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HomeMy WebLinkAboutDenton Audit 08-31-12 TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT FINANCIAL REPORT AUGUST 31, 2012 TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT TABLE OF CONTENTS AUGUST 31,2012 Page Number FINANCIAL SECTION Independent Auditors' Report............................................................................................. 1 -2 Management's Discussion and Analysis ............................................................................ 3 -5 Financial Statements: Statementof Net Assets................................................................................................... 6 Statement of Revenues, Expenses and Changes in Net Assets........................................ 7 Statement of Cash Flows ................................................................................................. 8 Notes to Financial Statements.......................................................................................... 9- 18 SUPPLEMENTAL SCHEDULES Schedule I— Schedule of Revenues and Expenses............................................................. 19 Schedule I1—Certificate of the Fixed Charges Coverage Ratio......................................... 20 FINANCIAL SECTION I, r z1hMN, i P ATTILLO, BROWN & HILL, I..L.P. CERTIFIED PUBLIC ACCOUNTANTS ■ BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors Texas Student Housing Authority— The Ridge at North Texas Project Westlake, Texas We have audited the accompanying financial statements of Texas Student Housing Authority — The Ridge at North Texas Project (the "Project"), as of and for the year ended August 31, 2012, which collectively comprise the Project's basic financial statements as listed in the table of contents. Texas Student Housing Authority — 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 Authority as of August 31, 2012, and the changes in its financial position and, where applicable, cash flows, 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 Authority—The Ridge at North Texas Project as of August 31, 2012, and the changes in financial position, and cash flows, where applicable, 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 Authority — 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. This gives the bondholders the right to accelerate and demand payment on the bonds in full. These conditions raise substantial doubt about the Project's ability 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. 1 401 WEST HIGHWAY 6■P.O.BOX 20725■WACO,TX 76702-0725■(254)772-4901 ■FAX:(254)772-4920■www.pbhcpa.com AFFILIATE OFFICES:BROWNSVILLE,TX(956)544-7778■HILLSBORO,TX(254)582-2583 TEMPLE,TX(254)791-3460■ALBUQUERQUE,NM(505)266-5904 Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 5 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Project's 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 financial statements. The supplemental information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion,the information is fairly stated in all material respects in relation to the financial statements as a whole. t January 7, 2013 2 MANAGEMENT'S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS As staff of the Texas Student Housing Authority (the "Authority") — 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, 2012. We encourage readers to consider the information presented herein in conjunction with the Project's financial statements which follow this section. As the Authority 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. FINANCIAL HIGHLIGHTS • The liabilities of the Project exceeded its assets at the close of the fiscal year by $11,517,183, a decrease of$1,133,912 over the prior year. • Operating revenue of$4,657,011 is $66,312 less than budget. Operating expense is $45,809 less than budget. Major components of the expense variance were personnel and utilities as compared to budget. • At the end of the current fiscal year, the total cash balances were $676,602 in unrestricted cash and$2,002,044 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS 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. 3 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 AUTHORITY- THE RIDGE AT NORTH TEXAS PROJECT NET ASSETS Business-type Activities 2012 2011 Current and other assets $ 3,428,317 $ 3,448,752 Capital assets 18,212,297 19,077,659 Total assets 21,640,614 22,526,411 Current liabilities 33,157,797 32,909,682 Total liabilities 33,157,797 32,909,682 Net assets: Invested in capital assets, net of related debt ( 9,485,379) ( 9,227,532) Unrestricted ( 2,031,804) ( 1,155,739) Total net assets $( 11,517,183) $( 10,383,271) 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 2012 2011 Total operating revenue $ 4,634,578 $ 4,216,352 Total operating expenses ( 3,087,084) ( 3,059,800) Total operating income 1,547,494 1,156,552 Interest income 22,433 18,601 Interest expense ( 2,703,839) ( 2,342,558) Total nonoperating loss ( 2,681,406) ( 2,323,957) CHANGE IN NET ASSETS ( 1,133,912) ( 1,167,405) NET ASSETS,BEGINNING ( 10,383,271) ( 9,215,866) NET ASSETS,ENDING $( 11,517,183) $( 10,383,271) The statement of cash flows recaps how cash changed from year to year. 4 FINANCIAL ANALYSIS OF THE PROJECT'S FUNDS Notes 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 Trust Indenture. As of August 31, 2012, these balances were as follows: Revenue Fund $ 49 Bond Fund-Series 2001A 124,639 Bond Fund-Series 2001B 2 Debt Service Reserve Fund-A 6 Debt Reserve Fund-CD 1,876,976 Debt Service Reserve Fund-B 365 Repair and Replacement Fund 13 Series B Principal Fund 3 Denton(UNT)Operating Reserve 7 Denton(UNT)Ser A Princ ( 16) Total $ 2,002,044 Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Bonds payable. As of August 31, 2012, since the bonds are in default, all amounts are considered due immediately. 2001A Bonds $ 25,130,000 2001B Bonds 3,240,000 Less discounts ( 672,324) Total $ 27,697,676 For the fiscal year ending August 31, 2012, the total principal and interest payment is calculated at $2,330,369. A total of$645,000 in principal was paid during 2012. ECONOMIC FACTORS AND NEXT YEAR'S BUDGET 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, 2013, 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. CONTACTING THE PROJECT'S FINANCIAL MANAGEMENT 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. 