DGN II, INC. HUD PROJECT NO. 066-EE108-WAH FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION

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1 FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION Years Ended June 30, 2016 and 2015

2 C O N T E N T S Page Number REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 FINANCIAL STATEMENTS Statements of Financial Position 3 Statements of Activities 4 Statements of Cash Flows 5 Notes to Financial Statements 7 SUPPLEMENTAL INFORMATION Schedules Required by HUD 12 Schedule of Expenditures of Federal Awards 14 Notes to Schedule of Expenditures of Federal Awards 15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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 16 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE 18 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FEDERAL AWARDS 20 OFFICER S CERTIFICATION 22 MANAGEMENT AGENT CERTIFICATION 23 INDEPENDENT AUDITOR INFORMATION 24

3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of DGN II, Inc. Miami, Florida Report on the Financial Statements We have audited the accompanying financial statements of DGN II, Inc. (HUD Project No EE108-WAH) (a non-profit organization), which comprise the statements of financial position as of June 30, 2016 and 2015, and the related statements of activities, 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 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 audits 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 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

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5 STATEMENTS OF FINANCIAL POSITION June 30, 2016 and 2015 ASSETS CURRENT ASSETS Cash $ 28,169 $ 15,880 Prepaid expenses and other current assets 21,314 21,920 TOTAL CURRENT ASSETS 49,483 37,800 ASSETS WHOSE USE IS LIMITED Utility deposits - 2,373 Tenant security deposits 12,753 12,256 Reserve for replacements 154, ,584 TOTAL ASSETS WHOSE USE IS LIMITED 167, ,213 PROPERTY AND EQUIPMENT Building and improvements 6,886,266 6,886,266 Furniture and equipment 143, ,828 Construction in progress 4,895 6,460 7,034,969 7,018,554 Less accumulated depreciation (1,427,541) (1,241,746) PROPERTY AND EQUIPMENT, NET 5,607,428 5,776,808 TOTAL ASSETS $ 5,824,188 $ 5,967,821 The accompanying notes are an integral part of the financial statements.

6 LIABILITIES AND NET DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses $ 40,264 $ 46,832 Due to affiliates 377, ,578 TOTAL CURRENT LIABILITIES 417, ,410 TENANT SECURITY DEPOSITS 12,753 12,256 TOTAL LIABILITIES 430, ,666 COMMITMENTS AND CONTINGENCIES LONG-TERM RESTRICTED CAPITAL Capital advance 6,894,300 6,894,300 Less accumulated amortization (1,335,771) (1,163,414) TOTAL LONG-TERM RESTRICTED CAPITAL, NET 5,558,529 5,730,886 NET DEFICIT (164,673) (195,731) TOTAL LIABILITIES AND NET DEFICIT $ 5,824,188 $ 5,967,

7 STATEMENTS OF ACTIVITIES Years Ended June 30, 2016 and 2015 REVENUES Rental revenue - Tenants $ 131,738 $ 134,307 Grant revenue - Project Rental Assistance Contract 212, ,612 Grant revenue - Amortization of capital advance 172, ,358 Other revenue 4,345 4,476 TOTAL OPERATING REVENUES 521, ,753 EXPENSES General and administrative 95,459 97,088 Contract services 63,598 50,683 Management fees 43,761 39,143 Property insurance 25,045 24,566 Property operations and maintenance 76,300 68,902 Depreciation 185, ,429 TOTAL OPERATING EXPENSES 489, ,811 CHANGE IN NET DEFICIT 31,058 18,942 NET DEFICIT, BEGINNING OF YEAR (195,731) (214,673) NET DEFICIT, END OF YEAR $ (164,673) $ (195,731) The accompanying notes are an integral part of the financial statements

8 STATEMENTS OF CASH FLOWS Years Ended June 30, 2016 and CASH FLOWS FROM OPERATING ACTIVITIES Rental revenue - Tenants $ 131,292 $ 134,307 Grant revenue - Project Rental Assistance Contract 212, ,612 Other revenue 4,345 4,476 General and administrative (102,809) (95,075) Contract services (63,570) (49,977) Management fees (43,469) (38,884) Property insurance (25,160) (6,138) Property operations and maintenance (73,962) (68,539) NET CASH PROVIDED BY OPERATING ACTIVITIES 39,242 52,782 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in reserve for replacements (15,940) (6,579) Purchase of property and equipment (14,750) (4,950) NET CASH USED IN INVESTING ACTIVITIES (30,690) (11,529) CASH FLOWS FROM FINANCING ACTIVITIES Net change in due to affiliates 3,737 (34,730) NET INCREASE IN CASH 12,289 6,523 CASH, BEGINNING OF YEAR 15,880 9,357 CASH, END OF YEAR $ 28,169 $ 15,880 The accompanying notes are an integral part of the financial statements

