ANNUAL REPORT $14,500,000 TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS MULTIFAMILY HOUSING REVENUE BONDS (The Waters at Willow Run Apartments), Series 2013 Name: The Waters at Willow Run, LP Address: 15433 FM 1325, Austin, Texas 78728 Period covered: Year ended CUSIP Number: 88275A CMO Maturity: October 1, 2016 The Project as of is still under construction and approximately 98% completed. The Project will begin leasing in 2016. Financial information regarding the Project is provided in the audited financial statements that are included in this report. Contact information: The Waters at Willow Run. LP c/o Atlantic Housing Foundation 5910 N Central Expressway, Suite 1310 Dallas, Texas 75201 Attention: Michale N. Nguyen, President
FINANCIAL STATEMENTS DECEMBER 31, 2015
TABLE OF CONTENTS Page INDEPENDENT AUDITOR S REPORT 1 FINANCIAL STATEMENTS BALANCE SHEET 2 STATEMENT OF OPERATIONS 3 STATEMENT OF PARTNERS EQUITY 4 STATEMENT OF CASH FLOWS 5 6-15
BALANCE SHEET ASSETS Cash $ 8,736 Prepaid expenses 3,526 Restricted cash and reserves 15,033,167 Land 1,300,144 Construction in progress 24,741,019 Financing costs - FHA, net 305,558 Bond issuance costs, net 205,428 Total Assets $ 41,597,578 LIABILITIES AND PARTNERS' CAPITAL Construction payables $ 1,044,048 Accrued interest 73,386 Deferred income 27,425 Due to general partner affiliate 1,727,588 Mortgage note - FHA 18,541,912 Bonds payable 14,500,000 Developer fee payable 1,818,122 Total Liabilities 37,732,481 Partners' Capital 3,865,097 Total Liabilities and Partners' Capital $ 41,597,578 See accountant's report and notes to financial statements. 2
STATEMENT OF OPERATIONS From September 23, 2013 (Inception) to REVENUES Interest income $ 3,208 Total Revenues 3,208 EXPENSES Advertising 30,634 Administrative 45,568 Salaries, wages and employee benefits 118,712 Amortization 2,510 Total Expenses 197,424 NET INCOME (LOSS) $ (194,216) See accountant's report and notes to financial statements. 3
STATEMENT OF PARTNERS' EQUITY From September 23, 2013 (Inception) to Special General Limited Limited Partner Partner Partner Total Balance at September 23, 2013 $ - $ - $ - $ - Contributions 100 4,104,113 100 4,104,313 Syndication costs - (45,000) - (45,000) Net Income (Loss) (19) (194,195) (2) (194,216) Balance at $ 81 $ 3,864,918 $ 98 $ 3,865,097 See accountant's report and notes to financial statements. 4
STATEMENT OF CASH FLOWS From September 23, 2013 (Inception) to Cash flows from operating activities: Net income (loss) $ (194,216) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization 2,510 Decrease (increase) in prepaid expenses (3,526) Decrease (increase) in operating reserves (113,944) Increase (decrease) in deferred income 27,425 Total adjustments (87,535) Net cash provided by (used in) operating activities (281,751) Cash flow from investing activities Payments for land (1,300,144) Deposits to construction reserves, net (166,265) Deposits to replacement reserve (52,463) Payments for construction in progress (21,189,177) Net cash provided by (used in) investing activities (22,708,049) Cash flow from financing activities Mortgage proceeds - FHA 18,541,912 Partner capital contributions 4,104,313 Proceeds from bond notes payable 14,500,000 Deposits to bond collateral account (14,501,860) Deposits to debt service reserves, net (198,635) Payments for syndication costs (45,000) Advances from general partner affiliate, net 1,727,588 Payments for bond issuance costs (821,714) Payments for permanent financing costs - FHA (308,068) Net cash provided by (used in) financing activities 22,998,536 Net increase (decrease) in cash and equivalents 8,736 Cash and equivalents, beginning of period - Cash and equivalents, end of period $ 8,736 Supplemental disclosures of cash flow information: Cash paid for interest $ 1,043,268 See accountant's report and notes to financial statements. 5
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION The Waters at Willow Run, LP (the "Partnership") was formed in Texas on December 27, 2011. Under the terms of the Amended and Restated Agreement of Limited Partnership dated September 23, 2013, (the "Partnership Agreement"), the general partner is AHF-Waters at Willow Run, LLC, a Texas limited liability company (the "General Partner"), the limited partner is CREA WAWR, LLC, a Delaware limited liability company (the "Limited Partner"), and the special limited partner is CREA SLP, LLC, an Indiana limited liability company (the "Special Limited Partner"). The Partnership shall continue in existence until December 31, 2060, unless dissolved earlier. The Partnership was organized to acquire, construct, own, finance, lease and operate a 242 unit multifamily project for low and moderate income individuals in Austin, Texas, to be commonly known as The Waters at Willow Run Apartments (the "Project"). As of, no buildings have been placed into service. The project received an allocation of low income housing tax credits from the Texas Department of Housing and Community Affairs under Section 42 of the Internal Revenue Code of 1986, as amended, which regulates the use of the Project