negotiating, coordinating, and supervising the planning, architectural, engineering, construction services, and other development-related activities necessary for construction of the Project. The development agreement specifies total payment of $1,000,000. The developer fees are capitalized as part of the building and improvements and have been earned and recognized in accordance with the development fee agreement. The developer fee payable accrues interest at The remaining developer fee and related accrued interest were paid in full during the year ended December 31, Accrued developer fee interest for the year ended December 31, 2010 was $4,365. The current liability reported as loans and notes balances of $100,816 represented the outstanding developer fees payable at December 31, Management Fees - The Partnership has contracted with PVM to provide management services to the Partnership. During 2011, a new management fee agreement was approved. The current monthly management fee is not greater than 5.00 percent of residential income collected. For the year ended 2010, the approved management monthly fee was not greater than 5.26 percent of residential income collected. Total management fees reported in 2011 and 2010 totaled $69,983 and $69,641, respectively. Partnership Asset Management Fee - The Partnership incurs an annual asset management fee of $7,500 payable to an affiliate of the Limited Partner. The fee increases annually by 2 percent. Partnership asset management fees incurred and accrued in 2011 and 2010 were $8,787 and $8,615, respectively. Incentive Partnership Management Fee - The Partnership incurs an annual incentive management fee payable to Pathway Senior Living of Michigan, LLC (aka Gibson Avenue LLC), an affiliate of one of the General Partners. The fee is equal to 7 percent of gross income per annum, limited to the net cash flow of the Partnership, and is payable on a cumulative basis in an amount and in the priority set forth in the partnership agreement. No amounts have been incurred or accrued at December 31, 2011 and Operation Deficit Guaranty - As provided for in the partnership agreement, the General Partner will provide loans to the Partnership for operating deficits incurred in the three years after breakeven operations have occurred. These loans, not to exceed $675,000, will be noninterest-bearing and will be repaid from operating cash flows. During the years ended December 31, 2011 and 2010, the General Partner did not provide loans to the Partnership to fund operating deficits. 16

21 Notes to Financial Statements December 31, 2011 and 2010 Note 5 - Current Vulnerability Due to Certain Concentrations The Partnership's sole asset is The Village of Oakland Woods (the "Project"). The Project s operations are concentrated in the multifamily 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 additional administrative burden, to comply with a change. Note 6 - Contingencies The Project's low-income housing tax credits are contingent on its ability to maintain compliance with applicable sections of Section 42. Failure to maintain compliance with occupant eligibility, and/or unit gross rent, or to correct noncompliance within a specified time period could result in recapture of previously taken tax credits plus interest. In addition, such potential noncompliance may require an adjustment to the contributed capital by the investor limited partner. Note 7 - Property Purchase Price According to the partnership agreement, PVM, as an affiliate of the Managing General Partner, has an option to purchase the Partnership's Project at the end of the lowincome housing tax credit compliance period, anticipated in 2017, at a price which would facilitate the purchase while protecting the Partnership's tax benefits from the Project. Such option is based on the Managing General Partner maintaining the lowincome occupancy of the Project and in a form satisfactory to legal and accounting counsel. The term of this right of first refusal shall commence one day after the compliance period and shall terminate one year thereafter. Note 8 - Low-income Housing Tax Credits (Unaudited) The Partnership was allocated low-income housing tax credits by the Michigan State Housing Development Authority totaling $12,187,230. The expected availability of the remaining credits for the following years is as follows: 2012 $ 1,218, ,101,745 Total $ 2,320,468 17

22 Notes to Financial Statements December 31, 2011 and 2010 Note 8 - Low-income Housing Tax Credits (Unaudited) (Continued) The following table summarizes amounts due to the General Partner or its affiliates: Accounts and notes payable - Operations $ 17,234 $ 11,753 Entity accounts payable - Long term 77,627 79,000 Other related party loans - Capital improvements 247, ,500 Other related party loans - Affordable Housing Program 396, ,219 Developer fees payable - 100,816 Accrued interest - Developer fee - 4,365 18

23 Supplemental Information 19

24 Independent Auditor's Report on Additional Information To the Partners Pontiac ILF Limited Dividend Housing Association We have audited the financial statements of, Pontiac ILF Limited Dividend Housing Association, as of and for the year ended December 31, Our audit was made for the purpose of forming an opinion on the financial statements taken as a whole. The additional information is presented for the purpose of additional analysis and is not a required part of the financial statements. For the purpose of electronic submission to the U.S. Department of Housing and Urban Development, Real Estate Assessment Center (REAC), the supplemental information is also deemed to include the financial data template information as presented in the balance sheet, statement of profit and loss, statement of partners equity, and the statement of cash flows. 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. February 20,

