HOWARD COUNTY HOUSING COMMISSION BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION SIX MONTHS ENDED DECEMBER 31, 2016

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1 BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION SIX MONTHS ENDED

2 TABLE OF CONTENTS SIX MONTHS ENDED INDEPENDENT AUDITORS REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS 4 BASIC FINANCIAL STATEMENTS STATEMENT OF NET POSITION 10 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION 11 STATEMENT OF CASH FLOWS 12 NOTES TO FINANCIAL STATEMENTS 13 REQUIRED SUPPLEMENTARY INFORMATION 40 SCHEDULE OF COMMISSION S PROPORTIONATE SHARE OF NET PENSION LIABILITY ERS PENSION PLAN 41 SCHEDULE OF COMMISSION S CONTRIBUTIONS ERS PENSION PLAN 42 NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION 43 SUPPLEMENTAL INFORMATION 44 FINANCIAL DATA SCHEDULES: ENTITY-WIDE BALANCE SHEET SUMMARY 45 ENTITY-WIDE REVENUE AND EXPENSE SUMMARY 47 SINGLE AUDIT REPORT 49 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 50 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE 52 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 54 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 55 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 56

3 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT Board of Commissioners Howard County Housing Commission Howard County, Maryland Report on the Financial Statements We have audited the accompanying financial statements of the Howard County Housing Commission (the Commission) which comprise the statement of net position as of December 31, 2016, and the related statements of revenues, expenses, and changes in net position, and cash flows for the six months 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 and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the 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. (1)

4 Board of Commissioners Howard County Housing Commission Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Commission as of December 31, 2016, and the changes in financial position and cash flows thereof for the six months then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis-of-matter As discussed in Note 1 to the financial statements the Commission fiscal year end was changed from June 30 to December 31. Our opinion in not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 4 through 9, schedule of Commission s proportionate share of net pension liability ERS pension plan, on page 41, and the schedule of Commission s contributions ERS pension plan on page 42 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Commission s basic financial statements. The financial data schedules, as listed on the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is also presented for purposes of additional analysis and is not a required part of the basic financial statements. The financial data schedules and schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the financial data schedules and schedule of expenditures of federal awards are fairly stated, in all material respects, in relation to the basic financial statements as a whole. (2)

5 Board of Commissioners Howard County Housing Commission Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 15, 2017, on our consideration of the Commission s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the result of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Commission s internal control over financial reporting and compliance. a CliftonLarsonAllen LLP Baltimore, Maryland September 15, 2017 (3)

6 MANAGEMENT S DISCUSSION AND ANALYSIS The Howard County Housing Commission (HCHC or the Commission) is a public housing authority created in 1990 pursuant to the State of Maryland enabling legislation for the purpose of acting as Howard County, Maryland s public housing authority, administrator of related programs and grants, and owner and manager of various housing developments and scattered site units. The Commission is overseen by a 7-member Board of Commissioners, appointed by the Howard County Executive and confirmed by the Howard County Council. The Commission s management team offers the readers of the Commission s financial statements this narrative overview and analysis of the financial activities of the Commission for the six-month period ended December 31, We encourage readers to consider the information presented here in conjunction with the Commission s financial statements. The purpose of this Discussion and Analysis is (i) to provide an overview of the financial statements contained in this document; (ii) to offer brief programmatic and financial highlights of the past fiscal year; and (iii) to present limited information about factors that may affect the Commission during the coming fiscal year. Using This Audit Report This audit report consists of a series of financial statements. The Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Net Position (see pages 10 and 11, respectively), and Supplemental Information provides information about the activities of the Commission as a whole. The Statement of Revenues, Expenses and Changes in Net Position, in particular, shows that the Commission s work is supported in part by annual allocations from the U.S. Department of Housing & Urban Development (HUD). These funds are subject to annual appropriation risk and, accordingly, the Commission has been adversely impacted by slightly smaller appropriations on an annual basis. The Statement of Cash Flow statement (see page 12) shows the flow of cash in operations, capital expenditures, and investing. The Statement of Net Position reports information about the Commission as a whole and about its activities in a way that helps address whether the Commission as a whole is better off or worse off as a result of the period's activities. This statement includes all assets, deferred outflows, liabilities, and deferred inflows using the accrual basis of accounting, similar to the accounting used by most privatesector companies. This statement reports the Commission's net position - the difference between assets, deferred outflows, liabilities, and deferred inflows as one way to measure the Commission's financial health, or financial position. Over time, changes in the Commission's net position are one of several key indicators of the improvement or deterioration of the Commission s financial health. Net position as of December 31, 2016 and June 30, 2016 was as follows: December 31, 2016 June 30, 2016 Beginning Net Position $ 33,182,096 $ 32,660,057 Decrease in Net Position (2,572,067) 522,039 Ending Net Position $ 30,610,029 $ 33,182,096 (4)