as to occupant eligibility and unit gross rent, among other requirements. As such, the Project is required to lease a minimum of 40% of its units to families whose income is 60% or less of the area median gross income. The Project s units must meet the provisions of these regulations during each of 15 consecutive years (commencing the first credit year) in order for the Partnership to remain qualified to receive the full amount of tax credits. The Project is financed with a mortgage insured by the United States Department of Housing and Urban Development (HUD) and operates under Section 221(d)(4) of the National Housing Act. Under this program the Partnership provides housing to low and moderate income tenants, subject to regulation by HUD as to rental charges and operating methods. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The financial statements of the Partnership are prepared on the accrual basis of accounting and in accordance with generally accepted accounting principles. Rental property Land, land improvements, buildings, furniture and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as listed below: 6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Buildings 40 years Land Improvements 20 years Furniture, Fixtures & Equipment 10 years Improvements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Amortization Organization costs are expensed as incurred. Bond issuance costs of $821,714 are capitalized and amortized using the effective interest method over the three year life of the bonds. Bond issuance costs amortized during the construction period are capitalized as rental property. Permanent financing costs are capitalized and amortized using the effective interest method over the 40 year life of the loan. Income taxes No federal income taxes are payable by the Partnership and none have been provided in the accompanying financial statements. The partners are to include their respective share of Partnership income or loss in their separate tax returns. The Partnership may be subject to state franchise taxes consisting of a tax on taxable margin. No provision for state franchise taxes was made in the accompanying financial statements as the Partnership s management anticipates no state franchise tax liability from inception to the year ended. The rules governing uncertainty in income taxes for nonpublic enterprises require additional disclosures for situations, if any, where the Partnership s tax positions are considered uncertain. This did not have a material effect on the Partnership s results of operations or financial position. Income tax returns filed by the Partnership are subject to examination by the Internal Revenue Service for period of three years. There are no examinations currently in progress. Rental income Rental income is recognized as rentals become due under the terms of operating leases with Project tenants. Rental payments received in advance are deferred until earned. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and cash equivalents For purposes of the statement of cash flows, the Partnership considers investments purchased with an original maturity of three months or less to be cash equivalents. The reserve for replacements, escrow deposits, collateral funds, construction reserves, debt service reserves and tenant security deposits have use restrictions and are not considered to be cash equivalents. Cash and cash equivalents are reported at cost, which approximates fair market value. Accounts Receivable and Bad Debts Tenant receivables are charged to bad debt expense when they are determined to be uncollectible by management. Accounting principles used in the United States of America require that an allowance method be used to recognize bad debts; however, the effect of using the direct write off method is not materially different from the results that would have been obtained under the allowance method. Impairment of long-lived assets The Partnership 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 longlived 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. There were no impairment losses recognized as of. Subsequent Events The Partnership has evaluated subsequent events through April 6, 2016, the date the financial statements were available to be issued. NOTE 3 - RESTRICTED CASH AND RESERVES The terms of the trust indentures and loan documents require the Project to deposit specified amounts with the lenders and trustees in order to fund debt service requirements, capital expenditures and the payment of certain operating expenses. Disbursements from certain restricted accounts are controlled by the lenders and trustees. The assets held in certain restricted accounts are pledged as collateral against the respective loan obligations. Reserves held by the FHA Mortgage Loan Servicer and Bond Trustee consist of the following at : 8
