(A Nonprofit Organization) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT DECEMBER 31, 2016 AND 2015
TABLE OF CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT 1 2 STATEMENTS OF FINANCIAL POSITION 3 STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS 4 5 STATEMENTS OF CASH FLOWS 6 NOTES TO FINANCIAL STATEMENTS 7 12 SUPPLEMENTARY INFORMATION SCHEDULES OF FUNCTIONAL EXPENSES 13
INDEPENDENT AUDITOR'S REPORT Board of Directors 1600 Broadway Street NE Minneapolis, MN 55413-2617 Members of the Board: We have audited the accompanying financial statements of Kelly Apartments, Inc. (a not-for-profit organization) HUD Project No. 092-HD005-CMI, which comprise the Statements of Financial Position as of December 31, 2016, and 2015, and the related Statements of Activities and Changes in Net Assets, and Cash Flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of Kelly Apartments, Inc. as of December 31, 2016, and 2015, and the changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The Schedules of Functional Expenses for the years ended December 31, 2016 and 2015 are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the financial statements, and, accordingly, we do not express and opinion or provide any assurance on it. Respectfully submitted, CARLSON ADVISORS, LLP Minneapolis, Minnesota March 30, 2017
STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2016 AND 2015 ASSETS December 31, 2016 2015 CURRENT ASSETS Cash in Bank $ 11,894 $ 18,339 RESTRICTED DEPOSITS AND FUNDED RESERVES Cash, Reserve for Replacement 130,585 121,111 Cash, Tenant Damage Deposits 5,229 5,228 Total Restricted Deposits and Funded Reserves 135,814 126,339 PROPERTY AND EQUIPMENT Land 52,500 52,500 Buildings and Improvements 398,242 398,242 Furniture and Equipment 10,563 10,563 Total 461,305 461,305 Less: Accumulated Depreciation 332,232 315,889 Total Property and Equipment (At Depreciated Cost) 129,073 145,416 Total Assets $ 276,781 $ 290,094 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts Payable $ 3,839 $ 2,674 LONG-TERM LIABILITIES Tenant Damage Deposits 1,894 1,721 Due to Related Party 127,822 118,386 Total Long-Term Liabilities 129,716 120,107 Total Liabilities 133,555 122,781 NET ASSETS Unrestricted Deficit (25,308) (10,806) Temporarily Restricted 168,534 178,119 Total Net Assets 143,226 167,313 Total Liabilities and Net Assets $ 276,781 $ 290,094 See accompanying Notes to Financial Statements. (3)
STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2016 Temporarily Unrestricted Restricted Total REVENUE Tenant Assistance Payments $ 14,649 $ - $ 14,649 Tenant Rent 24,941-24,941 Other Income 2,510-2,510 Interest Income 6-6 Total Revenue 42,106-42,106 Net Assets Released from Restriction 9,585 (9,585) - Net Revenue 51,691 (9,585) 42,106 EXPENSES Maintenance and Repairs 17,445-17,445 Maintenance Allocation 12,900-12,900 Utilities 4,071-4,071 Administrative Allocation 5,329-5,329 Insurance 2,300-2,300 Supplies 1,578-1,578 Professional Fees 5,853-5,853 Licenses and Permits 335-335 Miscellaneous 39-39 Interest Expense - - - Total Expenses 49,850-49,850 DECREASE IN NET ASSETS BEFORE DEPRECIATION 1,841 (9,585) (7,744) DEPRECIATION 16,343-16,343 DECREASE IN NET ASSETS (14,502) (9,585) (24,087) NET ASSETS (DEFICIT), BEGINNING OF YEAR (10,806) 178,119 167,313 NET ASSETS (DEFICIT), END OF YEAR $ (25,308) $ 168,534 $ 143,226 See accompanying Notes to Financial Statements. (4)
STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2015 Temporarily Unrestricted Restricted Total REVENUE Tenant Assistance Payments $ 16,632 $ - $ 16,632 Tenant Rent 21,596-21,596 Other Income 598-598 Interest Income 23-23 Total Revenue 38,849-38,849 Net Assets Released from Restriction 9,585 (9,585) - Net Revenue 48,434 (9,585) 38,849 EXPENSES Maintenance and Repairs 8,409-8,409 Maintenance Allocation 12,600-12,600 Utilities 4,625-4,625 Administrative Allocation 5,340-5,340 Insurance 2,300-2,300 Supplies 1,460-1,460 Professional Fees 6,334-6,334 Licenses and Permits 335-335 Miscellaneous - - - Interest Expense 17-17 Total Expenses 41,420-41,420 DECREASE IN NET ASSETS BEFORE DEPRECIATION 7,014 (9,585) (2,571) DEPRECIATION 14,810-14,810 DECREASE IN NET ASSETS (7,796) (9,585) (17,381) NET ASSETS (DEFICIT), BEGINNING OF YEAR (3,010) 187,704 184,694 NET ASSETS (DEFICIT), END OF YEAR $ (10,806) $ 178,119 $ 167,313 See accompanying Notes to Financial Statements. (5)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Year Ended December 31, 2016 2015 CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Decrease in Net Assets $ (24,087) $ (17,381) Adjustments to Reconcile Decrease in Net Assets to Net Cash Provided by Operating Activities: Depreciation 16,343 14,810 Decrease (Increase) in Operating Current Assets: Prepaid Expenses - 31 Increase (Decrease) in Operating Current Liabilities: Accounts Payable 1,165 1,579 Net Cash Used For Operating Activities (6,579) (961) CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES Purchases of Fixed Assets - (1,800) Additions to Escrow Funds for Property and Equipment Replacements (9,474) (9,472) Tenant