Presentation of Financial Statement Disclosures Affiliate Relationships

Transcription

1 Discussion What financial statement disclosure format is the most useful to lenders and other financial statement readers for disclosing information about a not-for-profit affordable housing developer s list of interrelationships with combined or consolidated affiliates? GAAP Requirements A not-for-profit organization s audited financial statement should disclose the combined or consolidated organizations and their relationship to the parent company. This information generally appears in the first note to the financial statements, which may be called Organization and Nature of Activities, Description of Organization, or the like: Name of each consolidated subsidiary or combined entity Relationship of each consolidated or combined entity to the parent company Analysis/Input Lenders find it useful to understand more about the consolidated enterprise than the minimum GAAP requirements for disclosure, such as: Description of rental properties owned Type of entity owning each rental property Location of each property Age of property Size of property Type of property Providing this information may involve a lengthy disclosure for affordable housing developers. Not-forprofit developers with a large portfolio of properties generally present information about the entities that are combined or consolidated in a table format that is designed to provide lenders and other readers with the most meaningful summarized information about each entity and property in their portfolio. Smaller organizations may choose to write a short narrative about each entity or property in paragraph form. Such narratives can provide more information than a table, but require more time to formulate and read. Since much of the relevant data about each property lends itself to a table format, the table is considered a best practice, to be supplemented by narrative paragraphs as necessary. The structure of this disclosure, as well as the amount of information provided about each affiliate, varies in practice. A best practice is to first describe the separate legal entities that operate business lines, such as the developer and its affiliated companies, including those that provide property management, resident services, construction, lending or other lines of business. 1

2 Next, lenders are interested in the portfolio of properties. The most significant details regarding each property and the legal entity that owns it can be summarized in a table format. The last section can identify other entities included in the consolidation or combination, which don t own properties or conduct significant separate lines of business. Examples of these entities include general partners in limited partnerships or affiliates that own land that is leased to affiliates providing housing. Most not-for-profit developer organizations currently disclose the percentage of each general partner s ownership of each consolidated limited partnership, although the range is typically between.01% and 1% and the distinctions within that range are not meaningful to most readers. As a result, simply disclosing that each general partner s interest ranges from.01% to 1% may be sufficient in most cases. Additional information that cannot fit into the table may be included in paragraph narrative form (for a smaller portfolio) or in a supplemental portfolio summary report (which may either be included in the audited financial statements or separately issued). A sample portfolio summary report is available on the Strength Matters website. Sample Real Estate Properties are Owned by Parent Company and by Affiliates (Note: The sample below omits the first paragraph, which provides an overview of the entity, its mission and total size of its portfolio.) NOTE 1 ORGANIZATION AND NATURE OF ACTIVITIES ABC, Inc. (ABC) is affiliated through common board control or majority board control with other notfor-profit corporations. ABC also owns and controls subsidiary entities. All affiliates are supporting entities to ABC, or are instruments to further ABC s organizational objectives. These entities are included in the combined financial statements of ABC in accordance with generally accepted accounting principles (GAAP): ABC, Inc., a not-for-profit multi-service community development agency. ABC Management LLC, a for-profit property management company that oversees housing programs for low-income individuals and families, including elderly and disabled persons. ABC Services, Inc., a not-for-profit organization that provides or coordinates educational and social services to residents of housing managed by ABC Management. ABC Lending LLC, a for-profit lender that provides financing for low-income families home purchases. 2