7 MANAGEMENT S DISCUSSION AND ANALYSIS THE COMMISSION Financial Highlights After a quarter of a century of growth as a public housing agency, the Howard County Housing Commission today operates as one of the premier and most innovative local governmental entities throughout Maryland and the mid-atlantic region. With a budget of over $46,200,000, the Commission has become a successful and consistently creative provider of quality, inclusive, affordable housing. As the cost of housing continuously rises, and federal resources diminish, the high demand for affordable housing has driven the Commission to seek as well as create new fiscal opportunities along with innovative cooperative partnerships to answer the diverse needs of its constituents. As of the date of this audit, HCHC owns, or is developing, 19 mixed-income, multi- and single-family communities within Howard County, providing almost 2,000 dwelling units. Including its Housing Choice Voucher program, which offers housing opportunities for 1,300 residents, and its housing partnerships providing close to 800 units, HCHC provides housing for more than 4,000 families. With an estimated population of more than 315,000 forty percent of whom are minorities Howard County is one of the most diverse and fastest growing regions in Maryland. The Commission continues to serve Howard County as an entity of forward-thinking and solution-driven resources to provide full spectrum housing for the growing population. In the six-month period covered by this audit, the Commission continued its efforts to improve its financial standing while at the same time meeting its mission to create or preserve affordable housing through strategic acquisitions, development, and redevelopment. In July 2016, taking advantage of the prevailing favorable bond market interest rates, the Commission issued its own bonds for the purchase and redevelopment of a 132-unit community to be known as Gateway Village Apartments. The redevelopment allows us to transform an existing, aging, low-income project into a high-quality, mixed income community, while generating additional revenues for our other housing programs. In February of 2017, after the close of the period covered by this audit, the Commission purchased Woodfield Oxford Square, now renamed the Azure at Oxford Square, a 248-unit, high-end rental property. As part of the Burgess Mill bond issue, the Commission financed the rehabilitation of 50 scattered site properties that will provide greater energy efficiencies. Additionally, the Commission has maintained its agency credit rating from Standard & Poor s of A+ with a stable outlook. This rating, among the highest for comparable housing authorities, gives the Commission access to credit markets and signifies that the Commission, which has worked diligently over the past nine years to improve its financial position, has achieved a high level of financial stability and self-sufficiency. Throughout the six-month period, the Commission continued to pursue its mission of providing quality, inclusive, sustainable affordable housing for families who live or work in Howard County through a variety of programs and projects. Phase 2 of the Burgess Mill Station redevelopment continued in the planning stages. Construction began in the third quarter of The Commission acquired a property in Elkridge and partnered with a private developer to create an 84-unit mixed income townhome community in Elkridge known as Riverwatch, which has been completed and leased. Additionally, the Commission acquired a property in Jessup and began developing a permanent supportive housing facility and day resource center for homeless persons. The Leola Dorsey Center, as the project is known, was completed and opened in the 3 rd quarter of The Commission continued to work with the Howard Hughes Corporation and the County to find ways to include affordable housing in the revitalization of downtown Columbia. As always, these projects will be designed and produced in accordance with the Commission s six core principles: housing integration, sustainability, long-term viability, superior design, universal design, and economic self-sufficiency. (5)

8 MANAGEMENT S DISCUSSION AND ANALYSIS CONDENSED FINANCIAL INFORMATION The following table provides comparative financial information, where available, as of and for the period then ended. December 31, 2016 June 30, 2016 Variance ($) Variance (%) Current Assets Cash and Cash Equivalents $ 31,496,071 $ 32,121,112 $ (625,041) -1.95% Accounts Receivable 636,430 1,128,914 (492,484) % Investments - 430,502 (430,502) % Other Current Assets 333, , , % Total Current Assets 32,466,157 33,860,638 (1,394,481) -4.12% Noncurrent Assets Shared Equity Properties/Investment in Real Estate Partnership 4,546,375 5,768,695 (1,222,320) % Mortgages Receivable 6,148,272 5,976, , % Notes and Mortgages Receivable - Shared Equity, Net of Allowance of $139, , , % Capital Assets, Net 185,098, ,153,225 27,945, % Total Noncurrent Assets 196,084, ,189,780 26,894, % Total Assets 228,550, ,050,418 25,499, % Deferred Outflow of Resources 1,026, , , % Current Liabilities Accounts Payable 4,303,441 3,735, , % Current Portion of Long-Term Debt 2,474,002 3,260,519 (786,517) % Other Current Liabilities 1,080, , , % Total Current Liabilities 7,857,566 7,884,017 (26,451) -0.34% Noncurrent Liabilities Loans Payable - Long-Term 16,240,132 15,759, , % Bonds Payable - Long-Term 170,020, ,690,000 25,330, % Other Noncurrent Liabilities 3,777,850 2,235,183 1,542, % Total Noncurrent Liabilities 190,037, ,684,513 27,353, % Total Liabilities 197,895, ,568,530 27,327, % Deferred Inflow of Resources 1,071, , , % Net Position, as Restated Invested in Capital Assets, Net of Related Debt 15,369,471 15,254, , % Restricted 3,687,323 3,328, , % Unrestricted 11,553,235 14,599,401 (3,046,166) % Total Net Position $ 30,610,029 $ 33,182,096 $ (2,572,067) -7.75% (6)

