TABLE OF CONTENTS PAGE(S) Independent Auditors Report... 1 Statements of Financial Position September 30, 2013 and 2012... 2 Statement of Activities and Changes in Net Assets For the Year Ended September 30, 2013... 3 Statement of Activities and Changes in Net Assets For the Year Ended September 30, 2012... 4 Statements of Cash Flows For the Years Ended September 30, 2013 and 2012... 5 Notes to Financial Statements... 6 12
STATEMENTS OF FINANCIAL POSITION ASSETS 2013 2012 Cash and cash equivalents $ 24,240 $ 10,301 Investment in real estate 3,361,816 1,954,239 TOTAL ASSETS $ 3,386,056 $ 1,964,540 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable and accrued liabilities $ 4,881 $ 1,418 Annuity payable 36,038 22,985 Due to Auburn University Foundation 2,089 - TOTAL LIABILITIES 43,008 24,403 NET ASSETS Unrestricted 190,045 185,159 Temporarily restricted 1,628,693 70,941 Permanently restricted 1,524,310 1,684,037 TOTAL NET ASSETS 3,343,048 1,940,137 TOTAL LIABILITIES AND NET ASSETS $ 3,386,056 $ 1,964,540 See independent auditors report and notes to financial statements. 2
STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED SEPTEMBER 30, 2013 REVENUES TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL Public support - contributions $ - $ 1,610,315 $ - $ 1,610,315 Investment income 42 - - 42 Other revenue 25 - - 25 Grants from Auburn University Foundation 177,073 - - 177,073 Net assets released from restrictions 177,327 (54,506) (122,821) - TOTAL REVENUES 354,467 1,555,809 (122,821) 1,787,455 EXPENSES Program services Contributions to and support for Auburn University Foundation 172,403 - - 172,403 Other program services 17,180 - - 17,180 Total program services 189,583 - - 189,583 Supporting services General and administrative operations 159,998 - - 159,998 Total supporting services 159,998 - - 159,998 TOTAL EXPENSES 349,581 - - 349,581 CHANGE DUE TO OPERATIONS 4,886 1,555,809 (122,821) 1,437,874 INVESTMENT GAINS (LOSSES) Realized loss on investment in real estate - (3,098) (21,179) (24,277) Impairment on investment in real estate - (1,747) (15,727) (17,474) Change in valuation of split-interest agreement - 6,788-6,788 TOTAL INVESTMENT GAINS (LOSSES) - 1,943 (36,906) (34,963) CHANGE IN NET ASSETS 4,886 1,557,752 (159,727) 1,402,911 NET ASSETS AT BEGINNING OF YEAR 185,159 70,941 1,684,037 1,940,137 NET ASSETS AT END OF YEAR $ 190,045 $ 1,628,693 $ 1,524,310 $ 3,343,048 See independent auditors report and notes to financial statements. 3
STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED SEPTEMBER 30, 2012 REVENUES TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL Public support - contributions $ - $ 175,000 $ 144,000 $ 319,000 Investment income 177 - - 177 Rental property income 5,122 - - 5,122 Grants from Auburn University Foundation 150,000 - - 150,000 Net assets released from restrictions 448,855 (448,855) - - TOTAL REVENUES 604,154 (273,855) 144,000 474,299 EXPENSES Program services Contributions to and support for Auburn University 443,627 - - 443,627 Other program services 2,145 - - 2,145 Total program services 445,772 - - 445,772 Supporting services General and administrative operations 142,070 - - 142,070 Rental property expenses 10,149 - - 10,149 Total supporting services 152,219 - - 152,219 TOTAL EXPENSES 597,991 - - 597,991 CHANGE DUE TO OPERATIONS 6,163 (273,855) 144,000 (123,692) INVESTMENT GAINS (LOSSES) Realized loss on investment in real estate - (1,327) - (1,327) Impairment on investment in real estate - (35,090) - (35,090) Change in valuation of split-interest agreement - 77-77 TOTAL INVESTMENT (GAINS) LOSSES - (36,340) - (36,340) CHANGE IN NET ASSETS 6,163 (310,195) 144,000 (160,032) NET ASSETS AT BEGINNING OF YEAR 178,996 381,136 1,540,037 2,100,169 NET ASSETS AT END OF YEAR $ 185,159 $ 70,941 $ 1,684,037 $ 1,940,137 See independent auditors report and notes to financial statements. 4
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED CASH FLOWS FROM OPERATING ACTIVITIES 2013 2012 Changes in net assets $ 1,402,911 $ (160,032) Adjustments to reconcile changes in net assets to net cash used by operating activities: Contributions of real estate (1,610,315) (319,000) Realized loss on sale of real estate investment 24,277 1,327 Impairment on investment in real estate 17,474 35,090 Change in valuation of split-interest agreement (6,788) (77) Change in assets and liabilities: Accounts payable and accrued liabilities 3,463 (2,810) Due to Auburn University - (37,434) Due to Auburn University Foundation 2,089 (4,208) Net cash used by operating activities (166,889) (487,144) CASH FLOWS FROM INVESTING ACTIVITIES Capital additions to real estate (28,072) (18,347) Proceeds from sale of real estate investment 208,900 463,674 Net cash provided by investing activities 180,828 445,327 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,939 (41,817) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,301 52,118 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,240 $ 10,301 SUPPLEMENTAL DISCLOSURES: CASH FLOW INFORMATION Noncash increase (decrease) in Due to Auburn University $ - $ (37,434) Noncash increase (decrease) in Due to Auburn University Foundation 2,089 (4,208) NONCASH INVESTING AND FINANCING ACTIVITIES Real estate received for long-term purposes $ - $ 144,000 See independent auditors report and notes to financial statements. 5
