MM PROPERTY LLC Washington, DC

Transcription

1 Washington, DC FINANCIAL STATEMENTS Including Independent Auditors Report As of and for the Year Ended December 31, 2016

2 Financial Statements Contents Page Independent Auditors' Report 1-2 Balance Sheet 3 Statement of Operations 4 Statement of Changes in Members Equity 5 Statement of Cash Flows 6 Notes to the Financial Statements 7-13

3 Independent Auditors Report To the Members of MM Property LLC We have audited the accompanying financial statements of MM Property LLC, which comprise the balance sheet as of December 31, 2016, and the related statements of operations, changes in members equity, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MM Property LLC as of December 31, 2016 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. 1

4 Emphasis of Matter As discussed in Note 2 to the financial statements, during 2016, MM Property LLC changed its method of presenting long-term debt issuance costs in its balance sheet, as required by Accounting Standards Updated No , Simplifying the Presentation of Debt Issuance Costs. Our opinion is not modified with respect to this matter. Tysons, Virginia February 23,

5 Balance Sheet As of December 31, 2016 Assets Investment in Real Estate, net $ 26,213,297 Other Assets Cash 143,530 Escrows and reserves 1,072,458 Accounts receivable, net of allowance of $79,985 90,532 Prepaid expenses 146,572 Tenant security deposits 54,227 Total other assets 1,507,319 Total Assets $ 27,720,616 Liabilities and Members' Equity Loans Payable, net Note payable - DHCD $ 8,250,000 Bond loan payable - DCHFA 10,800,000 19,050,000 Less unamortized deferred financing costs (815,318) Total loans payable, net 18,234,682 Other Liabilities Accounts payable and accrued expenses 383,951 Accrued developer fee 800,000 Tenant security deposits payable 53,949 Prepaid rent 25,347 Total other liabilities 1,263,247 Total Liabilities 19,497,929 Members' Equity 8,222,687 Total Liabilities and Members' Equity $ 27,720,616 The accompanying notes are an integral part of these financial statements. 3

6 Statement of Operations For the Year Ended December 31, 2016 Revenues Rental $ 2,026,026 Operating Expenses Repairs and maintenance 228,729 Bad debt 125,924 Salaries and wages 194,858 General and administrative 309,224 Insurance 126,771 Utilities 131,889 Security 116,272 Real estate taxes 97,347 Management fees 83,996 Total operating expenses 1,415,010 Operating Income 611,016 Depreciation and Interest Expense Depreciation 1,015,981 Interest expense 646,798 Total depreciation and interest expense 1,662,779 Net Loss $ (1,051,763) The accompanying notes are an integral part of these financial statements. 4

7 Statement of Changes in Members Equity For the Year Ended December 31, 2016 Managing Investor Total Members' Member Member Equity Balance, January 1, 2016 $ (444,828) $ 9,719,278 $ 9,274,450 Net Loss (105) (1,051,658) (1,051,763) Balance, December 31, 2016 $ (444,933) $ 8,667,620 $ 8,222,687 The accompanying notes are an integral part of these financial statements. 5

8 Statement of Cash Flows For the Year Ended December 31, 2016 Cash Flows from Operating Activities Net loss $ (1,051,763) Reconciliation adjustments Depreciation and amortization expense 1,015,981 Change in allowance for doubtful accounts (18,913) Changes in: Taxes and insurance escrows 52,651 Accounts receivable (7,346) Prepaid expenses (60,054) Tenant security deposits, net (1,160) Accounts payable and accrued expenses 135,893 Accrued developer fee (139,824) Prepaid rent 1,604 Net cash used in operating activities (72,931) Cash Flows from Investing Activities Funding of replacement reserve fund (43,923) Proceeds from replacement reserve fund 40,750 Net cash used in investing activities (3,173) Cash Flows from Financing Activities Repayment of short-term bonds payable (115,000) Net Decrease in Cash (191,104) Cash, beginning of year 334,634 Cash, end of year $ 143,530 Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 566,459 The accompanying notes are an integral part of these financial statements. 6