9 MANAGEMENT S DISCUSSION AND ANALYSIS 12/31/2016 6/30/2016 Variance ($) Variance (%) Operating Revenues Rental Income $ 7,581,463 $ 12,879,698 $ (5,298,235) % HUD Grants 5,551,177 11,285,000 (5,733,823) % Other Grants and Revenue 5,497,175 15,681,164 (10,183,989) % Total Operating Revenues 18,629,815 39,845,862 (21,216,047) % Operating Expenses General Administrative and General 3,589,994 5,147,684 (1,557,690) % Housing Operations and Tenant Services 2,820,776 5,695,878 (2,875,102) % Housing Assistance Payments 9,026,327 18,566,996 (9,540,669) % Total Operating Expenses 15,437,097 29,410,558 (13,973,461) % Operating Income Before Depreciation 3,192,718 10,435,304 (7,242,586) % Depreciation 2,237,915 3,987,174 (1,749,259) % Total Operating Gain 954,803 6,448,130 (5,493,327) % Total Non-Operating Revenues (Expenses) (3,526,870) (5,926,091) 2,399, % Change in Net Position $ (2,572,067) $ 522,039 $ (3,094,106) % Change in Net Position: 1. Total assets and deferred outflows of the Commission exceeded total liabilities and deferred inflows at the close of the six-month period end by $30,610,029. This amount includes $11,553,235 in unrestricted assets. 2. Total assets of the Commission increased by $25,499,789 (12.56%) in the six-month period ended due, in part, to a $27 million increase in capital assets. The increase in capital assets is due to the purchase of Gateway Village Apartments. 3. The shared equity properties/investment in real estate partnership decreased by $1,222,320 from the prior year due to the sale of six MIHU properties located on Summit Rock Road and Southmoor St. 4. Net capital assets increased by $27,945,143 due to the purchase of Gateway Village Apartments and the continuing construction on Leola Dorsey Community Resource Center. 5. At the six-month period end, the Commission s current liabilities decreased by $26,451 (.34%). The decrease is the result of principal payments on a short term bank loan result of sale of six MIHU properties. 6. The noncurrent liabilities increased by $27,353,469 (16.81%) over the prior year. This increase is due to the result of the issuance of $25.38 million in Revenue Bonds series 2016 and $1.3 million in bond premium which was used to finance the purchase and renovation of Gateway Village Apartments. (7)

10 MANAGEMENT S DISCUSSION AND ANALYSIS 7. The Commission's total change in net position reported a negative variance of $2,572,067 (7.75%) as compared to the prior year. The reasons for the variance are stated below. Changes in Statement of Revenues and Expenses: 1. As of July 1, 2016, the Howard County Housing Commission discontinued certain operating practices that were jointly run with the Howard County Department of Housing and Community Development and changed its fiscal year end from June 30 to December 31. In order to bring the audit cycle in line with the new fiscal year, the period covered by this audit is six months, half the period covered by the previous audit. As a result, generally revenues, expenses, and depreciation should be half the amounts of the previous year. Elements of the revenues and expenses discussed here are those that vary substantially from this 50% rule. 2. Rental income increased by $1.1 million compared to half the period covered by the previous audit. The increase was due to the revenue generated by Gateway Village Apartments which was purchased in July Compared to the prior year, there was no major change in HUD grant funding. HUD grant funds are in line with the six-month nature of the audit. 4. Other grants and revenue decreased by $10,183,989. This reflects a reduction in specific HOME, CDBG and County Housing Initiatives funds grants for tenant relocation assistance, property acquisition, and RAD project renovation costs. 5. The general administrative expenses increased by $1 million compared to half the period covered by the previous audit. The increase was due to a shifting of staff and overhead costs from the County to the Commission due to the separation of HCHC from the County. In addition, property taxes and insurance increased with the acquisition of Gateway Village. 6. Housing Assistance Payments were reduced slightly as the Commission created a reserve for project based vouchers that were used for the Leola Dorsey Community Resource Center tenants. 7. Total non-operating expenses increased compared to half the period covered by the previous audit due to additional bond interest payments for the new series 2016 bonds that were sold in connection with the acquisition of Gateway Village. (8)