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Auburn University Real Estate Foundation, Inc. (the Real Estate Foundation) is a nonprofit organization existing solely for the purpose of receiving and administering real estate gifts and periodically undertaking construction projects on the Auburn University Foundation s (the AU Foundation) behalf. The Real Estate Foundation s financial statements are consolidated into the AU Foundation s financial statements since the AU Foundation is the sole member of the Real Estate Foundation. Both entities are tax-exempt under Section 501(c)(3) of the Internal Revenue Code (the Code) and file separate returns. The Real Estate Foundation operates on a fiscal year ending September 30 (year). The AU Foundation is a nonprofit organization existing solely for the purpose of receiving and administering funds for the use and benefit of Auburn University (the University). The AU Foundation annually elects the Real Estate Foundation s board of directors. Out of the five directors with full voting powers, four were AU Foundation board of directors. The Real Estate Foundation s incorporator serves as legal counsel for the Real Estate Foundation as well as the AU Foundation. The Vice President for Development of the University serves as president for the Real Estate Foundation as well as the AU Foundation. The Director for Development Accounting of the University serves as assistant treasurer for the Real Estate Foundation as well as the AU Foundation. The Director and Assistant Director for the Endowment Investment Office of the University serve as assistant treasurers for the Real Estate Foundation as well as the AU Foundation. The Executive Coordinator for the Vice President for Development of the University serves as secretary for the Real Estate Foundation as well as the AU Foundation. The Development Program Coordination for Trusts, Estates and Planned Giving Office under the Vice President for Development of the University serves as assistant secretary for the Real Estate Foundation. Basis of Accounting and Presentation The accompanying financial statements have been prepared on the accrual basis of accounting. The Real Estate Foundation's net assets are segregated into three classifications: Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed restrictions. Items included in this net asset category include unrestricted gifts and earnings on these funds. Temporarily Restricted Net Assets Temporarily restricted net assets are subject to donor-imposed restrictions that may or will be satisfied either by actions of the Real Estate Foundation or the passage of time. Items included in this net asset category include pledges to unrestricted and temporarily restricted accounts, temporarily restricted gifts and earnings on endowment funds expendable for purposes stipulated by the donor. Temporarily restricted net assets are used first before unrestricted net assets to meet an obligation. When such restrictions are satisfied, the amounts are reclassified to unrestricted net assets and are reported as net assets released from restrictions on the Statements of Activities and Changes in Net Assets. 6
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Permanently Restricted Net Assets Permanently restricted net assets are subject to donor-imposed restrictions to be maintained permanently. Items included in this net asset category include gifts for which donors have stipulated that the corpus be held in perpetuity with only the income being available for expenditure. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted funds held in interest-bearing demand deposit accounts. Deposits of $250,000 or less are insured by the Federal Deposit Insurance Corporation. Deposits in excess of the first $250,000 are covered by the Security for Alabama Funds Enhancement (SAFE) program enacted by State of Alabama law. This program requires the financial institution to pledge eligible collateral, such as U. S. Treasuries and federal agency instruments, to be held by a qualified custodian appointed by the State Treasurer. Fair Value Measurement The Real Estate Foundation follows the Financial Accounting Standards Board (FASB) guidance related to fair value measurements and disclosures. This guidance provides a framework for measuring fair value and a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: Level 1 -- Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Real Estate Foundation has the ability to access. Level 2 -- Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs which are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 -- Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. 7