Damage Deposits 173 (407) Change in Cash, Tenant Damage Deposits (1) (1) Net Cash Used for Investing Activities (9,302) (11,680) CASH PROVIDED BY FINANCING ACTIVITIES Borrowing from Related Party 9,436 9,361 NET DECREASE IN CASH (6,445) (3,280) CASH BEGINNING 18,339 21,619 CASH ENDING $ 11,894 $ 18,339 See accompanying Notes to Financial Statements. (6)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 1 SUMMARY OF ORGANIZATION Kelly Apartments, Inc. (Organization) is a not-for-profit corporation organized under the laws of the State of Minnesota for the purpose of operating a six-unit apartment project located in St. Louis Park, Minnesota. The Organization operates under the provision of Section 202 of the National Housing Act and is regulated by the United States Department of Housing and Urban Development (HUD) with respect to rental charges and operating methods. The Organization's major program is its Section 202 capital advance used for project development. The Organization has a Section 8 Housing Assistance Payment Contract (The "HAP" Contract for six units). Legal title to the project is held by Kelly Apartments, Inc., a not-for-profit corporation. The Organization also is subject to Section 8 Housing Assistance Payments agreements with HUD, and a significant portion of the Organization's rental income is received from HUD. The Organization's non-major program is its Section 8 rent subsidy. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Standards of Accounting and Financial Reporting The Organization follows the accounting guidance in the audit and accounting guide, Health Care Organizations, which is in conformity with the recommendations of the American Institute of Certified Public Accountants. Financial Statement Presentation The financial statements of the Organization have been prepared on the accrual basis of accounting and are presented in accordance with the FASB Accounting Standards Codification (ASC) 958, Not-for-Profit Entities. ASC 958 requires the Organization to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Assets accumulated and resources received and expended by the Organization are either unrestricted as to use or purpose or restricted by the donor for a particular purpose. Permanently restricted net assets account for donations restricted for specific purposes whereby the restriction does not expire. Temporarily restricted net assets represent contributions to the Organization whose use is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled by expending the funds for their restricted purpose. The designation of net assets for specific purposes by the Organization itself does not constitute a basis for reclassifying them as temporarily restricted. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits in banks and money market instruments. The Organization also considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Organization had no cash equivalents as of December 31, 2016 and 2015. The Organization places its temporary cash investments with one financial institution. (7)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued Rents Receivable Billings for rental services are recognized as income as the rent is due. Billings to governmental agencies for subsidized services are based upon contract billing rates which may be subsequently changed by the government authorities. Changes in regulations or governmental funding could result in the reduction of rental income. Any such adjustments to the contract rates are recognized as a reduction of income when their effect becomes reasonably determinable. Bad debts are provided on the allowance method based on historical experience and management's evaluation of outstanding rent receivable. The accounts receivable, if any, are stated net of allowance for doubtful accounts. Property and Equipment Property and equipment are stated at cost if purchased or fair market value at the date of the gift if donated. The Organization s capitalization threshold is for property and equipment which exceed $5,000. Renewals and betterments with a cost of greater than the threshold that materially prolong the useful lives of assets are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. Property and equipment are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives of the assets are as follows: Buildings and Improvements Furniture and Equipment 5 to 27.5 Years 3 to 7 Years Impairment of Long-Lived Assets The Organization reviews long-lived assets, including property, equipment and certain identifiable intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recovered. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. The Organization has determined that no impairment existed at December 31, 2016 and 2015. Revenue Recognition Revenues are recognized when rent is due. Revenue is generated by renting apartment space to residents. Contributions, including unconditional promises to give (pledges), are recognized in the period received. Conditional promises are not recognized until they become unconditional, that is when the conditions on which they depend are substantially met. (8)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued Revenue Recognition Continued All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. When a temporary restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. The Organization records restricted contributions for which the restriction is met in the same reporting period as unrestricted contributions. As of December 31, 2016 and 2015, the Organization had not received any contributions. Donated Materials and Services Donated materials are reflected as contributions in the financial statements at their estimated value at the date of receipt. Donated services are recognized as contributions in accordance with GAAP, if the service (a) creates or enhances nonfinancial assets or, (b) specialized skills are performed by people with those skills that would otherwise be purchased by the Organization. No amounts have been reflected in the statements for donated materials or services as of December 31, 2016 and 2015. Income Taxes The Organization was incorporated under the laws of Minnesota as a not-for-profit corporation and is exempt from federal income tax under Internal Revenue Code 501(c)(3). Uncertain Tax Positions The Organization has adopted accounting guidance related to uncertainty in income taxes. This guidance clarifies the recognition threshold and measurement requirements for income tax position taken or expected to be taken on income tax returns. This includes positions that the entity is exempt from income taxes or not subject to income taxes on unrelated business income. Under the standards, the Organization recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by taxing authorities. The Organization has identified no income tax uncertainties. Distributions The Organization's regulatory agreement with HUD stipulates, among other things, that the Organization will not make distributions of assets or income to any of its officers or directors. Use of Estimates The preparation of financial statements in conformity with the regulatory basis of accounting 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. (9)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued Functional Allocation of Expenses The costs of providing the programs and supporting service activities have been allocated. Salaries and related costs are allocated between the program and supporting service categories based upon the estimated time expended by the employee in those categories. Other costs are allocated according to management s estimate or on a direct basis. Functional expense totals for the years ended December 31, 2016 and 2015 are as follows: 2016 2015 Amount % Amount % Program $ 55,011 83.1 $ 44,556 79.2 Management and General 11,182 16.9 11,674 20.8 Fundraising - - - - Total $ 66,193 $ 56,230 New Accounting Standards In August 2016, the FASB issued ASU 2016-14, Not-For-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities, which provides guidance for the presentation of not-for-profit financial statements. The guidance requires not-for-profit entities to 1) reclassify Net Assets into two classes ( Without Donor Restrictions or With Donor Restrictions ) rather than three classes, 2) present both qualitative and quantitative information that communicates how the organization manages its liquid resources and the availability of financial assets to meet cash needs within one year of the balance sheet date, 3) present an analysis of expenses by function and nature, 4) present Investment Return amounts as a net presentation of investment expenses against investment returns, 5) present the Statement of Cash Flows in either direct or indirect method, but if using direct method, no longer required to show indirect reconciliation. The guidance will initially be applied using a retrospective approach. The amendments in the guidance are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. Management is evaluating the impact of the amended guidance on the entity s financial statements. NOTE 3 HUD RESTRICTED DEPOSITS Reserve for Replacement Under the regulatory agreement, the Organization is currently required to set aside amounts for the replacement of property and other project expenditures approved by HUD. HUD-restricted deposits, which were $130,585 and $121,111 at December 31, 2016 and 2015, respectively, are being held in separate accounts and generally are not available for operating purposes. (10)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 3 HUD RESTRICTED DEPOSITS Continued Tenant Damage Deposits Under the regulatory agreement, the Organization is required to set aside amounts for the return of resident paid damage deposits. HUD-restricted deposits which were $5,229 and $5,228 at December 31, 2016 and 2015, respectively, are being held in separate accounts and generally are not available for operating purposes. Residual Receipts There is no residual receipts account. NOTE 4 TEMPORARILY RESTRICTED NET ASSETS/CONTINGENCY In 1993, the Organization received $383,396 of capital advances for project