11 MANAGEMENT S DISCUSSION AND ANALYSIS CAPITAL ASSETS At December 31, 2016, the Commission had $185,098,368 invested in capital housing assets which was $27,945,143 more than the prior year. Capital Assets at Year-End (Net of Depreciation) December 31, 2016 June 30, 2016 Land $ 70,185,754 $ 60,051,174 Building and Improvements 134,796, ,738,495 Furniture and Equipment 57,338 57,338 Construction-in-Progress 6,898,546 2,912,995 Accumulated Depreciation (26,839,763) (24,606,777) Total $ 185,098,368 $ 157,153,225 Capital Assets: 1. During the six-month period, the Commission purchased Gateway Village Apartments, increasing the Land and Building and Improvements lines. Construction-in-progress cost largely reflects construction of the Leola Dorsey Community Resource Center. 2. The accumulated depreciation increased by $2.2 million from $24,606,777 in FY 2015 to $26,839,763 in the six-month period ending in 2016 due to the depreciation expense for Gateway Village Apartments. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS HUD s budgets continue to tighten and will likely continue to do so for the foreseeable future. This directly impacts the Housing Choice Voucher program, which is funded entirely by HUD. While any potential cuts will hurt the Agency s clients, it should have only a small impact on the Agency itself, since almost all Housing Choice Voucher funds are passed through to landlords. The decline of the homeownership market after the great recession and the countervailing upswing in the rental housing market, resulted in higher rental rates and greater demand for affordable housing. Affordable housing demand has also increased due to national economic trends that continue to leave many individuals and families unable to afford market-rate housing. Declining HUD funding and increased housing demand forced the Commission to close its Housing Choice Voucher waiting list, which contains over 5,000 applicants, on July 1, On the positive side, the capital markets have loosened credit availability and the Federal Reserve has indicated that interest rates are likely to remain relatively low for the foreseeable future. These circumstances, together with the resurgent multi-family rental market and the Commission s strong financial condition, offered the Commission the opportunity to acquire another multi-family property in July The Commission used the proceeds of a $25,380,000 general revenue bond issue to purchase the 132-unit Gateway Village Apartments in Jessup. The well-maintained property, built in 1988 and recently renovated, will not only provide additional affordable housing for moderate-income households, but will also provide the Commission with a stable source of cash flow well into the future. CONTACTING THE COMMISSION'S FINANCIAL MANAGEMENT This financial report is designed to provide the users of these financial statements with a general overview of the Commission's finances. If you have questions about this report or need additional financial information, contact the Commission at 9770 Patuxent Woods Drive, Suite 100 or call at (9)

12 STATEMENT OF NET POSITION CURRENT ASSETS Cash and Cash Equivalents - Unrestricted $ 5,701,759 Cash and Cash Equivalents - Restricted 25,241,447 Cash - Restricted Tenant Security Deposits 552,865 Accounts Receivable, Net of Allowance of $55, ,430 Prepaid Expenses and Other Assets 333,656 Total Current Assets 32,466,157 NONCURRENT ASSETS Shared Equity Properties 4,312,127 Investment in Real Estate Partnerships 234,248 Notes and Mortgages Receivable 6,148,272 Notes and Mortgages Receivable - Shared Equity, Net of Allowance of $162, ,035 Capital Assets, Net 185,098,368 Total Noncurrent Assets 196,084,050 Total Assets 228,550,207 DEFERRED OUTFLOW OF RESOURCES Pension Contributions Made Subsequent to Measurement Date 126,397 Difference Between Projected and Actual Earned on Pension Plan Investment 357,858 Changes in Pension Plan Assumptions 76,148 Interest Rate Swap 465,991 Total Deferred Outflow of Resources 1,026,394 Total Assets and Deferred Outflow of Resources $ 229,576,601 CURRENT LIABILITIES Accounts Payable and Accrued Expenses $ 4,303,441 Tenant Security Deposits 552,865 Accrued Compensated Absences, Current Portion 133,208 Unearned Revenue, Current Portion 317,152 Current Portion of Notes and Mortgages Payable 1,534,002 Current Portion of Bonds Payable 940,000 Other Current Liabilities 76,898 Total Current Liabilities 7,857,566 NONCURRENT LIABILITIES Accrued Compensated Absences, Less Current Portion 88,805 Unearned Revenue, Less Current Portion 873,843 Tenant Escrow Deposits 49,823 Notes and Mortgages Payable, Less Current Portion 16,240,132 Net Pension Liability 753,129 Bonds Payable 170,020,000 Original Issue Premium 1,546,259 Interest Rate Swap 465,991 Total Noncurrent Liabilities 190,037,982 Total Liabilities 197,895,548 DEFERRED INFLOW OF RESOURCES Unearned HAP Subsidy 875,907 Difference Between Projected and Actual Earned on Pension Plan Investment 114,088 Changes in Pension Plan Assumptions 8,437 Difference Between Expected and Actual Experience 72,592 Total Deferred Inflow of Resources 1,071,024 NET POSITION Net Investment in Capital Assets 15,369,471 Restricted 3,687,323 Unrestricted 11,553,235 Total Net Position $ 30,610,029 See accompanying Notes to Financial Statements. (10)