9 Notes to the Financial Statements NOTE 1 - ORGANIZATION MM Property LLC (the Company ) was formed on October 1, 2011 under the laws of the District of Columbia to acquire, rehabilitate, develop, and operate the low-income housing project called Mayfair Mansions III Apartments ( Property ) located in Washington, DC. The Property consists of 160 housing units being developed under the lowincome housing tax credit and historic tax credit programs. The Company shall continue until December 31, 2080 or until dissolved as provided in the Company s Second Amended and Restated Operating Agreement (the Operating Agreement ). The Company is owned 0.01 percent by MM Assets LLC (the Managing Member ) and percent by Wells Fargo Affordable Housing Community Development Corporation (the Investor Member ). Profits and losses are generally allocated 0.01 percent and percent to the Managing and Investor Members, respectively, pursuant to the Operating Agreement. As of December 31, 2016, under the terms of the Operating Agreement, the Investor Member has provided cumulative capital contributions or otherwise received credit for capital contributions totaling $13,363,563 and the Managing Member has provided cumulative capital contributions totaling $10. Pursuant to the Operating Agreement, net cash flow, as defined, will be distributed as follows: First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, to the Investor Member to make any unpaid credit adjuster payments and any unpaid historic tax credit ( HTC ) adjuster payments, as defined. to pay the asset management fee to the Investor Member until the total amount of payments (including payments in all prior years) equals $7,500 per year. to replenish the operating reserve until the balance in the operating reserve is $450,833, and then to replenish the debt service reserve until the balance in the debt service reserve is $315,087. to pay the amounts owed with respect to any developer loan. to pay required debt service on the District of Columbia Department of Housing and Community Development ( DHCD ) Loan. to repay any operating deficit loans, with any such payments to be applied first to accrued but unpaid interest and then to principal, and to pay deferred management fees to the management agent, and for any taxable year that ends during the initial HTC period, defined as five years following the date the rehabilitated Property is placed in-service, percent to the Investor Member and 0.01 percent to the Managing Member; for any taxable year beginning after the initial HTC period, percent as distributions to the members in the percentages of 10 percent to the Investor Member and 0.01 percent to the Managing Member and up to percent to the Managing Member to pay the incentive management fee due, provided, however, that any amounts otherwise payable as an incentive management fee and that exceed the limitation set forth in the Operating Agreement shall be paid 100 percent to the Managing Member as an additional distribution. Distributions of net cash flow from a sale or refinancing will be in accordance with the Operating Agreement. The Property was approximately 94 percent occupied at December 31, NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash - Cash consist of currency on hand and demand deposits with financial institutions. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. Noninterest bearing accounts are aggregated with any interest bearing deposits, and the combined total is guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. 7

10 Notes to the Financial Statements NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Escrows and Reserves - The Company funds and maintains certain escrows and reserves as required by the Operating Agreement or by the Company s long-term debt agreements, as discussed in Note 3. Disbursement or release of the funds in the Company s escrows and reserves are based on terms and conditions set forth in the aforementioned agreements. As of December 31, 2016, the balances of the Company s escrows and reserves are as follows: Taxes and insurance escrows (a) $ 70,238 Operating reserve fund 450,833 Debt reserve fund 315,087 Replacement reserve fund (b) 236,300 $ 1,072,458 (a) The taxes and insurance escrows require monthly deposits totaling $22,971. (b) The replacement reserve fund requires monthly deposits of $3,667, with fixed 3 percent annual increases. Accounts Receivable - Accounts receivable are stated at realizable value as determined by management. Management determines the collectability of accounts receivable and the need for an allowance for doubtful accounts based on the Company s historical experience, the existing economic conditions, and the financial stability of its tenants. Past due balances over 30 days and other high risk accounts are reviewed individually for collectability. Receivables are written off after collection attempts have failed. Management has determined that an allowance for doubtful accounts of $79,985 is appropriate at December 31, Investment in Real Estate - The Company records rental real estate investments at the cost of acquisition or construction. At December 31, 2016, the Company s investment in real estate, net of accumulated depreciation, consists of the following: Land $ 3,028,037 Buildings and improvements 27,818,830 30,846,867 Less accumulated depreciation (4,633,570) $ 26,213,297 Depreciation on the buildings and improvements is computed using the straight-line method over 27.5 years. Total depreciation expense for the year ended December 31, 2016 was $1,015,981. Expenditures for maintenance and repairs are charged to expense when incurred. Expenditures for renewals and betterments which add to the value of the related assets or materially extend the life of the assets are capitalized. When assets are sold, retired, or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income. Impairment of Long Lived Assets - The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the future net undiscounted cash flow expected to be generated and any estimated proceeds from the eventual disposition. If the long-lived asset is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount exceeds the fair value as determined from an appraisal, discounted cash flow analysis or other valuation technique. The Company does not believe that impairment indicators are present as of December 31, There was no impairment loss included in the accompanying statement of operations for the year ended December 31,

