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HomeMy WebLinkAbout01-29-08 TSH Denton Agenda Packet TEXAS1W. STUDENT " HousING AGENDA THE BOARD OF DIRECTORS OFT E TEXAS STUDENT HOUSING CORPORATION- DENTON PROJECT (AN INSTRUMENTALITY OFT E TOWNTOF WESTLA ) JANUARY 29,2008 5:30 P.M. TEXAS STUDENT HOUSING OFFICE 3 VILLAGE CIRCLE, SUITE 207 WESTLAKE, TE S 1. CALL TO ORDER. 2. DISCUSS AND CONSIDER APPROVAL OF DENTON PROPERTY ANNUAL AUDIT FOR FY 2006-2007 PRESENTED BY PATILLO BROWN ILL, L.L.P. 3. REVIEW AND APPROVE MINUTES OF NOVEMBER 20,2007. 4. ADJOURN. CERTIFICATION I certify that the above notice was posted at the Town Hall of the Town of Westlake,3 Village Circle,and Westlake Civic Campus,2600 J.T. Ottinger Road,Westlake,Texas,on or before Friday,January 25,2008,by 5 p.m. under the Open Meetings Act,Chapter 551 of the Texas Government Code. Kim Sutter,TRMC, Town Secretary If you plan to attend this public meeting and have a disability that requires special needs,please advise the Town Secretary 48 hours in advance at 817-490-5710 and reasonable accommodations will be made to assist you. TEXASI STUDENT "" HouSING ww� MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF THE TEXAS STUDENT HOUSING CORPORATION—DENT ON PROJECT (AN INSTRUMENTALITY OF THE TOWN OF STLA ) November 20,2007 PRESENT: Chair Jim Carter and Directors' Larry Darlage, George Ledak, Jac Irvine, Melanie Lekkos, Jill McKean, and Chuck Schultz. ABSENT: General Counsel Scott Bradley. OTHERS PRESENT: President .Hank Smyth, Finance Manager Pete Ehrenberg; and Secretary Kim Sutter. I. CALL T® ORDER. Chairman Carter called the meeting at 6:34 p.m. 2. CONSIDER DESIGNATING U.S. BAND AS THE TRUSTEE FOR THE TEXAS STUDENT HOUSING CORPORATION—DENTON PROJECT. Chairman Carter introduced the item and asked for a motion. MOTION: Director Schultz made a motion to designate U.S. Bank as the Trustee for the Texas Student Housing Corporation — Denton Project. Director Darlage seconded the motion. The motion carried by a vote of 7-0. 3. CIE AI®TD APPROVE MINUTES OF JUNE 2 , 2007. Chairman Carter introduced the item and asked for a motion. MOTION: Director Irvine made a motion to approve the minutes as presented. Director McKean seconded the motion. The motion carried by a vote of 7-0. TSHA—Denton Project Page 2 of 2 November 20,2007 . ADJOURN. There being no further business before the Board, Chairman Carter declared the meeting adjourned at 6:35 p.m. The Minutes are approved and certified to be a true and correct reflection of the actions of the officers and members of the Board, and is hereby certified to be an official copy thereof, on file among the official records of the Board, on this the 29th day of January 2008. Jim Carter, Chairman ATTEST: Kim Sutter, TRMC, Secretary � � � : ' � • . a � � .< FINANCIAL SECTION Independent Auditors' ---.----.--..—...—.---...—..—.—..---------_-... 1 -2 Management's Discussion and Analysis .—..—.—....-..—.-.—....-....--.--.........--.--_. 3-6 Financial Statements: Statementof Net Assets................................................................................................... 7 Statement ofRevenues, Expenses ood Changes io Net Assets........................................ 0 Statement n[Cash Flows ................................................................................................. g SUPPLEMENTAL SCHEDULES Schedule 7— Schedule of Revenues and Expenses............................................................. 19 PA'I' TIL. L. , BROWN & HILL., L_L_P. CERTIFIED PUBLIC ACCOUNTANTS 0 BUSINESS CONSULTANTS 11►11791�iI►117�1►�i/_�il�i1ILi7�: : ? ' i�1 To the Board of Directors Texas Student Housing Corporation— The Ridge at North Texas Project Westlake, Texas We have audited the accompanying financial statements of Texas Student Housing Corporation— The Ridge at North Texas Project (the "Project"), as of and for the year ended August 31, 2007, which collectively comprise the Project's basic financial statements as listed in the table of contents. Texas Student Housing Corporation — The Ridge at North Texas Project is a component unit of the Town of Westlake. These financial statements are the responsibility of the Project's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note I, the financial statements present only the Project and do not purport to, and do not, present fairly the financial position of Texas Student Housing Corporation as of August 31, 2007, and the changes in its financial position and cash flows, where applicable, for the period then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Texas Student Housing Corporation— The Ridge at North Texas Project as of August 31, 2007, and the changes in financial position, and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Texas Student Housing Corporation — The Ridge at North Texas Project will continue as a going concern. As discussed in Note I to the financial statements, the Project is in default on its bonds and bondholders may choose to continue as a going concern. Management's plans in regard to these matters are discussed in Note I. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 401 WEST HIGHWAY 6 E P.O.BOX 20725 M WACO,`i'X 76702-0725 N(254)772-4901 E FAX:(254)772-4920 fflwww.pbhcpacom AFFILIATE OFFICES:BROWNSVILLE,TX(956)544-7778 N HILLSBORO,TX(254)582-2583 TEMPLE,TX(254)791-3460 0 WHITNEY,TX(254)6944600 M ALBUQUERQUE,NM(505)266-5904 The management's discussion and analysis on pages 3 through 5 are not a required part of the basic financial statements but are supplemental information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming an opinion on the basic financial statements that collectively comprise the Project's basic financial statements. The accompanying supplemental information on pages 19 and 20 is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplemental information has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. D 8,, %# L.L. P I wite, I January 24, 2008 N AD As staff of the Texas Student Housing Corporation (the "Corporation") — The Ridge at North Texas Project (the "Project"), we offer the readers of the Project's financial statements this narrative overview and analysis of the financial activities of the Project for the fiscal year ended August 31, 2007. We encourage readers to consider the information presented herein in conjunction with the Project's financial statements which follow this section. As the Corporation is a component unit of the Town of Westlake and is thus considered a governmental entity, Governmental Accounting Standards Board Statement 34, Basic Financial Statements—and Management's Discussion and Analysis for State and Local Governments has been implemented. The reader should note that this financial report addresses only the financial condition of the Project itself for 2007. ® The liabilities of the Project exceeded its assets at the close of the fiscal year by $8,220,868, a decrease of$1,551,893 over the prior year. The primary reason for this increase is debt service payments. Operating revenue of$3,999,846 is $190,488 less than budget. Operating expense is $159,456 better than budget. Major components of the expense variance were utilities, and repair and maintenance as compared to budget. ® At the end of the current fiscal year, the total cash balances were $454,504 in unrestricted cash and $2,523,559 in restricted cash. This discussion and analysis is intended to serve as an introduction to the Project's basic financial statements. The Project's report consists of three parts, Management's Discussion and Analysis, the basic financial statements, and notes to financial statements. The basic financial statements include a statement of net assets, statement of revenues, expenses and changes in net assets, a statement of cash flows and supplemental schedules. The Project is being treated as a going concern. The Project is in default on its bonds and is not financially able to make scheduled principal and interest payments on its outstanding debt. They are considered an event of default by the Trustee, which gives the bondholders the right to accelerate and demand payment of the bonds in full. Management and the property manager are in the process of developing plans to increase occupancy and rental rates at the property to improve its financial performance. 9 The statement of net assets presents information on all of the Project's assets and liabilities with the difference between the two reported as net assets. TABLE 1 TEXAS STUDENT HOUSING CORPORATION- THE RIDGE AT NORTH TEXAS PROJECT NET ASSETS Current and other assets Capital assets Total assets Current liabilities Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted Total net assets Business-tvne Activities 2007 2006 $ 3,839,895 $ 4,032,368 22,699,714 23,492,952 26,539,609 27,525,320 34,760,477 34,194,295 34,760,477 34,194,295 ( 7,690,537) ( 7,089,81.4) 656,013 1,412,324 ( 1,186,344) ( 991,485) $( 8,220,868) $( 6,668,975) The statement of revenues, expenses and changes in net assets accounts for all of the Project's revenues and expenses regardless of when cash is paid or received. TABLE 2 TEXAS STUDENT HOUSING AUTHORITY- THE RIDGE AT NORTH TEXAS PROJECT CHANGES IN NET ASSETS Business-type Activities 2007 2006 Total operating revenue $ 3,999,846 Total operating expenses ( 2,766,614) Total operating income 1,233,232 Interest income 79,589 Interest expense ( 2,864,714) Total nonoperating loss ( 2,785,125) CHANGE IN NET ASSETS ( 1,551,893) NET ASSETS,BEGINNING ( 6,668,975) NET ASSETS,ENDING $( 8,220,868) The statement of cash flows recaps how cash changed from year to year. $ 3,629,813 ( 2,877,782) 752,031 143,381 ( 2,256,436) ( 2,113,055) ( 1,361,024) ( 5,307,951) $( 6,668,975) Dotes to financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. Restricted cash. Restricted cash represents monies held in escrow by the trustee and are restricted for the payment of expenses as outlined in the Installment Sale Agreement. As of August 31, 2007, these balances were as follows: Revenue Fund $( 1,880) Bond Fund, Series 2001A 326,290 Bond Fund, Series 2001B 22,848 Debt Service Reserve Fund, Series 2001A 2,266,714 Debt Service Reserve Fund,Series 2002B 354 Repair and Replacement Fund 40 Trustee Fee Fund 274 Series A Principal Fund ( 91,089) Series B Principal Fund 1 Denton(UNT)Operating Reserve 7 Total $ 2,523,559 Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Bonds payable. As of August 31, 2007, since the bonds are in default, all amounts are considered due immediately. 