13 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION SIX MONTHS ENDED OPERATING REVENUES Rental Income $ 7,581,463 HUD Subsidies 5,551,177 Other Government Grants 816,647 Other Revenues 4,680,528 Total Operating Revenues 18,629,815 OPERATING EXPENSES Administration 2,155,757 Tenant Services 524,570 Utilities 339,421 Maintenance 1,892,280 Protective Services 64,505 General Expenses 1,434,237 Housing Assistance Payments 9,026,327 Total Operating Expenses 15,437,097 Operating Income Before Depreciation 3,192,718 Depreciation 2,237,915 Total Operating Income 954,803 NON-OPERATING REVENUES (EXPENSES) Loss on Disposal of Properties (129,494) Interest Income 88,161 Interest and Amortization Expense (3,485,537) Total Non-Operating Revenues (Expenses) (3,526,870) CHANGE IN NET POSITION (2,572,067) Beginning Net Position 33,182,096 ENDING NET POSITION $ 30,610,029 See accompanying Notes to Financial Statements. (11)

14 STATEMENT OF CASH FLOWS SIX MONTHS ENDED CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from HUD $ 6,367,824 Cash Received from Tenants and Others 13,709,437 Cash Paid for Administrative and General (3,054,848) Cash Paid for Housing, Operating and Tenant Services (2,709,416) Cash Paid for Housing Assistance Payments (9,026,327) Net Cash Provided by Operating Activities 5,286,670 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of Fixed Assets (30,291,874) Gain/ Loss on Sale of Fixed Assets (20,678) Issuance of Bonds Payable 25,380,000 Premium on Bonds Payable 1,307,576 Bond Repayment (50,000) Interest on Bonds Payable (3,000,503) Interest on Notes and Mortgage Payable (120,654) Payment on Notes and Mortgage Payable (1,560,826) Proceeds from Notes Payable 1,255,111 Net Cash Used by Capital and Related Financing Activities (7,101,848) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Shared Equity Properties (955,329) Disposal of Shared Equity Properties 2,177,649 Interest on Investments 14,230 Issuance of Notes Receivable (100,000) Payments on Notes Receivable 2,484 Net Cash Provided by Investing Activities 1,139,034 DECREASE IN CASH AND CASH EQUIVALENTS (676,144) Cash and Cash Equivalents - Beginning 31,619,350 CASH AND CASH EQUIVALENTS - ENDING $ 30,943,206 CASH FLOWS FROM OPERATING ACTIVITIES Operating Income $ 954,803 Adjustments to Reconcile Cash and Cash Equivalents Provided by Operating Activities: Depreciation 2,237,915 Provisions for Bad Debt 46,855 Amortization of Bond Discount (350,287) Effects of Changes in Operating Assets and Liabilities: Accounts Receivable 445,629 Prepaid Expenses (153,546) Other Noncurrent Assets 430,502 Accounts Payable 568,269 Tenant Security Deposits 119,851 Deferred Revenue 881,966 Accrued Liabilities (14,974) Net Pension Liability 250,756 Net Deferred Outflow / Inflow of Resources Pension (131,069) Net Cash Provided by Operating Activities $ 5,286,670 See accompanying Notes to Financial Statements. (12)

15 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Howard County Housing Commission (the Commission), a component unit of Howard County, Maryland (the County) is a public corporation established by Maryland and Howard County law to act as builder, developer, owner and manager of housing for eligible participants. The Commission was established as a result of the following: Title IV of the Housing and Community Act of the Annotated Code of Maryland. Title 13 "Housing, Urban Renewal and Economic Development" of Howard County Code which permits the County to authorize the Commission to perform various housing functions either through contract with the County or by local law. The Commission is governed by seven commissioners appointed for five-year staggered terms by the Howard County Executive and confirmed by the Howard County Council. The Commission is included as a component unit of the County because of the significance of its operational and financial relationships with the County in that the County provides a significant amount of funding. The Commission has no taxing power. Specific powers of the Commission include the following: Purchase, lease, or transfer of real or personal property Operate housing developments Construct, improve, and renovate housing developments Invest funds held in reserve in securities Utilize federal/state housing subsidies Make loans Provide rent subsidies to persons of eligible income The financial year end of the Commission was changed from June 30 to December 31. Accordingly, the current financial statements are prepared for 6 months from July 1, 2016 through December 31, Nature of Activities Housing activities sponsored by the Commission include the following: Rental housing for low, moderate, and market rate income families, or elderly individuals. Projects presently owned and operated include various apartments, townhouses and single-family houses in Howard County, Maryland. Housing Choice Voucher Program (HCVP) sponsored by the U.S. Department of Housing and Urban Development (HUD) through which eligible persons may seek rental housing in the private marketplace. This program allows eligible families to obtain adequate rental housing while paying no more than a stipulated percent of their adjusted gross monthly income for rent. The accounting and financial reporting policies of the Commission conform to generally accepted accounting principles (GAAP) as applicable to governments. The following is a summary of the more significant policies. (13)