11 Notes to the Financial Statements NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Revenue Recognition - The Company leases apartment units to tenants primarily for terms of one year or less and require security deposits to be obtained. Rental revenue attributable to residential leases is recorded when due from tenants, generally upon the first day of each month. Rental revenue is recognized on the straight-line method over the term of the lease. Rental revenue includes fees for late payments, cleaning, damages, and laundry facilities and is recorded when earned. Rental and other revenue received in advance are deferred until earned. All leases between the Company and its tenants are operating leases. Income Taxes - For federal income tax purposes, the Company s income, losses, and credits are reported in the income tax returns of its members, and accordingly, no federal tax provision is recognized in the accompanying financial statements. While the Company is not taxed for federal income tax purposes, the Company s policy is to evaluate and review its tax positions on an ongoing basis to ensure compliance with the applicable portions of the Internal Revenue Code ( IRC ). The District of Columbia ( DC ) does not recognize pass-through entities and accordingly, taxable income is subject to income taxes. A provision for DC income taxes currently due has been recorded, which is included in operating expenses on the accompanying statement of operations. The Company calculates deferred taxes for the temporary differences between the financial reporting basis and the tax basis of the Company s assets and liabilities and assesses the certainty of tax positions when recognizing and measuring tax benefits based upon the criteria of more likely than not. The Company provided fully for a valuation allowance against the deferred tax assets because realization of the deferred tax assets is not deemed to be more likely than not. Concentrations - The Company operates one property located in Washington, DC and its operations are concentrated in the low-income housing real estate market. In addition, the Company operates in a heavily regulated environment. The operations of the Company are subject to the administrative directives, rules, and regulations of federal, state, and local regulatory agencies. Such administrative directives, rules, and regulations are subject to change by any of these authorities. Such changes may occur with little notice or inadequate funding to pay for the related cost, including the additional administrative burden, to comply with a change. Future operations and financial performance could be affected by changes in economic or other conditions in the geographical area, residential real estate markets, or demand for low-income housing, among others. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates. Subsequent Events - The Company has evaluated subsequent events through the report date of these financial statements, the date these financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements. Recent Accounting Pronouncements - In April 2015, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Simplifying the Presentation of Debt Issuance Costs ( ASU ). ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability instead of as an asset. The recognition and measurement guidance for debt issuance costs are not affected by this update. Due to the FASB s issuance of ASU , the Company changed its method of presenting long-term debt issuance costs. Prior to the issuance of ASU , the Company presented long-term debt issuance costs as part of investment in real estate, net on its balance sheet. As required by ASU , the Company now presents long-term debt issuance costs as a direct reduction of its long-term debt liability. The effect of the required retrospective application of this change in presentation was to decrease investment in real estate, net and decrease the Company s long-term debt liability by $815,318 as of December 31, See Note 3 for long-term debt disclosure presentation reconciliation. 9