2001A Bonds 2001B Bonds Less discounts Total $ 28,005,000 3,240,000 ( 859,749) $ 30,385,251 For the fiscal year ending August 31, 2008, the total principal and interest payment is calculated at $2,620,593. A total of$485,000 in principal was paid during 2007. Leases at the Project are primarily 12-month leases, however, due to competitive and market conditions, a relatively minor number of 6 and 10-month leases exist. These leases do bring a monthly premium over the 12-month leases. Occupancy for the fiscal year ending August 31, 2008, forecasts at 88%. Rental rates will see a small increase. This is exacerbated by the fact that University of North Texas does not allow freshmen to live in off-campus housing. This financial report is designed to provide the reader with a general overview of the Project's finances and to demonstrate the Project's accountability for the money it receives. If you have any questions about this report, or need additional information, please contact Pete Ehrenberg at (817) 490-5723, or Hank Smyth at (817) 281-5053. 0 ASSE'T'S Current assets: Cash Restricted cash Accounts receivable, net reserve of$2,857 Prepaid expenses Property management receivable Total current assets Capital assets: Land Other capital assets,net of accumulated depreciation Total capital assets Other assets: Deferred financing costs, net of amortization Total other assets Total assets LIABILITIES Current liabilities: Trade accounts payable Accrued liabilities Management and development fees payable Deferred revenue and prepaid rent Accrued interest Property management advance Bonds payable Total current liabilities NET ASSETS Invested in capital assets,net of related debt Restricted for debt service Unrestricted Total net assets S 454,504 2,523,559 3,091 18,315 31,420 3,030,889 2,200,000 20,499,714 22,699,714 809,006 26,539,609 186,924 353,961 831,011 631,047 1,867,546 499,737 30,390,251 34,760,477 ( 7,690,537) 656,013 ( 1,186,344) S( 8,220,868) G OPERATING REVENUES Rental $ 3,795,984 Other 203,862 Total operating revenues 3,999,846 OPERATING EXPENSES Persomlel 306,500 Contract services 44,669 Utilities 518,399 Repairs and maintenance 38,543 Turnover 126,913 Advertising and promotion 39,975 Achninistration 166,425 Management fees 184,61.7 Replacements 223,592 Depreciation and amortization 1,114,626 Travel 2,355 Total operating expenses 2,766,614 OPERATING INCOME 1,233,232 NONOPERATING REVENUES (EXPENSES) Interest income 79,589 Interest expense ( 2,864,714) Total nonoperating revenues (expenses) ( 2,785,125) The accompanying notes are an integral part of these financial statements. 7 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants $ 4,125,137 Cash paid to employees 291,143) Cash paid to suppliers 449,333) Net cash provided by operating activities 3,384,661 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable 442,515) Interest paid 2,902,199) Net cash used in capital and related financing activities 3,344,714) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 79,589 Net cash provided by investing activities 79,589 NET CHANGE IN CASH AND CASH EQUIVALENTS 119,536 CASH AND CASH EQUIVALENTS, BEGINNING 2,858,527 CASH AND CASH EQUIVALENTS, ENDING S 2,978,063 Cash S 454,504 Restricted cash 2,523,559 Total cash and cash equivalents S 2,978,063 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income 1,233,232 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 1,114,626 Changes in operating assets and liabilities: Accounts receivable 30,178 Prepaid expenses 2,072) Trade accounts payable 51,644) Accrued interest 949,871 Deferred revenue 170,466 Tenant security deposits 75,353) Other current liabilities 15,357 Net cash provided by operating activities $ 3,384,661 N1 10 1 1 . ,. 