3 (The following section of the sample disclosure applies to organizations that own real estate) ABC and affiliates control limited partnerships, which own affordable housing and commercial properties. Most of the partnerships participate in the Low-Income Housing Tax Credit program described in Section 42 of the Internal Revenue Code. ABC, or an affiliate, typically are the managing general partners of the limited partnerships and since ABC or an affiliate controls each partnership as defined by GAAP, the partnerships are consolidated in these financial statements. ABC also forms limited liability companies, general partnerships and not-for-profit organizations to own affordable housing properties that do not participate in the Low-Income Housing Tax Credit program. The following entities own affordable housing properties and commercial properties that are included in these financial statements: Entity Name Entity Type Relationship Location Placed in Service Date Size Type ABC Housing I, L.P. LP (1) San Francisco, units Multi-family CA ABC Housing II, L.P. LP (1) Fremont, CA units Multi-family ABC Housing III, L.P. LP (1) San Diego, CA units Senior Oceanview Homes, Inc. NPO (4) Austin, TX units Senior Bayview Housing, Inc. NPO (5) New Orleans, units Multi-family LA ABC, Inc. NPO (8) Los Angeles, units Multi-family CA Crestview Partners LP (6) New York, NY ,000 sq. ft Commercial Happy Valley LP (6) Memphis, TN units Multi-family Associates ABC Housing V, L.P. LP (2) Honolulu, HI units Multi-family Lonestar LLC LLC (7) Dallas, TX units Multi-family ABC Housing VI, L.P. LP (3) Minneapolis, MN Est units Senior Entity types in the table above consist of limited partnerships (LP), not-for-profit organizations (NPO) and limited liability companies (LLC). Relationships are as follows: (1) ABC directly owns managing general partner interests ranging between.01% and 1% of each limited partnership. 3

4 (2) One or more of ABC s affiliates owns the managing and any other general partner interests ranging between.01% and 1% of each limited partnership. (3) One of ABC s affiliates is the controlling co-general partner with another organization. Each organization s general partner interest ranges between.005% and.5% of each limited partnership. (4) The entity is controlled by ABC s board of directors through 100% common board membership. (5) The entity is controlled by ABC s board of directors through 51% to 99% common board membership. (6) ABC and/or one of its affiliates owns a 50% or greater general partner interest in the entity. As the managing general partner, ABC is deemed to control the partnership. (7) ABC and/or one of its affiliates is the sole member of the LLC or the sole partner in the partnership. (8) ABC owns the property directly. ABC forms subsidiaries to hold partner interests in the partnerships listed above, to own land leased to affiliated entities listed above and to perform other functions. These entities are also included in the combined financial statements of ABC and affiliates in accordance with generally accepted accounting principles (GAAP) because of common or majority board control of the not-for-profit organizations, or because ABC is the sole member of the limited liability companies: ABC GP, Inc., Crestview, Inc., Happy Valley, Inc., ABC Land Holdings, LLC, ABC Master Tenant, LLC, and ABC Support Corporation. An alternative to the table format is to use a paragraph describing each property such as the following example: ABC Housing III, LP was formed in 1999 to develop a 78-unit property located in San Diego, California. The 99.99% limited partnership interest was sold in 1999 to raise tax credit equity for the project. The project costs, totaling approximately $7,850,000 were financed by the tax credit equity, loans from the City of San Diego and a conventional lender. 4

5 Acknowledgements STRENGTH MATTERS gratefully acknowledges the work of S. Scott Seamands from Lindquist, von Husen & Joyce LLP and the following individuals that contributed to this paper: Denise DeMaio, Consultant, F. B. Heron Foundation, New York, NY Art Fatum, Chief Financial Officer, MidPen Housing Corporation, Foster City, CA Caroline Horton, Chief Financial Officer, Aeon, Minneapolis, MN David Keene, Director of Finance and Operations, The Neighborhood Developers, Chelsea, MA John Maneval, Director of Lending, NeighborWorks Capital Corporation, Silver Spring, MD Timothy Martin, Chief Credit Officer, Enterprise Community Loan Fund, Columbia, MD Mary White Vasys, Principal, Vasys Consulting Ltd, Chicago, IL Last Updated: October 2013 DISCLAIMER This paper contains certain recommended financial statement presentation best practices for nonprofit affordable housing organizations that develop and own affordable housing in the United States. This paper was developed by a working group comprised of chief financial officers from certain leading nonprofit affordable housing organizations active in the networks of NeighborWorks America, Housing Partnership Network and Stewards of Affordable Housing for the Future, as well as representatives of socially responsible lenders, working in conjunction with a representative from Lindquist, von Husen & Joyce LLP, an independent public accounting firm. This publication should not be construed as accounting or other advice on any specific facts or circumstances. The contents of this paper are intended for general informational purposes only, and you are urged to consult your accountants and other professional advisors concerning your specific situation and any financial reporting or accounting questions you may have. For further information, contact info@strengthmatters.net. 5