NOTE 3 RESTRICTED CASH AND RESERVES (Continued) FHA Loan Bond Servicer Trustee Total Construction Reserves $ 166,265 $ - $ 166,265 Bond Collateral - 14,501,860 14,501,860 FHA Principal Reserve 152,273-152,273 Tax and Insurance Escrow 113,944-113,944 Replacement Reserves 52,463-52,463 Debt Service Reserves - 46,362 46,362 Total $ 484,945 $ 14,548,222 $ 15,033,167 FHA Principal Reserve Commencing April 1, 2015, the Project made monthly principal payments to a reserve held by the FHA loan servicer. As of, the principal reserve held $152,273. FHA Mortgage Tax and Insurance Escrow Monthly deposits are paid to the mortgagor for the payment of property and mortgage insurance. As of, the balance in the insurance escrows was $113,944. Replacement Reserve In accordance with the HUD Regulatory Agreement, a replacement reserve is to be funded $5,829 per month for major repairs and capital expenditures. Disbursements from the replacement reserve are controlled by the mortgage lender. As of, the replacement reserve held $52,463. Bond Collateral The Trustee placed funds into an interest-bearing account in order to fully collateralize the bonds. As of, the bond collateral fund held $14,501,860. FHA Working Capital and Operating Deficit Reserve Under terms of the FHA loan agreements, the Partnership was required to establish a $751,508 working capital reserve at initial closing to fund construction contingencies and working capital. As of, the working capital reserve held $119,047 and is classified as a construction reserve. 9
NOTE 3 RESTRICTED CASH AND RESERVES (Continued) Under terms of the FHA loan agreements, the Partnership was required to establish an operating deficit reserve in the amount of $770,723 to fund operating deficits. The FHA mortgage lender was provided a $770,723 irrevocable standby letter of credit on behalf of the Partnership to satisfy this requirement. An affiliate of the General Partner has provided funds to secure the letter of credit. NOTE 4 CONSTRUCTION CONTRACT The Partnership entered into a third party construction contract in the amount of $18,084,506, including change orders and additional off site costs, to construct the Project. At December 31, 2015, construction in the amount of $18,058,006 has been completed and stored to date. The contractor is owed $1,037,854, including retainage of $947,970, at. NOTE 5 LONG TERM DEBT FHA Mortgage In September 2013, the Partnership executed a $18,787,700 HUD-insured Section 221(d)(4) loan agreement with a commercial lender to provide permanent financing for the Project. The loan accrues interest at 3.8% per annum and is secured by a first lien deed of trust on the rental property. The loan was payable in monthly interest only payments until March 1, 2015. Thereafter, monthly principal and interest payments of $76,200 commenced and are due until maturity, March 1, 2055. On, the loan balance was $18,541,912 and interest of $60,698 was accrued. TDHCA Bond Construction Loan In September 2013, the Partnership executed a $14,500,000 Multifamily Note (the Bond Loan ) payable to the Texas Department of Housing And Community Affairs ( TDHCA ), which financed a portion of the acquisition, construction and development of the Project through the issuance of $14,500,000 TDHCA Multifamily Housing Revenue Bonds, Series 2013 (the Bonds ). The Bond Loan is secured by the Trust Indenture, a deed of trust and is subordinate to the FHA mortgage. The Bond Loan bears an initial rate of.35% until October 1, 2014 and thereafter at the applicable remarketing rate for the bonds (.35% at ). Semi-annual interest payments are due until maturity, October 1, 2016. The Bond Loan is 100% cash collateralized by funds held with the Trustee. Subsequent to the Project s placed in service date, the Bonds will be fully redeemed from funds held by the trustee and the FHA Mortgage will remain outstanding as permanent debt. Repayment schedule for the FHA Mortgage and Bond Loan are as follows: 10
NOTE 5 LONG TERM DEBT (Continued) FHA Bond Mortgage Loan 2016 $ 212,471 $ 14,500,000 2017 220,687-2018 229,220-2019 238,084-2020 247,291 - Thereafter 17,639,947 - Total $ 18,787,700 $ 14,500,000 The fair value of the notes payable are estimated based on the current rates offered to the Property for debt of the same remaining maturities. At, the fair value of the notes approximates the amount recorded in the financial statements. NOTE 6 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP Capital Contributions and Allocations of Profit, Loss, Tax Credits, and Cash Flow The General Partner contributed $100 for a.01% interest in the Partnership. The Special Limited Partner contributed $100 for a.001% interest in the Partnership. The Investment Limited Partner is required to contribute, subject to adjustments based on the amount of Low-Income Housing Tax Credits delivered by the Project, $6,840,190 for a 99.989% interest in the Partnership. As of, the Investment Limited Partner had contributed $4,104,113. Remaining capital contribution installment payments are payable upon the achievement of certain construction, financing, operating and reporting milestones, as defined. Profits, losses and tax credits are generally allocated in accordance with the partners partnership ownership percentages. After stabilization, cash flow shall be distributed annually in the following order and