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Financial Instruments The Real Estate Foundation has provided fair value estimates for certain financial instruments in the notes to financial statements. The carrying amount of cash and cash equivalents, and accounts payable and accrued liabilities approximate fair value because of the terms and/or relatively short maturity of those financial assets and liabilities. Investment in Real Estate Real estate received by gift is recorded at the fair value at the date of contribution as determined by independent appraisal. If real property is revalued, a decrease in the valuation of real estate is reported as impairment on investment in real estate on the Statements of Activities and Changes in Net Assets. Split-Interest Agreement The Real Estate Foundation is the charitable beneficiary of an irrevocable split-interest charitable remainder trust under which the donor-designated beneficiaries will receive payments during their lifetime, and the Real Estate Foundation receives the assets upon the termination of the trust subsequent to their death. Contribution revenue is recorded at the fair value of the assets contributed less the present value of the payments expected to be made to the beneficiaries in accordance with the terms of the agreement. The present value of the payments is estimated by using the applicable federal discount and mortality rates published by the federal government. The change in the valuation of the split-interest agreement, based on the change in the assets received and liabilities incurred under the agreement, is reported as change in valuation of splitinterest agreement on the Statements of Activities and Changes in Net Assets. When the Real Estate Foundation serves as trustee of the split-interest agreement, contributed assets are recorded as investments, and the present value of the amounts due to the other beneficiaries is recorded as annuity payable on the Statements of Financial Position. Contribution revenue is recognized when the agreement is executed. Assets recorded under these agreements totaled $52,880 and $32,652 as of September 30, 2013 and 2012, respectively. Contributions Contribution revenue is recorded at the fair value of the assets or services received or the fair value of the liabilities satisfied on the date of distribution. An unconditional promise to give cash and other assets is recorded at the date the promise is received at its net realizable present value. A contribution is recorded as unrestricted revenue in the period the asset is received if there is no donor restriction that limits the use of the asset. A contribution is recorded as either temporarily or permanently restricted when there is a donor restriction that limits the use of the donated asset. When a donor restriction expires, either when a stipulated time restriction ends or purpose restriction is satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions on the Statements of Activities and Changes in Net Assets. 8
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates in the Preparation of Financial Statements Management has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Income Tax-Exempt Status The Real Estate Foundation has received a letter from the Internal Revenue Service recognizing the Real Estate Foundation as a tax-exempt organization under Section 501(c)(3) of the Code. Accordingly, no provision for income taxes has been made in the accompanying financial statements. The Real Estate Foundation follows the accounting guidance for uncertainty in income taxes using the provisions of FASB Accounting Standards Codification (ASC), 740, Income Taxes. As of September 30, 2013 and 2012, the Real Estate Foundation had no uncertain tax positions that qualify for recognition or disclosure in the financial statements and no interest and penalties related to income taxes. The Real Estate Foundation has filed its tax returns through September 30, 2012. The tax returns for years ended September 30, 2010 and thereafter are subject to audit by the taxing authorities. Subsequent Events Management has evaluated subsequent events through December 16, 2013, which is the date the financial statements were available to be issued. 2. FAIR VALUE MEASUREMENT The Real Estate Foundation s assets and liabilities measured at fair value are based on one or more of three valuation techniques, which include the following: Market approach prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Cost approach amount that would be required to replace the service capacity of an asset (that is, replacement cost). Income approach techniques to convert future amounts to a single, present amount based on market expectations (including present value techniques, option-pricing models, and lattice models). The fair value of investment in real estate is determined from periodic valuations prepared by independent appraisers. The fair value of the liabilities associated with split-interest agreements is based on the discounted net present value of the expected cash flows. There have been no changes in the methodologies used for the years 2013 and 2012. 9