1. � t AUGUST 31,2007 Texas Student Housing Corporation—The Ridge at North Texas (the "Project"), a Texas nonprofit organization, was incorporated on May 17, 2001, a component unit of the Town of Westlake, Texas (the "Town") pursuant to Section 53.35(b) of the Texas Education Code, as amended (the "Act"). The Project's primary purpose is to purchase, own and operate a student housing facility known as Texas Student Housing Corporation—The Ridge at North Texas. The Project was purchased from Jefferson Commons—Denton, L.P. on July 17, 2001. The Project obtained its financing through the issuance of Texas Student Housing Corporation — Denton Project Texas Student Housing Revenue Bonds (University of North Texas Project), Series 2001A and Subordinate Series 2001B (the 'Bonds"). The Bonds were issued through a Trust Indenture (the "Trust Indenture") by and between the Corporation and The Bank of New York (the "Trustee"). The Series 2001A and Subordinate Series 2001B bonds were issued in the face amounts of $29,105,000 and $5,250,000, respectively. The accompanying financial statements present the operations of the Project, whose revenue streams are pledged for the bonds described herein. The Corporation was also established to acquire educational facilities and housing facilities to be used by the students, faculty and staff of institutions of higher education and facilities incidental, subordinate or related thereto or appropriate within the State of Texas. The Project was operated and managed under the terms of the (a) Property Management and Leasing Agreement by and between the Corporation and JPI Campus Quarters Management, L.P. ("JPI") and (b) the Asset Management Agreement by and between the Corporation and JPI Apartment Management, L.P., up until September 30, 2004. The Project subsequent to September 30, 2004, is managed and operated by Asset Campus Housing under the terms of a Property Management and Leasing Agreement. The 2007 financial statements were prepared assuming the Project will continue as a going concern. The Project's bonds payable are considered to be in default due to the discontinuance of principal and interest payments. These are considered an event of default by the Trustee, which gives the bondholders the right to accelerate and demand payment of the bonds in full. Management and the property manager are in the process of developing and implementing plans to increase occupancy and rental rates at the property to improve its financial performance. 6 A summary of the Project's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: For financial reporting purposes, management has considered all potential component units. The decision to include a potential component unit in the reporting entity was made by applying the criteria set forth in GASB Statement No. 14 as amended by GASB Statement No. 39. The criteria used is as follows: Financial Accountabidaty — The primary government is deemed to be financially accountable if it appoints a voting majority of the organization's governing body and 1) is able to impose its will on that organization; or 2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. Additionally, the primary government may be financially accountable if an organization is fiscally dependent on the primary government regardless of whether the organization has a separately elected governing board appointed by a higher level of government or a jointly appointed board. The Project uses the economic resources measurement focus. This means that all assets, liabilities, equity, revenues, and expenses are accounted for using the accrual basis of accounting. Revenue is recognized when earned and expenses are recognized when they are incurred. In applying the requirements of GASB Statement No. 20, the Project has chosen to apply all applicable GASB pronouncements as well as Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The Project is an instrumentality of the Town and, therefore, its income is not subject to federal income taxation pursuant to Section 115 of the Internal Revenue Code. � Il II• SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A. Reporting Entity (Continued) err •1 The Project considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. At August 31, 2007, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of $2,523,559 that is held by the Trustee for the bonds payable under provisions of the Trust Indenture. During the year ended August 31, 2007, the investment income received from cash was $79,589. See Note III for risk disclosures and breakdown of restricted cash accounts. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management writes off uncollectible amounts through a reduction to revenue and a credit to accounts receivable based on its assessment of the outstanding receivables. At year- end, management assesses the accounts receivable balance and establishes a valuation allowance based on historical experience and an evaluation of the outstanding balances. An allowance of$2,857 has been provided at August 31, 2007. Costs associated with the issuance of bonds are deferred and amortized over the term of the bonds. 0=22 �Tllfi� All adverting costs are expensed as they are incurred. Advertising costs for the year ended August 31, 2007, were approximately $40,000. Property and equipment have been recorded at the date of acquisition at cost. Routine maintenance and repair costs to ready the units for the next period are expensed as incurred. IM II. SUMNIARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Assets,Liabilities and Net Assets or Equity (Continued) Capital Assets (Continued) Expenditures directly related to the improvement of property are capitalized at cost. The Project capitalizes the cost of roof replacements and expenditures for other major property improvements. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Estimated Asset Class Useful Lives Building 30 years Furniture and fixtures 3-20 years At August 31, 2007, the carrying amount of Texas Student Housing Authority—The Ridge at Forth Texas Project deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total $2,978,063 of which $2,523,559 represented restricted cash. Restricted cash represents amounts placed on deposit in accounts and held by the Trustee, which are restricted for the payment of expenses as required by the Trust Indenture. At August 31, 2007, restricted cash consists of the following funds and accounts: Fund/Account Description Revenue Fund 1,880) Bond Fund,Series 2001A 326,290 Bond Fund,Series 2001B 22,848 Repair and Replacement Fund 40 Trustee Fee Fund 274 Series A Principal Fund ( 91,089) Series B Principal Fund 1 Operating Reserve Fund 7 Debt Service Reserve Fund,Series 2001A 2,266,714 Debt Service Reserve Fund,Series 2001B 354 Total $ 2,523,559 IN III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) Restricted Cash (Continued) The following is a brief description of the funds and accounts making up the restricted cash balance at year-end, as defined by the Trust Indenture: Revenue Fund — The Revenue Fund was established for monthly deposits from the depository account that holds general revenues of the Project. All monies are deposited in the Revenue Fund and then properly distributed to the other funds, as required by the Trust Indenture. Amounts in the fund at year-end represent amounts that have not been distributed to the other funds due to timing of the interfund transfers. Bond Fund— The Trustee makes monthly deposits in the Bond Fund pursuant to the Trust Indenture. Amounts in the Bond Fund shall be used solely to fund the payment of principal and interest on the bonds, for the redemption of the bonds at or prior to maturity, and to purchase bonds on the open market. In the event of default, amounts in this fund may pay the fees and expenses of the Trustee prior to making any payments to the bondholders. This fund has two accounts, the Series 2001A and the Series 2001B accounts. Repair and Replacement Fund— Amounts in the Repair and Replacement Fund may be (a) used to pay the maintenance and repair costs related to the Project, which the Project is obligated to pay pursuant to the Trust Indenture and (b) transferred to the Bond Fund to pay principal of or interest on the bonds to the extent there are insufficient monies in the Bond Fund. Surplus Fund— The Trustee shall deposit any remaining amount in the Revenue Fund into the Surplus Fund. Amounts on deposit in the Surplus Fund will be released to the Project if certain release tests are satisfied. If the release tests are not satisfied, the Trustee will retain the monies on deposit in the Surplus Fund. Trustee Fee Fund—Amounts are deposited in the Trustee Fee Fund on a monthly basis and are intended to pay the fees to the Trustee at year-end. Series A Principal Fund — Amounts in the Series A Principal Fund represent sinking fund payments set aside for repayment of the principal balance on the Series A Bonds. Series B Principal Fund — Amounts in the Series B Principal Fund represent sinking fund payments set aside for repayment of the principal balance on the Series B Bonds. IN III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) Restricted Cash (Continued) Operating Reserve Fund — Amounts in the Operating Reserve Fund may be transferred to the property Manager to fund operations if the transfer from the Revenue Fund is not sufficient to pay operating expenses. Amounts may also be transferred to the Bond Fund to pay principal and interest on the bonds; to the extent there are insufficient monies in the Bond Fund on any interest payment date. Debt Service Reserve 2001A Account — The amounts on deposit in this account are to be used for the purpose of playing principal and interest on the Series 2001A Bonds as they become due in the event there should be insufficient funds in the Bond Fund. Debt Service Reserve 2001R Account — The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Series 2001B Bonds as they become due in the event there should be insufficient funds in the Bond Fund. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies relating to a governmental entity's cash and investments. Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an instrument. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. Texas Student Housing Corporation — The Ridge at North Texas Project is not significantly exposed to interest rate risk as all investments earn a variable rate. Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Public Funds Investment Act has a minimum rating that is required for investments. Texas Student Housing Corporation — The Ridge at North Texas Project holds all of its cash and investments with the bond Trustee and commercial banks. � . ,; , III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) The investment policy of Texas Student Housing Corporation — The Ridge at North Texas Project is subject to the indenture agreement of the bonds. As of August 31, 2007, the Project held all of its restricted cash balances with the Trustee, which represents 85% of the total cash and investments held at August 31, 2007. I # 4 • 1 Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act does not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least the bank balances less FDIC insurance at all times. As of August 31, 2007, the Project has unrestricted cash of $454,504 (bank balance $461,310). Of the bank balances, $100,000 was covered by federal depository insurance while the remaining $361,310 was uncollateralized. The Project has a Bank Deposit Guarantee Bond from the Project's depository in the amount of$3,000,000. B. Property Management Advance and Management Fees As of August 31, 2007, the Project has recorded a liability to JPI for amounts received of approximately $499,737. These advances have been made to the Project according to the terms of the Agreements. Further, the Agreement requires interest to accrue on the advances at the "Prime Rate" as published in The Wall Street Journal, plus 100 basis points 9.25% at August 31, 2007). As of August 31, 2007, the financial statements include accrued interest related to the Property Management advance in the amount of approximately $278,030 with expense for 2007 of approximately $71,942. r; IN III. DETAILED DOTES ON ALL FUNDS (Continued) Da Property Management Advance and Management Fees (Continued) In addition, the Project owes JPI property and asset management fees for the management of the Denton Property. As of August 31, 2007, the Project has recorded $831,011 in unpaid property and asset management fees. Interest accrues at 12% on unpaid management fees. Accrued interest of approximately $252,652 and current year expense of $27,074 has been recorded at August 31, 2007. The Project owes management fees of approximately $70,000 to ACH at August 31, 2007, which is included in other current liabilities. Capital asset activity for the Project for the year ended August 31, 2007, was as follows: Capital assets,not being depreciated: Land Total capital assets, not being depreciated Capital assets,being depreciated: Building Furniture and fixtures Total capital assets. being depreciated Less accumulated depreciation for: Building Furniture and fixtures Total accumulated depreciation Total capital assets, being depreciated,net Capital assets,net I!I�i�eTiT+� 1 ii is Beginning Ending Balance Balance $ 2,200,000 $ - $ - $ 2,200,000 2,200,000 - - 2,200,000 25,705,000 - - 25,705,000 1,253,841 - - 1,253,841 26,958,841 - - 26,958,841 ( 3,422,375) ( 851,833) - ( 4,274,208) ( 1,993,514) ( 191,405) - ( 2,184,919) ( 5,415,889) ( 1,043,238) ( 6,459,127) 21,542,952 ( 1,043,238) - 20,499,714 $ 23,742,952 $( 1,043,238) $ - $ 22,699,714 The bonds are tax-exempt governmental obligations under the Internal Revenue Code. The bonds payable represent amounts due to the bondholders, via the Trustee, and payable under the terms of the Trust Indenture dated July 1, 2001. The Bonds are payable solely from the revenues pledged and assigned under the terms of the Trust Indenture. The Town of Westlake does not have any liability for the payment of the bonds, as the bonds are non- recourse to both the Town of Westlake and Texas Student Housing Authority. Interest rates on the bonds range from 5.00% to 11.00% and are payable semi-annually on July 1 and January 1 of each year thereafter. (continued) m III. DETAILED NOTES ON ALL FUNDS (Continued) D. Bonds Payable (Continued) At August 31, 2007, the Project was not in compliance with certain covenants of the Indenture including insufficient funds in some of the required funds discussed in Note II and the fixed charge ratio. Upon certain events of default either the Trustee, or owners of not less than 25% in aggregate principal of the bonds then outstanding, may declare the principal and all interest then due to be immediately due and payable. Generally accepted accounting principles require that if the events of default occur, the liability should be disclosed as current on the financial statements. In addition, all required principal payments on the Series B bonds had not been made at August 31, 2007. The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2007: The debt originally was to be amortized through 2031 with varying monthly principal payment amounts ranging from $2,618,093 to $3,465,280 for interest and principal. The annual requirements to amortize all debts outstanding as of August 