priority: 1) To pay the Asset Manager any accrued but unpaid Asset Management Fee; 2) To repay any unpaid loans made by a Limited Partner or the Special Limited Partner, as defined; 3) To the Limited Partner any amounts owed pursuant to Credit Adjusters, as defined; 4) To pay any unpaid Developer Fee and then as a return of capital to the General Partner to the extent of any General Partner Capital Contribution; 5) To the Operating Reserve Account until such time as the aggregate amount in such account is equal to the Operating Reserve Amount, and then to the Replacement Reserve Account until such account is equal to the required balance; 6) To repay on a pro rata basis any unpaid loans made by the General Partner, as defined; 7) To the payment of any Deferred Management Fee; 8) To the General Partner to repay any amounts advanced pursuant to the Operating Deficit Guaranty and Permanent Loan Shortfall Guaranty, as defined; 11
NOTE 6 - CERTAIN PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP (Continued) 9) 90% of the balance, if any, to the General Partner as an Incentive Management Fee but not in excess of 12% of the gross revenues of the Partnership; 10) Remaining Cash Flow, if any, shall be distributed.01% to the General Partner and 99.99% to the Limited Partner. If the amount of the distribution to the Limited Partner is less than 10% of the cash flow of the Project, then the Limited Partner shall receive a priority distribution that, when added to the sum distributable to the Limited Partner shall equal 10% of cash flow. Guaranty of tax credits Under the terms of the Partnership Agreement, the General Partner has the duty to use its best efforts to ensure that the Partnership qualifies for the maximum lawful low-income housing tax credits. In the event that actual low-income housing credits accruing to the benefit of the Limited Partner are less than the amount of credits that were projected at the formation of the Partnership the contributions of capital otherwise required of the Limited Partners may be reduced, or constructive advances deemed made, in accordance with applicable provisions of the Partnership Agreement. Completion Guaranty The General Partner and Developer have provided a guarantee to fund any cost overruns necessary to complete construction of the Project. Any amounts paid by the General Partner under the Completion Guaranty shall not be reimbursed by the Partnership, nor treated as a loan or capital contribution from the General Partner. Operating Reserve In order to fund operating and debt service deficits, the Partnership shall establish an Operating Reserve of $300,000 from proceeds of the Fourth Limited Partner Capital Installment and any released proceeds from the HUD Working Capital Reserve. Upon exhaustion of the Operating Reserve Account, continuing shortfalls shall be funded from the Operating Deficit Guaranty. Operating Deficit Guaranty If, at any time during the Operating Deficit Guaranty Period (5 year period commencing with the date of stabilized operations) an operating deficit exists, then the General Partner shall contribute funds to the Partnership in an amount equal to the operating deficit. These loans are non-interest bearing and shall be repaid out of cash flow. If the Partnership fails to achieve stabilization, the Operating Deficit Guaranty Period is extended until such conditions are met. 12
NOTE 7 TRANSACTIONS WITH RELATED PARTIES Due to General Partner Affiliate As of, the Partnership received net advances of $1,727,588, from a General Partner affiliate. The advances are considered short term non-interest bearing loans to the Partnership. Developer Agreement On September 23, 2013, the Partnership entered into a $3,168,746 Development Agreement with a General Partner affiliate to perform services related to the development and construction of the Project. As of, a fee of $2,218,122 has been earned and is included in rental property of the Partnership. As of, $1,818,122 of earned developer fees were unpaid. Upon project completion, unpaid deferred developer fees accrue interest at 5% per annum and are payable from cash flow. The General Partner shall be obligated to make a capital contribution to pay any outstanding deferred development fees remaining after the thirteenth year after completion of the Project. Asset Management Fee The Partnership is to pay an affiliate of the Limited Partner an annual cumulative Asset Management Fee for its services in managing the operations of the Partnership. The Asset Management Fee commences the month following the placed in service date. The fee equals $18,150 per year (pro-rata for any partial calendar year) and increases annually 3%. The fee is payable from available cash flow. Incentive Management Fee The Partnership shall pay the General Partner an annual non-cumulative Incentive Management Fee for its services in monitoring the operations of the Partnership. The fee is to be paid from available cash flow, as defined. Property Management Agreement The Partnership executed a property management agreement with Atlantic Housing Management, LLC, a General Partner affiliate, to operate, manage and lease the property. The agreement is for one year and renews annually. The management fee, to be paid monthly, equals 4% of gross operating receipts. If Project revenues are insufficient to pay operating expenses, payment of management fees will be deferred to the extent necessary and repaid from available cash flow. No property management fees have been paid as of. 13