development from HUD. These capital advances are non-interest bearing and are to be repaid only if default occurs within forty years of the agreement date. Conditions of default include termination of interest in the housing unit or the housing unit ceases to be used as housing for low income tenants. If no default occurs, the capital advance will be deemed to have been paid in full in the final year of the agreement and no repayment will be required. Because the likelihood of the Organization defaulting is remote, the Organization recognized the funds as temporarily restricted net assets. The funds are transferred out of temporarily restricted net assets to unrestricted net assets over an amortization period of forty years. The annual amortization amount is $9,585. NOTE 5 DUE TO RELATED PARTY Community Involvement Programs (CIP), a Minnesota not-for-profit corporation, is a related party to the Organization because of common members of their Board of Directors. CIP provides office space and management support to the Organization as needed. Due to related party consists of total unreimbursed expenses paid by CIP's general fund on behalf of Kelly Apartments, Inc. programs. The general fund pays all common expenses of its programs and the programs reimburse the fund as needed. At December 31, 2016 and 2015, the balance of $127,822 and $118,386, respectively, of unreimbursed expenses paid by the general fund for Kelly Apartments, Inc. was substantially for insurance costs, office rent, and allocation of administrative and maintenance costs. (11)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 6 CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS The Organization's sole asset is a six-unit apartment project. The Organization's operations are concentrated in the multifamily real estate market. In addition, the Organization operates in a heavily regulated environment. The operations of the Organization are subject to the administrative directives, rules and regulations of federal, state and local regulatory agencies, including, but not limited to HUD. Such administrative directives, rules and regulations are subject to change by an act of congress or an administrative change mandated by HUD. Such changes may occur with little notice or inadequate funding to pay for the related cost, including the additional administrative burden, to comply with a change. NOTE 7 MAINTENANCE AND ADMINISTRATIVE ALLOCATION The Organization does not have any employees, nor does it pay any related payroll taxes or benefits. All maintenance on the project is performed by CIP, a related Organization. CIP allocates a portion of its maintenance and administrative expenses to Kelly Apartments, Inc. Maintenance expenses are allocated based on the number of units (6) compared to the number of units in the Organization (98). The maintenance allocation was $12,900 and $12,600 for the years ended December 31, 2016 and 2015, respectively. Administrative expenses are allocated based on a percentage of budgeted revenues. The management fee was $5,329 and $5,340 for each of the years ended December 31, 2016 and 2015, respectively. NOTE 8 COMMITMENTS AND CONTINGENCIES The Organization is subject to legal proceedings and claims which arise in the course of providing health care services. The Organization maintains liability insurance coverage for claims made during the policy year. In management s opinion, adequate provision has been made for amounts expected to be paid under the policy s deductible limits for unasserted claims not covered by the policy and any other uninsured liability. The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for resident services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse of statutes and regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for resident services previously billed. NOTE 9 SUBSEQUENT EVENTS In preparing these financial statements, the Organization has evaluated for recognition or disclosure the events or transactions that occurred through March 30, 2017, the date the financial statements were available to be issued. (12)
SUPPLEMENTARY INFORMATION
SCHEDULES OF FUNCTIONAL EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (UNAUDITED) 2016 2015 Management Management Total Program and Total Program and Costs Services General Fundraising Costs Services General Fundraising Maintenance and Repairs $ 17,445 $ 17,445 $ - $ - $ 8,409 $ 8,409 $ - $ - Maintenance Allocation 12,900 12,900 - - 12,600 12,600 - - Utilities 4,071 4,071 - - 4,625 4,625 - - Administrative Allocation 5,329-5,329-5,340-5,340 - Insurance 2,300 2,300 - - 2,300 2,300 - - Supplies 1,578 1,578 - - 1,460 1,460 - - Professional Fees 5,853-5,853-6,334-6,334 - Licenses and Permits 335 335 - - 335 335 - - Miscellaneous 39 39 - - - - - - Interest Expense - - - - 17 17 - - Total Expenses Before Depreciation 49,850 38,668 11,182-41,420 29,746 11,674 - Depreciation 16,343 16,343 - - 14,810 14,810 - - Total Expenses $ 66,193 $ 55,011 $ 11,182 $ - $ 56,230 $ 44,556 $ 11,674 $ - See accompanying Independent Auditor's Report. (13)