25 Balance Sheet Data December 31, 2011 Assets Current Assets 1120 Cash - Operations $ 256, Tenant accounts receivable 10, Accounts receivable - HUD 29, Short-term investments - Operations 343, Prepaid expenses 24, T Total current assets 663,515 Deposits - Held in Trust 1191 Tenant deposits held in trust 52,001 Deposits - Funded 1310 Escrow deposits 101, Replacement reserve 148, Other reserves 86, T Total deposits - Funded 335,837 Fixed Assets 1410 Land and land improvements 1,461, Buildings and building improvements 13,563, Building equipment (portable) 601, T Total fixed assets 15,627, Accumulated depreciation (3,724,866) 1400N Net fixed assets 11,902,348 Other Assets 1520 Deferred financing costs - Net 65, T Total assets $ 13,019,333 21

26 Balance Sheet Data (Continued) December 31, 2011 Liabilities and Partners Equity Current Liabilities 2110 Accounts payable - Operations $ 35, Accounts payable - Entity 8, Accrued wages payable 13, Accrued payroll taxes payable Accrued interest payable - First mortgage 16, Accrued interest payable - Other loans and notes Accrued property taxes 39, Mortgage payable - First mortgage 82, Other loans and notes (short term) T Total current liabilities 196, Tenant deposits held in trust (contra) 42,452 Long-term Liabilities 2305 Accounts payable - Entity (long term) 77, Mortgage payable - First mortgage 5,150, Other loans and notes payable 643, T Total long-term liabilities 5,871, T Total liabilities 6,110,909 Partners Equity 3130 Partners equity 6,908, T Total liabilities and partners equity $ 13,019,333 22

27 Statement of Profit and Loss Data Year Ended December 31, 2011 Rent Revenue 5120 Rent revenue - Gross potential $ 394, Tenant assistance payments 1,037, Miscellaneous rent revenue T Total rent revenue (potential at 100% occupancy) 1,431,958 Vacancies 5220 Apartments (33,115) 5152N Net rent revenue (rent revenue less vacancies) 1,398,843 Financial Revenue 5410 Project operations Investments - Replacement reserve Investments - Miscellaneous T Total financial revenue 982 Other Revenue 5910 Laundry and vending revenue Miscellaneous revenue T Total other revenue T Total revenue 1,400,571 Administrative Expenses 6203 Conventions and meetings Advertising and marketing 5, Other renting expenses 1, Office salaries 78, Office expenses 19, Management fee 69, Manager or superintendent salaries 48, Legal expenses Auditing expenses 14, Bad debts Miscellaneous administrative expenses 2, T Total administrative expenses 241,795 Utilities Expense 6450 Electricity 19, Water 47, Gas 10, T Total utilities expense 78,640 23

28 Statement of Profit and Loss Data (Continued) Year Ended December 31, 2011 Operating and Maintenance Expenses 6510 Payroll $ 112, Supplies 63, Contracts 91, Garbage and trash removal 6, Security payroll/contract 30, Snow removal 23, Vehicle and maintenance equipment operation and repairs 3, Miscellaneous operating and maintenance expenses 13, T Total operating and maintenance expenses 345,972 Taxes and Insurance 6710 Real estate taxes 39, Payroll taxes (FICA) 19, Property and liability insurance (hazard) 50, Workers' compensation 3, Health insurance and other employee benefits 29, T Total taxes and insurance 142,677 Financial Expenses 6820 Interest on first mortgage payable 211, Mortgage insurance premium/service charge 21, Miscellaneous financial expenses 130, T Total financial expenses 363, T Total Costs of Operations Before Depreciation and Amortization 1,172, T Profit Before Depreciation and Amortization 227, Depreciation Expense 429, Amortization Expense 286,396 Corporate or Mortgagor Entity Expenses 7120 Legal expenses Other expenses 8, T Net entity expenses 8, Net Loss $ (497,051) 24

29 Statement of Profit and Loss Data (Continued) Supplemental Information Year Ended December 31, 2011 S Total principal required under the mortgage, even if payments under a workout agreement are less or more than those required under the mortgage $ 69,754 S Replacement reserve deposits required by the Regulatory Agreement or amendments thereto, even if payments may be temporarily suspended or waived 22,104 S Replacement reserve or residual receipt releases that are included as expense items on this profit and loss statement 0 S Project improvement reserve releases under the flexible subsidy program that are included as expense items on this profit and loss statement 0 25

30 Statement of Partners Equity Data Year Ended December 31, 2011 General Partners Limited Partners Total S Balance - January 1, 2011 $ 357,437 $ 7,105,917 $ 7,463, Net loss (497) (496,554) (497,051) S Distributions to partners (1,320) (56,559) (57,879) 3130 Balance - December 31, 2011 $ 355,620 $ 6,552,804 $ 6,908,424 26