9 STATEMENTS OF CASH FLOWS (Continued) Years Ended June 30, 2016 and 2015 NET CASH PROVIDED BY OPERATING ACTIVITIES Change in net deficit $ 31,058 $ 18,942 Reconciliation of change in net deficit to net cash provided by operating activities: Depreciation 185, ,429 Grant revenue - Amortization of capital advance (172,358) (172,358) Changes in operating assets and liabilities: Prepaid expenses and other current assets 2,980 (18,760) Accounts payable and accrued expenses (8,233) 22,101 Due to affiliates - 18,428 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 39,242 $ 52,782 The accompanying notes are an integral part of the financial statements

10 NOTES TO FINANCIAL STATEMENTS Years Ended June 30, 2016 and 2015 NOTE 1 - NATURE OF THE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Organization DGN II, Inc. (the Organization ) was organized on March 9, 2006, under the laws of the state of Florida as a non-stock, not-for-profit organization, for the purpose of developing a 52-unit, multifamily apartment complex to house low-income elderly persons (the Project ) under Section 202 of the National Housing Act. The Project is located in Pembroke Pines, Florida, and is operating under the name of Douglas Gardens North Towers II. The Organization is a subsidiary of Miami Jewish Health Systems, Inc. (the Sponsor ). The Organization has entered into a Capital Advance Program Use Agreement with the U.S. Department of Housing and Urban Development ( HUD ), which restricts the use of the Project solely as rental housing for very low-income elderly for not less than 40 years beginning on September 1, Tenant Security Deposits Tenant security deposits are held in a separate bank account in the name of the Project. Reserve for Replacements Reserve for replacements represents cash restricted for the future replacement of property and equipment. The funding and use of these reserve funds is subject to HUD oversight, regulation and approval. Property and Equipment Property and equipment are valued at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expenses as incurred. Purchases, replacements, and betterments of significant items are capitalized. The subject assets are being depreciated using the straight-line method over their estimated useful lives as follows: Description Furniture and equipment Building and improvements Life 5-20 Years Years - 7 -

11 NOTE 1 - NATURE OF THE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment (Continued) Depreciation expense for the years ended June 30, 2016 and 2015, amounted to $185,795 and $184,429, respectively. Rental Revenue and Grant Revenue Project Rental Assistance Contract Rental income from tenants and project rental assistance contract payments from HUD are recognized in the period occupancy rights are provided. Rental payments received in advance are deferred until earned. Rental rates are approved by HUD. Grant Revenue Capital Advance Grant revenue capital advance amortization is computed using the straight-line method over the term of the capital advance (see Note 3). Income Taxes The Organization is a not-for-profit organization exempt from income tax, as described under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no income tax liability or provision for income taxes is included in the accompanying financial statements. As of June 30, 2016, with few exceptions, the Organization is no longer subject to income tax examinations by the United States federal taxing authority for any tax years ended before the tax year ended June 30, Use of Estimates The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Subsequent Events The Organization has evaluated subsequent events through September 20, 2016, which is the date the financial statements are available to be issued. As of September 20, 2016, no subsequent events requiring modification of or disclosure in the financial statements were noted