NOTES TO FINANCIAL STATEMENTS 2. FAIR VALUE MEASUREMENT (Continued) The following table presents the financial assets and liabilities subject to fair value measurement by valuation hierarchy level as of September 30, 2013. Fair Value Level 1 Level 2 Level 3 Asset: Investment in real estate $ 3,361,816 $ - $ 3,361,816 $ - Liability: Annuity payable $ 36,038 $ - $ - $ 36,038 The following table presents the financial assets and liabilities subject to fair value measurement by valuation hierarchy level as of September 30, 2012. Fair Value Level 1 Level 2 Level 3 Asset: Investment in real estate $ 1,954,239 $ - $ 1,954,239 $ - Liability: Annuity payable $ 22,985 $ - $ - $ 22,985 The following table presents a roll forward of the amounts for annuity payable: 2013 2012 Beginning balance $ 22,985 $ 23,062 Change in valuation of split-interest agreement 13,053 (77) Ending balance $ 36,038 $ 22,985 3. INVESTMENT IN REAL ESTATE Real estate held for investment consists of the following as of September 30, 2013 and 2012: 2013 2012 Jackson County, AL $ 1,590,744 $ 465,744 Lee County, AL - 220,325 Talladega County, AL 124,561 123,333 Escambia County, FL 872,953 866,578 Gadsden County, FL 169,033 169,033 Fannin County, GA 52,881 32,652 Fayette County, GA 62,158 76,574 Gwinnett County, GA 489,486 - Total investment in real estate $ 3,361,816 $ 1,954,239 10
NOTES TO FINANCIAL STATEMENTS 4. RELATED PARTY TRANSACTIONS The AU Foundation granted the Real Estate Foundation $177,073 and $150,000 during the years 2013 and 2012, respectively, and these amounts are reported as grants from Auburn University Foundation on the Statements of Activities and Changes in Net Assets. The Real Estate Foundation reimbursed the AU Foundation $4,293 and $7,079 during the years 2013 and 2012, respectively, for general and administrative expenses. Of these reimbursements, $2,089 was outstanding as of September 30, 2013 and is reported as due to Auburn University Foundation on the Statement of Financial Position. The Real Estate Foundation provided cash grants to the AU Foundation for $49,669 to the Sam Ginn College of Engineering general gift fund and $122,734 to an endowed scholarship during the year 2013. The Real Estate Foundation entered into an agreement with the University to provide certain services and facilities. The Real Estate Foundation reimbursed $113,851 and $100,978 for agreement-related services and facilities during the years 2013 and 2012, respectively. The Real Estate Foundation reimbursed the University $790 during the year 2013 for general and administrative expenses. The Real Estate Foundation provided a cash grant to the University for $443,627 for the Sam Ginn College of Engineering for capital construction during the year 2012. 5. NET ASSETS Temporarily restricted net assets as of September 30, 2013 and 2012 are available for expenditure for the following purposes: 2013 2012 Academic units $ 4,429 $ 56,001 Capital 1,610,315 7,604 Trusts 13,457 6,669 Other 492 667 Total temporarily restricted net assets $ 1,628,693 $ 70,941 The Real Estate Foundation applies FASB guidance on the net asset classification of donorrestricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). The guidance also requires disclosures about an organization's endowment funds. Permanently restricted net assets represent principal of endowment gifts which are to be invested in perpetuity, the income and gains from which are either added to endowment corpus or expended in accordance with donor-imposed restrictions, if any. While the Real Estate Foundation does not administer an endowment, it does accept contributions of real estate that will fund donor-designated endowments administered by the AU Foundation. These contributions are recorded at fair value on the date of the contribution as public support in the permanently restricted class on the Statements of Activities and Changes in Net Assets and are recorded as permanently restricted net assets on the Statements of Financial Position until the properties are sold. When transferred, the net assets are released from restriction and reported on the Statements of Activities and Changes in Net Assets. 11
NOTES TO FINANCIAL STATEMENTS 5. NET ASSETS (Continued) Permanently restricted net assets, whose income and gains are restricted for donor-imposed purposes as of September 30, 2013 and 2012, are designated for the following purposes: 2013 2012 Academic units $ 30,933 $ 41,942 Faculty support 461,012 461,012 Student aid 863,352 1,012,070 Trusts 169,013 169,013 Total permanently restricted net assets $ 1,524,310 $ 1,684,037 12