31 Statement of Cash Flows Data Year Ended December 31, 2011 Cash Flows from Operating Activities Receipts: S Rental $ 1,396,955 S Interest 982 S Gifts - S Other cash receipts 5,659 S Total receipts 1,403,596 Disbursements: S Administrative (30,254) S Management fee (69,983) S Utilities (78,640) S Salaries and wages (235,966) S Operating and maintenance (233,706) S Real estate taxes (39,450) S Property insurance (50,178) S Miscellaneous taxes and insurance (52,509) S Tenant security deposits 17,846 S Interest payments - First mortgage (223,466) S Mortgage insurance premium (11,153) S Miscellaneous financial (130,298) S Entity/Construction disbursements (10,051) S Total disbursements (1,147,808) S Net cash provided by operating activities 255,788 Cash Flows from Investing Activities S Net deposit to the mortgage escrow account (23,181) S Net deposit to the reserve for replacement account (1,911) S Net withdrawal (deposit) to other reserve 122 S Net purchase of fixed assets (102,499) S Net cash used in investing activities (127,469) Cash Flows from Financing Activities S Principal payments - First mortgage (5,144,858) S Proceeds from mortgages, loans or notes payable 5,300,000 S Principal payments on loans or notes payable (24,134) S Distributions (57,879) S Other financing activities (150,739) S Net cash used in financing activities (77,610) S Net Increase in Cash 50,709 S Cash - Beginning of year 548,393 S1200T Cash - End of year $ 599,102 27

32 Statement of Cash Flows Data (Continued) Year Ended December 31, 2011 A reconciliation of net loss to net cash from operating activities is as follows: 3250 Net loss $ (497,051) Adjustments to reconcile net loss to net cash from operating activities: 6600 Depreciation 429, Amortization 286,396 (Increase) decrease in assets: S Tenant accounts receivable (1,888) S Accounts receivable - Other 4,913 S Prepaid expenses 11,044 S Cash restricted for tenant security deposits 18,024 Increase (decrease) in liabilities: S Accounts payable - Operations 14,552 S Accounts payable - Entity (1,373) S Accrued liabilities 3,371 S Accrued interest payable (11,680) S Tenant security deposits held in trust (178) S Asset management fee 172 S Net cash provided by operating activities $ 255,788 28

33 Supplemental Information Year Ended December 31, Schedule of Reserve for Replacements - In accordance with the provisions of the Regulatory Agreement, restricted cash is held by Berkadia to be used for replacement of property with the approval of HUD as follows: 1320P Balance - January 1, 2011 $ 146, DT Monthly deposits (1, x 5+ $1, x 6 +2,491) 22, INT Interest WT Approved withdrawals (20,333) 1320 Balance - December 31, 2011 $ 148, Schedule of Residual Receipts - N/A 3. Computation of Surplus Cash - Form HUD See attached 4. Schedule of Changes in Fixed Asset Accounts - See attached 5. Schedule of 5300 Accounts - N/A 6. Schedule of 6900 Accounts - N/A 7. Nursing Home Data - N/A 8. Detail of Accounts: 6390 Membership dues $ 2,365 Miscellaneous expense 325 Travel and conferences 40 Total $ 2, Maintenance expenses $ 13, Interest on security deposits $ 169 Mortgage prepayment penalty 130, Total $ 130, Partnership asset management fee $ 8,787 29

34 Supplemental Information (Continued) Year Ended December 31, 2011 S Payment of legal expenses $ 63 Payment of accrued assest managment fee 8,615 Payment on advances from PVM for initial contruction costs 1,373 Total $ 10,051 S Payment on developer fee $ 100,816 Payment of accrued interest - Developer fee 4,365 Payments of deferred costs related to mortgage refinance 45,558 Total $ 150,739 30

35 Schedule of Changes in Fixed Asset Accounts Year Ended December 31, 2011 Assets Balance January 1, 2011 Additions Deductions Balance December 31, 2011 Balance January 1, 2011 Accumulated Depreciation Current Provision Deductions Balance December 31, 2011 Net Book Value December 31, Land and land improvements $ 1,441,941 $ 19,711 $ - $ 1,461,652 $ 335,868 $ 51,741 $ - $ 387,609 $ 1,074, Buildings and building improvements 13,554,942 8,724-13,563,666 2,482, ,276-2,837,905 10,725, Building equipment (portable) 527,832 74, , ,883 22, , ,544 Total $15,524,715 $ 102,499 $ - $15,627,214 $ 3,295,380 $ 429,486 $ - $ 3,724,866 $11,902,348 Fixed Asset Addition Detail: Land and land improvements: Knox box pillar $ 2,100 Bronze steel handrail 1,785 Concrete walkway 1,736 Catch basin and curbs 14,090 Buildings and building improvements - Windows - common and fitness rooms 8,724 Building equipment (portable): 10 Bookcases 1, chairs 3,386 Carpeting 12,876 Lateral files 8,419 8 tables 1,563 Wood flooring 7,421 Globe and magnetic board 424 Resident monitoring system 38,356 Total $ 102,499 31