12 NOTE 2 - ASSETS WHOSE USE IS LIMITED The reserve for replacements was established under an agreement with HUD for the purpose of repairing and replacing assets of the Project. Additions to this account consist of monthly transfers from operations and interest earnings on the funds. Disbursements of these funds can only be made with the approval of HUD. The tenant security deposit account was established according to HUD regulations for the safekeeping of the tenants initial rental deposits. Additions to this account occur when a tenant moves in. Disbursements of these funds can only be made when a tenant vacates. The account was fully funded at June 30, 2016 and Assets whose use is limited are recorded at fair value and, at June 30, 2016 and 2015, were comprised of cash amounting to $167,277 and $153,213, respectively. NOTE 3 - GRANTS Capital Advance Program The Organization received a capital advance from HUD under Section 202 of the Housing Act of 1959 in the amount of $6,894,300. The capital advance was used to pay for construction of the building. The Organization executed a Use Agreement restricting use of the Project to rental housing to eligible households, as approved by HUD for a 40-year period. The capital advance bears no interest and is not required to be repaid as long as the housing remains available to eligible, very low-income elderly or disabled persons for a period of 40 years and is operated in accordance with HUD requirements. Failure to keep the housing available for elderly or disabled persons would require the Organization to return the entire capital advance outstanding plus interest since the date of the first advance. The Organization amortizes the grant award to income using the straight-line method over the 40-year period. Amortization approximated $172,000 for each of the years ended June 30, 2016 and As a requirement of the Capital Advance Program, the Organization is required to make monthly deposits to a replacement reserve in the amount of $2,301. Project Rental Assistance Contract In January 2008, the Organization entered into a Project Rental Assistance Contract ( PRAC ) with HUD to provide project rental assistance payments on behalf of eligible tenants leasing units from the Project. On September 1, 2015, the PRAC was renewed for a one-year term. For the years ended June 30, 2016 and 2015, the Organization received $212,575 and $172,612, respectively, from HUD for the PRAC

13 NOTE 4 - RELATED-PARTY TRANSACTIONS Management Fee The property is managed by Douglas Gardens Senior Housing, Inc., an affiliate, pursuant to a Project Owner s/management Agent s Certificate approved by HUD. Effective March 1, 2012, the management agreement provides for compensation of 12.76% of gross revenues received, as defined by the agreement. The management agreement automatically renews for one year each January 31 st. Management fees for the years ended June 30, 2016 and 2015, amounted to $43,761 and $39,143, respectively. Due to Affiliates Included in due to affiliates are unsecured advances due to entities affiliated with the Organization relating to transactions involving working capital, the payment of certain operating expenses, and the payment of certain costs related to property and equipment on behalf of the Project. These amounts are unsecured, non-interest bearing, and are due on demand. NOTE 5 - GROUND LEASE ASSIGNMENT The Organization s 52-unit multifamily apartment complex was constructed on a parcel of land leased by a related party ( DGN, Inc. ) The Sponsor assigned DGN, Inc. rights to lease the land and improvements from the state of Florida (the Owner ) and required a one-time payment of $10. The lease requires that the land and improvements be used for the establishment and operations of residential housing facilities for low-income senior citizens under Section 202 of the National Housing Act. The term of the lease is 75 years, commencing on May 28, 2002, the original date of the lease, and ending on May 27, 2077, with no option for renewal. Upon expiration of the lease, all improvements to the property revert to the Owner. The Organization is responsible for all assessments on and maintenance of any improvements during the term of the lease. NOTE 6 - CONCENTRATIONS OF RISK Concentration and Regulatory Risk The Organization s assets are comprised primarily of a 52-unit apartment project, and its operations are concentrated in the multifamily real estate market. In addition, the Organization operates in a heavily regulated environment. The operations 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

14 NOTE 6 - CONCENTRATIONS OF RISK (Continued) Risk Management The Organization is exposed to various risks of loss related to theft of, damage to, and destruction of assets, and natural disasters. The Organization carries commercial insurance for these risks. For risks related to torts, errors, or omissions, or injuries to employees, the Organization is a participant in the Sponsor s professional and general liability and workers compensation liability self-insurance programs. Credit Risk Financial instruments which potentially subject the Organization to concentrations of credit risk consist principally of cash. The Organization maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Organization believes that it is not exposed to any significant credit risk on cash

15 SUPPLEMENTAL INFORMATION

16 SCHEDULES REQUIRED BY HUD Year Ended June 30, 2016 Computation of Surplus/(Deficiency) in Cash - Annual Cash $ 28,169 Tenant security deposits 12,753 Total cash 40,922 Less payables Accounts payable and accrued expenses (40,264) Tenant security deposits (12,753) Due to affiliates (377,315) Cash (deficiency) $ (389,410) See Report of Independent Certified Public Accountants

17 SCHEDULES REQUIRED BY HUD (Continued) Year Ended June 30, 2016 Schedule of Changes in Fixed Asset Accounts Beginning Ending Balance Additions Deductions Balance Building and improvements $ 6,886,266 $ - $ - $ 6,886,266 Furniture and equipment 125,828 17, ,808 Construction in progress 6,460 1,665 (3,230) 4,895 Total $ 7,018,554 $ 19,645 $ (3,230) 7,034,969 Accumulated depreciation $ 1,241,746 $ 185,795 $ - 1,427,541 Net book value $ 5,607,428 Schedule of Reserve for Replacements Balance at beginning of year $ 138,584 Total monthly deposits ($2, x 12) 27,616 Other deposits - interest income 75 Withdrawals (authorized by HUD) (11,751) Balance at end of year $ 154,524 See Report of Independent Certified Public Accountants