12 Notes to the Financial Statements NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED During February 2016, the FASB issued ASU No , Leases (Topic 842) ( ASU ). ASU requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-ofuse asset representing its right to use the underlying asset for the lease term. ASU is effective for annual periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early adoption is permitted. Although the primary effect of ASU is on the lessee, the Company is currently assessing the effect as the lessor that ASU will have on its results of operations, financial position, and cash flows. NOTE 3 - LONG-TERM DEBT Deferred financing costs represent direct costs incurred to obtain the loans payable, and are recorded and amortized on a straight-line basis, which approximates the effective interest method, to interest expense over the term of the loans payable. Amortization expense for the year ended December 31, 2016 was $30,500, and is included in depreciation expense in the accompanying statement of operations. As of December 31, 2016, the outstanding loans payable were: Note payable - DHCD $ 8,250,000 Unamortized deferred financing costs (109,986) 8,140,014 Bond loan payable - DCHFA 10,800,000 Unamortized deferred financing costs (705,332) 10,094,668 Total $ 18,234,682 Tax Exempt Bond Financing - Construction financing was provided in the form of an $11,000,000 loan (the Senior Loan ) from the District of Columbia Housing Finance Agency ( DCHFA ), through the issuance of tax-exempt Multi-Family Housing Revenue Bonds, Series 2009A-10 in the aggregate principal amount of $8,390,000 and DCHFA Multi-Family Housing Revenue Bonds, Series 2011A, in the aggregate principal amount of $2,610,000. Interest only payments were due at the beginning of each month through the Conversion to Permanent Phase Date ( Conversion ), as defined in the financing agreement. Prior to Conversion, interest accrued at a blended rate equal to percent, including an issuer s fee equal to the greater of $5,000 or 0.60 percent per annum of the bonds outstanding. The Conversion occurred on December 20, 2013, at which time the Senior Loan was converted into permanent financing in the amount of $11,000,000. The permanent financing requires monthly debt service payments of principal, interest, and servicing fees, remitted into a principal reserve fund held by the trustee. Bond redemptions are processed by the trustee in accordance with the financing agreement, which stipulates that mandatory principal reserve fund redemptions commenced July 1, 2015 and occur annually on January 1 and July 1, with fixed principal reductions, increasing over time, based on an amortization schedule, in accordance with the financing agreement. Interest on the permanent financing accrues at a rate of percent per annum through the maturity date of January 1, The note is secured by the Multifamily Deed of Trust Assignment of Rents and Security Agreement. As of December 31, 2016, the principal balance outstanding on this loan was $10,800,000. For the year ended December 31, 2016, interest expense recognized on the Senior Loan includes $294,461 of interest and $224,429 of servicing fees. 10

13 Notes to the Financial Statements NOTE 3 - LONG-TERM DEBT - CONTINUED Future principal maturities of the Senior Loan are as follows: Principal Deferred Financing Payments Amortization Total Year ending December 31, 2017 $ 130,000 $ (26,204) $ 103, ,000 (26,204) 113, ,000 (26,204) 118, ,000 (26,204) 128, ,000 (26,204) 133,796 Thereafter 10,070,000 (574,312) 9,495,688 $ 10,800,000 $ (705,332) $ 10,094,668 DHCD Loan - On July 7, 2010, the Company entered into a loan agreement with the DHCD in the amount of $7,300,000 for the acquisition of the land and buildings. During 2011, the loan amount was increased to $8,250,000. The loan is secured by a deed of trust on the land and buildings. From Permanent Loan Closing (defined as the date of the Conversion, or December 20, 2013) through the loan term, defined as 40 years from the date of Permanent Loan Closing (January 1, 2054), the Company is required to make annual installments of principal and interest of the lesser of 50 percent of surplus cash as defined in the Operating Agreement (see Note 1) or $251,259, at which time the loan matures and all unpaid interest and principal is due. Interest accrues at a rate of 1 percent per annum. For the year ended December 31, 2016, no payments of principal and interest were required. As of December 31, 2016, the principal balance outstanding on this loan was $8,250,000. As of December 31, 2016, future maturities of the unamortized deferred financing costs are as follows: Deferred Financing Amortization Year ending December 31, 2017 $ 3, , , , ,165 Thereafter 94,161 $ 109,986 Interest expense of $82,500 was recognized on this loan for the year ended December 31, 2016, all of which is unpaid as of December 31, 2016 and included in accounts payable and accrued expenses on the accompanying balance sheet. 11