36 Computation of Surplus Cash Year Ended December 31, 2011 S Cash $ 651, Accounts Receivable - HUD 29,397 S Total Cash 680,500 Current Obligations S Accrued Mortgage (or Bond) Interest Payable 16,354 S Accounts Payable - 30 Days 35,293 S Accrued Expenses (Not Escrowed) 13, Tenant/Patient Deposits Held In Trust (Contra) 42,452 S Total Current Obligations 108,068 S Surplus Cash (Deficiency) $ 572,432 32

37 Schedule of Net Operating Cash Flows - Partnership Year Ended December 31, 2010 Cash received: Net rental revenue $ 1,398,503 Other revenue 1,086 Adjustments for tenant and HUD receivables and prepaid rents 3,025 Total cash received 1,402,614 Current Obligations Total expenses 1,897,622 Depreciation and amortization (715,882) Partnership fees (8,787) Principal payments 69,749 Beginning expense accruals (98,969) Ending expense accruals 105,212 Required deposits to reserves 38,400 HUD Surplus Cash: $572,432 Total cash expenditures 1,287,345 Net operating cash flows before fees, payments, and distributions $ 115,269 LP Asset management fee $ 8,787 Payment on GP-AHP Loan $ 35,000 Payment on PVM Loan $ 37,619 Additional repayment of PVM Loan (9.69% ) $ 3,281 Distribution - Pathway of Pontiac, Inc. (9.31% ) $ 3,153 Distribution - Limited Partner (81.00%) $ 27,429 33

38 Report on Internal Control

39 Report on Internal Control Independent Auditor's Report To the Partners Pontiac ILF Limited Dividend Housing Association We have audited the financial statements of Pontiac ILF Limited Dividend Housing Association as of and for the year ended December 31, 2011 and have issued our report thereon dated February 20, We have also audited Pontiac ILF Limited Dividend Housing Association 's compliance with specific program requirements that could have a direct and material effect on each of its major U.S. Department of Housing and Urban Development (HUD)-assisted programs for the year ended December 31, 2011, and have issued our reports thereon, dated February 20, We conducted our audits 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 Consolidated Audit Guide for Audits of HUD Programs ("Guide"), issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General. Those standards and the Guide require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether Pontiac ILF Limited Dividend Housing Association complied with the compliance requirements referred to above that could have a direct and material effect on a major HUD-assisted program. Management of Pontiac ILF Limited Dividend Housing Association is responsible for establishing and maintaining effective internal control over financial reporting and internal control over compliance with the compliance requirements referred to above. In planning and performing our audits of the financial statements and compliance, we considered Pontiac ILF Limited Dividend Housing Association 's internal control over financial reporting and its internal control over compliance with specific program requirements that could have a direct and material effect on a major HUD-assisted program to determine the auditing procedures for the purpose of expressing our opinions on the financial statements and compliance, but not for the purpose of expressing an opinion on the effectiveness of Pontiac ILF Limited Dividend Housing Association 's internal control over financial reporting and internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Pontiac ILF Limited Dividend Housing Association 's internal control over financial reporting and internal control over compliance. 35

40 To the Partners Pontiac ILF Limited Dividend Housing Association 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 (1) misstatements of Pontiac ILF Limited Dividend Housing Association financial statements or (2) noncompliance with specific program requirements of a HUD-assisted program 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 (1) a material misstatement of the entity s financial statements, or (2) material noncompliance with specific program requirements of a HUDassisted program will not be prevented or detected and corrected on a timely basis. Our consideration of internal control over financial reporting and internal control over compliance was for the limited purpose described in the third paragraph of this report and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control that we consider to be material weaknesses, as defined above. However, we identified a certain deficiency in internal control that we consider to be a significant deficiency. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness in internal control over financial reporting or a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiency described in the accompanying schedule of findings and questioned costs as finding to be a significant deficiency. The Pontiac ILF Limited Dividend Housing Association response to the deficienys identified in our audit is described in the accompanying schedule of findings and questioned costs. We did not audit Pontiac ILF Limited Dividend Housing Association Limited Partnership response, and accordingly, we express no opinion on the response. This report is intended solely for the information and use of the board of directors, the audit committee, management, others within the entity, and the U.S. Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. February 20,