18 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2016 Federal Federal Federal Grantor/ Contract CFDA Expenditures Pass Through Grantor/Program Title Number Number Recognized United States Department of Housing and Urban Development: Supportive Housing for the Elderly N/A $ 6,894,300 ** Project Rental Assistance Contract FL29-S ,575 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 7,106,875 ** Represents the initial amount of the capital advance and not funds expended during the year. See Report of Independent Certified Public Accountants

19 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2016 (1) Basis of Presentation The accompanying schedule of expenditures of federal awards (the Schedule ) includes the federal award activity of DGN II, Inc. (the Organization ) under programs of the federal government for the year ended June 30, The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of the Organization, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the Organization. (2) Basis of Accounting Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement

20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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 To the Board of Directors of DGN II, Inc. Miami, Florida We have audited, in accordance with the 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, the financial statements of DGN II, Inc. (the Organization ), which comprise the statements of financial position as of June 30, 2016 and 2015, and the related statements of activities, and cash flows for the years then ended, and the related notes to the financial statements, and have issued our report thereon dated September 20, Internal Control over Financial Reporting In planning and performing our audits of the financial statements, we considered the Organization s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Organization s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audits we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified

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22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors of DGN II, Inc. Miami, Florida Report on Compliance for Each Major Federal Program We have audited DGN II, Inc. s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct, and material effect on DGN II, Inc. s major federal program for the year ended June 30, DGN II, Inc. s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal program. Auditor s Responsibility Our responsibility is to express an opinion on compliance for DGN II, Inc. s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about DGN II, Inc. s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for its major federal program. However, our audit does not provide a legal determination of DGN II, Inc. s compliance. Opinion on its Major Federal Program In our opinion, DGN II, Inc. complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30,

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24 SCHEDULE OF FINDINGS AND QUESTIONED COSTS - FEDERAL AWARDS Year Ended June 30, 2016 SECTION I - SUMMARY OF AUDITOR'S RESULTS Financial Statements Type of auditor's report issued Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None reported Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major federal awards programs: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None reported Type of auditor's report issued on compliance for major federal programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with Title 2 CFR Section (a)? Yes X No

25 SCHEDULE OF FINDINGS AND QUESTIONED COSTS - FEDERAL AWARDS (Continued) Year Ended June 30, 2016 SECTION I - SUMMARY OF AUDITOR'S RESULTS (Continued) Federal Awards (Continued) CFDA Name of Major Federal Program or Cluster Number(s) Department of Housing and Urban Development Supportive Housing for the Elderly Dollar threshold used to distinguish between Type A and Type B programs for federal awards: $750,000 Auditee qualified as low-risk auditee pursuant to the Uniform Guidance? X Yes No SECTION II - FINANCIAL STATEMENT FINDINGS No findings were reported. SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS No findings were reported. SECTION IV - FEDERAL AWARDS SUMMARY OF PRIOR AUDIT FINDINGS No findings were reported

26 OFFICER S CERTIFICATION Year Ended June 30, 2016 I hereby certify that I have examined the accompanying financial statements and accompanying supplemental data for the fiscal year ended June 30, 2016 for DGN II, Inc. and, to the best of my knowledge and belief, the same is complete and accurate. By: John F. Kelleher Chief Financial Officer Date

27 MANAGEMENT AGENT CERTIFICATION Year Ended June 30, 2016 We hereby certify that we have examined the accompanying financial statements and accompanying supplemental data for the fiscal year ended June 30, 2016, for DGN II, Inc. and, to the best of our knowledge and belief, the same is complete and accurate. By: Jason Pincus Douglas Gardens Senior Housing, Inc. Date By: Ingrid M. Rodriguez Property Manager Date EIN

28 INDEPENDENT AUDITOR INFORMATION Year Ended June 30, 2016 Firm: Moore Stephens Lovelace, P.A. Federal Employer I.D. No Florida CPA Certificate No. AD Lead Auditor: Michael Gossman, CPA, CFE, CFF 701 Brickell Avenue Suite 550 Miami, FL Telephone (305)