16 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Accounting and Measurement Focus Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The Commission s funds are accounted for on an economic resources measurement focus using the accrual basis of accounting. Under this method, revenues are recorded when earned, and expenses are recorded when liabilities are incurred. The Commission s accounts are maintained in accordance with the principles of enterprise fund accounting. The Commission is required to follow all statements of Governmental Accounting Standards Board (GASB). Use of Estimates in Preparing Financial Statements Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues, expenditures, and expenses. Actual results could vary from the estimates used. Component Units The Commission is the general partner in several real estate limited partnerships. The limited partnership interests are held by third parties unrelated to the Commission. As the general partner, the Commission has certain rights and responsibilities with respect to the limited partnerships. Additionally, the Commission is financially accountable for the limited partnerships under certain conditions as the Commission is legally obligated to fund operating deficits up to a maximum limit per partnership, in accordance with the terms of the partnership agreements. The Commission has several investments in real estate limited partnerships. These are neither discrete nor blended component units. See Note 6 for more information. The Commission converted its only public housing property, Allfa Pines/Scattered Sites, to a project-based voucher (PBV) Section 8 rental assistance program, under the Rental Assistance Demonstration (RAD) program. Effective December 1, 2015, the Commission entered into a housing assistance payment (HAP) contract with HCH New Ventures, LLC, a wholly owned legally separate entity. In accordance with GASB Statement No. 14 and 61, HCH New Ventures, LLC will be presented as a blended component unit. (14)

17 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents For Statement of Cash Flows reporting purposes, cash and cash equivalents includes unrestricted and restricted cash on hand, demand deposits, liquid cash and investments, certificates of deposit, and repurchase agreements with initial maturities of three months or less at the time of purchase. Investments Statutes authorize the Commission to invest in obligations of the U.S. Treasury, repurchase agreements, certificates of deposit and certain other investments allowed by HUD. These investments are carried at fair market value. There are no investments as of December 31, Accounts Receivable Accounts receivable consists of payments due from HUD and related affiliates, rent payments due from tenants, and other miscellaneous receivables arising from the normal course of operations. A reserve for uncollectible accounts is established based on management s estimates. See Note 4 for more information. Capital Assets Capital assets include property held for and under development, operating properties, and fixed assets used in operations that have an individual cost of $5,000 or more and have an estimated useful life of more than one year. Donated capital assets are recorded at the estimated fair market value on the date received. The Commission capitalizes costs associated with properties held for and under development, including interest costs during the construction period. The carrying amount of such properties does not exceed the estimated net realizable value. Capital assets are stated at cost, less accumulated depreciation. Depreciation is computed under the straight-line method over the following estimated useful lives: Buildings and Improvements Furniture and Equipment years 3-10 years Proceeds from the disposal of capital assets are recognized in the period received. Proceeds from the sale of property acquired or significantly improved with HUD or State funds are refunded to HUD or the State as required by contract. Deferred Outflows/Inflows of Resources A deferred outflow of resources represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (expense) until the future period. The Commission recognized deferred outflows for contributions made subsequent to the measurement date related to pension. (15)

18 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred Outflows/Inflows of Resources (Continued) A deferred inflow of resources represents an acquisition of net position that applies to future period and so will not be recognized as an inflow of resources (revenue) until the future period. The Commission recognized deferred inflows for the difference between the projected and actual investment earnings related to pensions as well as changes in the proportion of pension related to the Commission. Additionally, a deferred inflow was recorded for the effect of the Commission s derivative instruments. See Note 11 for more information. Pension For purpose of measuring the net position liability, deferred outflows of resources and deferred inflows of resources related to pension, and pension expense, information about the fiduciary net position of the Howard County Retirement Plan (the Plan) and additions to/deductions from the Plan s fiduciary net position have been determined on the same basis as they are reported by the Plan. For this purpose, benefit payments (including refunds on employee contributions) are recognized when due and payable in accordance with benefit terms. Investments are reported at fair value. Compensated Absences The total accumulated universal leave (incorporating vacation) is accrued in the period earned as this cost is to be funded with current resources. Vacation benefits, including the FICA portion, are earned by employees based on time in service, and the rights to such benefits are vested. Howard County Housing Commission has no requirement that universal leave be taken in the year earned. Upon termination, employees are paid for any accumulated universal leave. Net Position Net Position is displayed in three components: Net investment in capital assets: This component of net position consists of all capital assets, reduced by the outstanding balances of any bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted: This component of net position consists of restricted assets when constraints are placed on the asset by creditors (such as debt covenants), grantors, contributors, laws, regulations, etc. Unrestricted: This component consists of net position that does not meet the definition of "Net invested in capital assets," or "Restricted." The Commission first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position are available. (16)