14 Notes to the Financial Statements NOTE 4 - DEVELOPMENT AND ASSET MANAGEMENT FEES For services rendered in connection with the development of the Property and the supervision of the construction, the Company has agreed to pay an affiliate of the Managing Member a development fee in the amount of $3,165,736. The affiliated entity shall be paid its developer fee from debt and equity proceeds as provided for in the Operating Agreement. Any portion which is unpaid after the final capital contribution shall constitute a loan bearing interest at 5 percent and payable annually from net cash flow, in accordance with the Operating Agreement (see Note 1) but, in no event, later than December 31, On May 14, 2014, the development fee, which has been earned in full, began to accrue interest in accordance with the Operating Agreement. As of December 31, 2016, $800,000 remains due to the affiliated entity and is included in accrued developer fee on the accompanying balance sheet, which includes $45,408 of accrued interest recognized in Pursuant to the Asset Management Fee Agreement, the Investor Member earns a cumulative asset management fee of $7,500 per year, commencing in 2012 and increasing 3 percent annually, thereafter. Any unpaid fees shall accrue and be paid in subsequent years to the extent there exists sufficient net cash flow, as defined in the Operating Agreement (see Note 1). For the year ended December 31, 2016, asset management fees totaled $8,636, all of which is due to the Investor Member at December 31, 2016 and is included in accounts payable and accrued expenses on the accompanying balance sheet. NOTE 5 - GUARANTEES The Managing Member has guaranteed unlimited operating deficits of the Property until all conditions of the capital contributions have been satisfied. Thereafter, the guarantee will be reduced to $765,920 for at least 60 months. At the end of the 60 month period, the guarantee will be released, provided the operating reserves are fully funded and the Property achieves a debt service coverage of 1.15 to 1. Any advances under this guarantee will be treated as operating deficit loans, and will be paid from available net cash flow in accordance with the Operating Agreement (see Note 1). As of December 31, 2016, no advances have been made under this guaranty. The Managing Member and certain affiliates have guaranteed the lien free completion of the Property. The Managing Member and affiliates are obligated to pay all excess development costs pursuant to the Guaranty Agreement. As of December 31, 2016, there have been no advances under this guaranty. NOTE 6 - PROPERTY MANAGEMENT FEE On January 1, 2014, the Company entered into a property management agreement with E&G Group, which requires a fee of $6,038 per month with an annual escalation not to exceed 2 percent. For the year ended December 31, 2016, management fees totaled $75,360. NOTE 7 - PURCHASE OPTION Pursuant to the Purchase Option Agreement dated October 1, 2011, the Managing Member has the right to purchase the entire interest of the Investor Member at the end of the low-income housing tax credit compliance period at a purchase option price, as defined in the Purchase Option Agreement. As a condition to exercise the purchase option, the Managing Member shall agree to pay the Investor Member, in addition to the purchase option price, the sum of all unpaid amounts owed to the Investor Member under any provision of the Operating Agreement. 12

15 Notes to the Financial Statements NOTE 8 - LOW-INCOME HOUSING TAX CREDITS The Company generated federal low-income housing tax credits ( LIHTCs ) from the Property. Generally, such LIHTCs become available for use by its members pro-rata over a ten year period that begins with the placed in service date for each building. To qualify for the LIHTCs, the Company must meet certain requirements, including attaining a qualified eligible basis sufficient to support the allocation, renting the Property pursuant to IRC Section 42 which regulates the use of the Property as to occupant eligibility and unit gross rent, among other requirements. As a result of these requirements that the Company must meet, there can be no assurance that the aggregate amount of the LIHTCs will be realized. Failure to meet all such requirements may result in generating a lesser amount of LIHTCs than expected. NOTE 9 - HISTORIC TAX CREDITS The Company generated HTCs from the Property. Generally, such credits are available for use by the members on the date the Qualified Rehabilitation Expenditures (the QREs ), as defined, are placed in service and are equal to 20 percent of the QREs with respect to any Certified Historic Structure. In order to qualify for these HTCs, the Company must comply with various federal requirements. These requirements include, but are not limited to, the Property being listed as a Certified Historic Structure in the National Register, located in a Registered Historic District, certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district and the rehabilitation being preferred in a manner consistent with standards established by the Secretary of the Interior. In addition, the Property cannot be sold or transferred for a five year period commencing on the date the QREs are placed in service. The HTCs are subject to complying with certain requirements, and therefore, there can be no assurance that the aggregate amount of the HTCs will be realized. Failure to meet all such requirements may result in generating a lesser amount of HTCs than expected. NOTE 10 - COMMITMENTS AND CONTINGENCIES The Company may be subject to claims and lawsuits that arise primarily in the ordinary course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company s financial position or future results of operations. 13