31, 2007, are as follows and have not been adjusted for the default of the bonds. Under the original terms of the Indenture, a total of $510,000 in principal and $2,110,593 in interest is due in fiscal 2008. The total interest to be paid will depend on the ultimate maturities of the bonds. Year Ending August 31, Principal Interest Total 2008 $ 31,245,000 $ 33,990,402 $ 65,235,402 E. Net Assets Net assets represent the residual assets after liabilities are deducted. These assets are reported in the following categories: Invested in Capital Assets, Net of Related Debt consists of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. E M= [IN Amounts Beginning Ending Due Within Balance Increases Decreases Balance One Year Revenue Bonds: 2001A Bonds $ 28,490,000 $ - $( 485,000) $ 28,005,000 $ 28,0055000 2001B Bonds 3,240,000 - - 3,240,000 3,240,000 Less discounts ( 897,234) - 37,485 ( 859,749) ( 859,749) Total $ 30,832,766 $ - $( 447,515) $ 30,385,251 $ 30,385,251 The debt originally was to be amortized through 2031 with varying monthly principal payment amounts ranging from $2,618,093 to $3,465,280 for interest and principal. The annual requirements to amortize all debts outstanding as of August 31, 2007, are as follows and have not been adjusted for the default of the bonds. Under the original terms of the Indenture, a total of $510,000 in principal and $2,110,593 in interest is due in fiscal 2008. The total interest to be paid will depend on the ultimate maturities of the bonds. Year Ending August 31, Principal Interest Total 2008 $ 31,245,000 $ 33,990,402 $ 65,235,402 E. Net Assets Net assets represent the residual assets after liabilities are deducted. These assets are reported in the following categories: Invested in Capital Assets, Net of Related Debt consists of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. E M= [IN III. ETAILED NOTES ON ALL FUNDS (Continued) E. Net Assets (Continued) Restricted for Debt ,service results when constraints placed on net asset use are either externally imposed by creditors, grantors and the like, or imposed by law through constitutional provisions or enabling legislation. F. Concentrations The Project consists of one property in Denton, Texas and is dependent upon the Denton area and the higher education facilities in the Denton area for revenue. G. Commitments and Contingencies The Project has yet to have an arbitrage calculation performed for its outstanding debt. After that analysis, the Project may incur a liability for interest earned in accordance with Internal Revenue Service regulations. IN � i~ i; OPERATING EXPENSES Personnel Contract services Utilities Repairs and maintenance Turnover Advertising and promotion Administration Travel Total operating expenses REVENUES AVAILABLE FOR FIXED CHARGES OTHER EXPENSES Management fees Replacements Depreciation and amortization Interest Total other expenses Budget Actual Variance 223,592 1,114,626 $ 4,084,374 $ 3,795,984 S( 288,390) 105,960 203,862 97,902 - 79,589 79,589 4,190,334 4,079,435 ( 110,899) 340,907 306,500 34,407 49,900 44,669 5,231 532,252 518,399 13,853 48,830 38,543 10,287 162,525 126,913 35,612 48,400 39,975 8,425 217,921 166,425 51,496 2,500 2,355 145 1,403,235 1,243,779 159,456 2,787,099 2,835,656 48,557 188,565 184,617 242,300 223,592 1,114,626 1,114,626 2,864,714 2,864,714 4,410,205 4,387,549 EXCESS OF EXPENSES OVER REVENUES $( 1,623,106) $( 1,551,893 3,948 18,708 22,656 $ 71,213 1 W L • ! We are providing this letter, as required by the Trust Indenture by and between Texas Student Housing Corporation — The Ridge at North Texas (the "Project") and The Bank of New York (the "Trustee"), dated July 1, 2001, as amended on March 22, 2005, relating to Texas Student Housing Corporation — Denton Project Texas Student Housing Revenue Bonds (University of North Texas project) the "Indenture," to certify the fixed charges coverage ratio as of August 31, 2007. The fixed charges coverage ratio is defined in the Indenture as the ratio of revenue available for fixed charges to fixed charges. Further, fixed charges are defined in the Indenture as the sum of all cash outflows related to the Project that the Issuer cannot avoid without violating long-term contractual or legal obligations (those obligations which extend for a period greater than one year), including, but not limited to, (i) interest on indebtedness other than short-term indebtedness, and (ii) scheduled payments of principal on indebtedness other than short-term indebtedness, provided that maximum annual debt service shall be used for purposes of computing (i) and (ii) above. The audited financial statements indicate revenue available for fixed charges for the year ended August 31, 2007, to be $2,835,656. Based on the above revenues and fixed charges, we calculate that the fixed charges coverage ratio as of August 31, 2007, to be .90, which is based on one year of operations and is not in compliance with the Indenture. FM