19 NOTES TO FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Grant Restrictions The Commission has received loans and grants from the U.S. Department of HUD and the Maryland Department of Housing and Community Development to build and improve housing projects. The grants require that only individuals and families that meet various income, age and family status be housed or aided in some of the Commission s rental units. Revenue Recognition Dwelling rent income, HUD grants received for operations, other operating fund grants and operating miscellaneous income are shown as operating income. HUD grants received for capital assets and all other revenue are shown as non-operating revenue. Interest Expense Interest is expensed as incurred except when interest is incurred during the construction period and is capitalized as part of the cost of the asset. New GASB Pronouncements During the six months ended December 31, 2017, the Commission implemented GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments The objective of this Statement is to identify in the content of the current governmental financial reporting environments the hierarchy of generally accepted accounting principles (GAAP). The implementation of this Statement did not result in any additional disclosures or changes to the financial statements. NOTE 2 CASH AND CASH EQUIVALENTS Cash At year-end, the aggregate carrying amount of the Commission s cash was $31,496,071 and the bank balance was $31,646,378. As of December 31, 2016, $659,751 of deposits were not collateralized. NOTE 3 CASH AND CASH EQUIVALENTS - RESTRICTED Restricted cash consisted of the following at December 31, 2016: HCVP Family Self-Sufficiency Escrows $ 126,721 HCVP HAP Reserves 259,001 HCVP Advancement of HAP Funding 875,907 Replacement Reserves 2,610,269 Project Funds 308,547 Bond Proceeds 20,551,497 Debt Service 454,370 Loan Escrow 55,135 Tenant Security Deposits 552,865 Total $ 25,794,312 (17)

20 NOTES TO FINANCIAL STATEMENTS NOTE 4 ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at December 31, 2016: Accounts Receivable - Tenants $ 220,863 Accounts Receivable - Other Governments 170,230 Accounts Receivable - Portability 183,461 Accounts Receivable - Fraud Recovery, Net of Allowance of $55,145 30,916 Accounts Receivable - Other 30,960 Total $ 636,430 NOTE 5 INVESTMENTS IN SHARED EQUITY PROPERTIES The Commission s Shared Equity Program assists qualified Howard County home buyers to purchase homes. The Commission purchases a percentage of the property to help maintain perpetual affordability. Upon sale of the property, the co-owner has to pay the Commission its share of the total sale price. The property is recorded at cost. The Commission has invested in a total of 36 properties, with an average equity percentage of 52%. Total equity investment at December 31, 2016 totaled $4,312,127. During the six-month period end December 31, 2016, the Commission funded 3 purchases. NOTE 6 INVESTMENT IN REAL ESTATE PARTNERSHIPS The Commission is a partner, owner, or interest holder either solely or severally with multiple organizations as part of various housing projects, development and construction projects, and for financing purposes. These separate legal entities are established to advance the mission of the Commission related to development and management of various forms of affordable housing. Activity of these entities is reflected in the financial statements of the Commission as applicable, to the extent of their ownership interest and level of activity, using the equity method of accounting for investments. The following table reflects these entities, their purpose, and the Commission s interest. Date Percentage Equity Project HCHC Affiliate Formed HCHC Interest Ownership Interest Dorsey-Selbourne Limited Partnership Parkview at Emerson The Residence at Ellicott Gardens Dorsey-Selbourne Limited Partnership 10/1/1999 General Partner 0.01% $ 52,379 Emerson Development LLLP (1) 12/28/2007 General Partner 9.99% 138 The Residence at Ellicott Gardens LLC 6/7/2006 Managing Member 0.01% 69,896 Monarch Mills Monarch Mills, LP 4/1/2010 General Partner 0.01% (818) Parkview at Columbia Development Columbia LLLP 5/25/2010 General Partner 0.90% 8,156 Milltowne Associates Milltowne Associates, LP 8/30/2011 General Partner 0.009% 104,497 $ 234,248 (1) The profits and losses of the Partnership, and any distributions of Partnership property, shall be allocated among and distributed to the Partners as follows: Shelter 90.01% Commission 9.99%. (18)