NOTE 8 - CONCENTRATIONS OF RISK The Partnership obtains a credit report on prospective tenants prior to entering into a lease agreement and generally requires a security deposit equal to a portion of one month s rent. Credit risk associated with leases is limited to the amount of rent receivable from tenants less security deposits. The Partnership may, at times, maintain cash balances at financial institutions which exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation ( FDIC ). The Partnership has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk to cash. The Partnership operates one property located in Austin, Texas. Future operations could be affected by changes in economic or other conditions in that geographical area or by changes in federal low-income housing subsidies or the demand for such housing. The Partnership s sole asset is the Project. The Partnership s operations are concentrated in the multifamily real estate market. In addition, the Partnership operates in a heavily regulated environment. The operations of the Partnership are subject to 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 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS The Partnership s financial instruments consist of cash and notes payable. The partnership estimates that the fair value of all its financial instruments does not differ materially from their aggregate carrying values in the accompanying balance sheet. The estimated fair value amounts have been determined by the partnership using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Partnership could realize in a current market exchange. None of the financial instruments are held for trading purposes. NOTE 10 TAX EXEMPT STATUS - BONDS The tax-exempt status of the interest on the Bonds is conditioned upon the Partnership complying with the Internal Revenue Code and applicable Treasury Regulations as they relate to the issuance of the Tax Exempt Bonds. The Partnership is required to abide by provisions of a Regulatory Agreement including, but not limited to, (1) requirements relating to the renting of units to persons of low and moderate income, and (2) substantially all the tax-exempt bond proceeds must be used to provide qualified residential projects. Failure to comply may result in the loss of taxexempt status of the interest on the Bonds retroactive to their issuance. As of December 31, 2015, the Partnership s management believes the Partnership has maintained those requirements. 14
NOTE 11 - REGULATORY AGREEMENT - FHA The Partnership executed a 221(d)(4) Regulatory Agreement for Multifamily Housing Project with the U.S. Department of Housing and Urban Development ( HUD ) dated September 20, 2013, in order to credit enhance the mortgage loan. The Company is required to abide by the regulatory agreement provisions including, but not limited to, (1) limitations on surplus cash distributions, (2) replacement reserve requirements, (3) the maintenance of certain tenant income requirements and (4) compliance with Affirmative Fair Housing regulations. HUD Regulatory Agreement provisions prevail if there is a conflict with any Partnership agreements. In addition, the HUD Regulatory Agreement requires the Partnership to maintain tenant security deposits in a trust account separate from other funds of the Project. The amount shall at all times equal or exceed the aggregate of all outstanding obligations under said account. NOTE 12 TAX CREDITS The Partnership expects to generate an aggregate of $7,224,540 of low-income housing tax credits ( LIHTC s ). The LIHTC s will become available for use by its partners pro rata over a 10-year period that will begin in 2016. In order to qualify for LIHTC s, the Project must comply with various federal and state requirements. These requirements include, but are not limited to, renting to low-income tenants at rental rates that do not exceed specified percentages of area median gross income for the first 15 years of operation. Because LIHTC s are subject to complying with various regulatory requirements, there can be no assurance that the aggregate amount the LIHTC s will be realized. In addition, failure to meet all such requirements could result in generating a lesser amount of LIHTC s than expected or recapture of previously taken LIHTC s plus interest. NOTE 13 DEFERRED REVENUE During 2015, the Partnership entered into a contract to market communication services to tenants. The Partnership received upfront fees of $27,425 after commissions. The Partnership has deferred recognition of income for the upfront fees until the property is placed in service. The Partnership will recognize income over the life of the contract. 15