21 NOTES TO FINANCIAL STATEMENTS NOTE 6 INVESTMENT IN REAL ESTATE PARTNERSHIPS (CONTINUED) The Commission owns 70 shares of common stock in Elkridge Housing Corporation which, through an affiliated entity, holds a nominal interest in the Orchard Club Limited Partnership. The Orchard Club Limited Partnership owns a housing development known as the Orchard Club Project in Elkridge, Maryland. Shares owned by the Commission were acquired by gift. As of this reporting date, there was no available established market value for these securities nor any other means to determine a value. Accordingly, this disclosure is reported for information purposes only and no value is reflected in the financial statements. The potential value is determined by management to not be material to these financial statements. NOTE 7 NOTES AND MORTGAGES RECEIVABLE Notes and mortgages receivable at December 31, 2016, consisted of the following: Principal Accrued Interest Total 1. Mortgage Notes Receivable $ 669,644 $ 74,715 $ 744, ODC Loan for Patuxent Square 2,000,000 1,045,000 3,045, Monarch Mills LP 259,315 17, , BRAC Loan Fund 320, , Milltowne Associates 1,600,000 50,667 1,650, Burgess Mill I 111, ,427 Total Notes and Mortgages Receivable - Noncurrent $ 4,960,386 $ 1,187,886 $ 6,148, Notes Receivable Shared Equity 8815 Glenrobbin $ 95,000 $ - $ 95, Notes Receivable Shared Equity 8513 Ice Crystal, Net of Allowance ($139,974) 94,626-94, Notes Receivable Shared Equity 8417 Ice Crystal 101, ,409 Total Notes and Mortgages Receivable Shared Equity - Noncurrent $ 291,035 $ - $ 291, Mortgage Notes Receivable - the Commission loans funds to moderate income households to purchase affordable homes. The interest on the loans is between 0% - 7% per annum. The payment of principal and interest is deferred until the time of sale, transfer, or refinance of the property. The loan is used to pay the closing costs or down payment on the purchase of the home. 2. ODC Loan for Patuxent Square On July 7, 2006 the Commission loaned $2,000,000 to Residential Limited Partnership (ODC) for the development costs and capital assistance of the eighty (80) unit residential rental housing project known as Patuxent Square located in Laurel, Maryland. The interest on the permanent loan is 6% per annum. Payments of principal and interest are deferred until maturity on July 7, Monarch Mills LP On March 30, 2010 the Commission made a $259,315 loan to Monarch Mills, LP for the purpose of providing financing to aid in the construction of a 269-unit multifamily and senior apartment community which will provide affordable housing for low income households. The interest on the loan is 1% per annum. The payments of principal and interest begin July 1, 2012 but are subject to deferral depending on cash flow. All unpaid principal and interest is due at maturity on July 1, (19)

22 NOTES TO FINANCIAL STATEMENTS NOTE 7 NOTES AND MORTGAGES RECEIVABLE (CONTINUED) 4. BRAC Loan Fund on September 29, 2011 the Commission made a $160,000, unsecured, non-recourse loan, with an interest rate of zero percent to the Maryland Department of Housing and Community Development for affordable rental housing preservation developments through the MD-BRAC Preservation Loan Fund. The loan is expected to be repaid by September 29, On August 9, 2013, the Commission made another $160,000, unsecured, non-recourse loan, with an interest rate of zero percent to the Maryland Department of Housing and Community Development. The loan is expected to be repaid by August 9, Milltowne Associates - the Commission made a $1,600,000 bridge-funded HOME capital assistance loan to Milltowne Associates, LP for a portion of the development costs to construct and operate a 198-unit, mixed income residential housing project known as Hilltop Phase I located in Ellicott City, Maryland. The construction loan period commenced on the date of closing of the HOME loan (November 28, 2011) and shall not exceed twenty-three months. The permanent loan period shall commence on the first day of the first month after the construction loan period ends and is for a term of 40 years. No interest shall accrue on the outstanding principal balance throughout the construction loan period. During the permanent loan period interest shall accrue on the outstanding balance of the principal at the rate of 1.0% per year. 6. Burgess Mill I The Commission made a $111,427, unsecured loan to HCHC Partners III, LLC, a wholly owned component unit of the Commission, and general partner of Milltowne Associates, LP. The funds were subsequently loaned by HCHC Partners III, LLC to Milltowne Associates, LP. The loan was used to cover the cost of repairs to the parking lot located on the property known as Burgess Mill. Interest shall accrue at 8% per annum. Any principal and interest outstanding is to be repaid solely from net cash flow of the property as defined by the partnership agreement. 7. Shared Equity 8815 Glenrobbin Place - the Commission made a mortgage loan on July 2, 2015 in the amount of $95,000 to assist a borrower in purchasing residential property located at 8815 Glenrobbin Place, Jessup Maryland. No principal or interest is due on the Commission s deed of trust note until the property is either sold, refinanced, or is no longer the primary resident of the home owner. 8. Shared Equity 8513 Ice Crystal Lane The Commission owned a 67.59% equity interest in the property when it was originally purchased by the homeowners. During fiscal year 2014, the homeowners refinanced their first mortgage with a new financial institution. The Commission was not included on the deed of trust for the new first mortgage. The Commission prepared a deed of trust note to secure their interest in the property after the refinance. No principal or interest is due on the Commission s deed of trust note until the property is either sold, refinanced or is no longer the primary residence of the homeowner. The Commission recorded an allowance of $139,974 against the note. (20)