5 FINANCIAL STATEMENTS TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT STATEMENT OF NET ASSETS AUGUST 31,2012 ASSETS Current assets: Cash $ 676,602 Restricted cash 2,002,044 Accounts receivable,net reserve of$2,857 110,360 Total current assets 2,789,006 Capital assets: Land 2,200,000 Other capital assets,net of accumulated depreciation 16,012,297 Total capital assets 18,212,297 Other assets: Deferred financing costs,net of amortization 639,311 Total other assets 639,311 Total assets 21,640,614 LIABILITIES Current liabilities: Trade accounts payable 403,548 Accrued liabilities 10,455 Unearned revenue and prepaid rent 418,739 Accrued interest 4,627,379 Bonds payable 27,697,676 Total current liabilities 33,157,797 NET ASSETS Invested in capital assets,net of related debt ( 9,485,379) Unrestricted ( 2,031,804) Total net assets $( 11,517,183) The accompanying notes are an integral part of these financial statements. 6 TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT STATEMENT OF REVENUES,EXPENSES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31,2012 OPERATING REVENUES Rental $ 4,411,645 Other 222,933 Total operating revenues 4,634,578 OPERATING EXPENSES Personnel 339,149 Contract services 98,195 Utilities 804,220 Repairs and maintenance 103,313 Turnover 425,027 Advertising and promotion 104,411 Administration 141,455 Management fees 132,000 Depreciation and amortization 936,786 Travel 2,528 Total operating expenses 3,087,084 OPERATING INCOME 1,547,494 NONOPERATING REVENUES(EXPENSES) Interest income 22,433 Interest expense ( 2,703,839) Total nonoperating revenues(expenses) ( 2,681,406) CHANGE IN NET ASSETS ( 1,133,912) NET ASSETS,BEGINNING ( 10,383,271) NET ASSETS,ENDING $( 11,517,183) The accompanying notes are an integral part of these financial statements. 7 TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31,2012 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants $ 4,443,478 Cash paid to employees ( 338,714) Cash paid to suppliers ( 1,852,574) Net cash provided by operating activities 2,252,190 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable ( 645,000) Interest paid ( 1,685,369) Net cash used in capital and related financing activities ( 2,330,369) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 22,433 Net cash provided by investing activities 22,433 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 55,746) CASH AND CASH EQUIVALENTS,BEGINNING 2,734,392 CASH AND CASH EQUIVALENTS,ENDING $ 2,678,646 Cash $ 676,602 Restricted cash 2,002,044 Total cash and cash equivalents $ 2,678,646 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 1,547,494 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 865,362 Changes in operating assets and liabilities: Accounts receivable ( 93,767) Prepaid expenses 24,517 Trade accounts payable 5,482 Deferred revenue ( 97,333) Other current liabilities 435 Net cash provided by operating activities $ 2,252,190 The accompanying notes are an integral part of these financial statements. 8 TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT NOTES TO FINANCIAL STATEMENTS AUGUST 31,2012 I. GENERAL STATEMENT Texas Student Housing Authority — 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 Authority—The Ridge at North Texas. The Project was purchased from Jefferson Commons—Denton, L.P. on July 1, 2001. The Project obtained its financing through the issuance of Texas Student Housing Authority— 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 Authority and The Bank of New York(the "Trustee"). The Series 2001 A and Subordinate Series 2001 B 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 Authority 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 Authority and JPI Campus Quarters Management, L.P. ("JPI") and (b) the Asset Management Agreement by and between the Authority 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 2012 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. 9 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Project's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: A. Reporting Entity 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 Accountabilitv — 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. B. Measurement Focus and Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. The Authority uses the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or noncurrent) are included on the statement of net assets and the operating statement present increases (revenues) and decreases (expenses) in net total assets under the accrual basis of accounting, revenues are recognized when earned, and expenses are recognized at the time the liability is incurred. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their business-type activities and Enterprise Funds, subject to this same limitation. The government has elected not to follow subsequent private- sector guidance. C. Assets, Liabilities and Net Assets or Equity Income Taxes 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. (continued) 10 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A. Reporting Entity (Continued) Cash and Cash Equivalents The Project considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. At August 31, 2012, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of$2,002,044 that is held by the Trustee for the bonds payable under provisions of the Trust Indenture. During the year ended August 31, 2012, the investment income received from cash was $22,433. 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 Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management writes off uncollectible amounts through a charge to expenses 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, 2012. Deferred Financing Costs Costs associated with the issuance of bonds are deferred and amortized over the term of the bonds. Advertising Costs All adverting costs are expensed as they are incurred. Advertising costs for the year ended August 31, 2012, were approximately$104,411. Capital Assets 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. (continued) 11 II. SUMMARY 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 III. DETAILED NOTES ON ALL FUNDS A. Cash and Investments At August 31, 2012, the carrying amount of Texas Student Housing Authority—The Ridge at North Texas Project deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total $2,678,646 of which $2,002,044 represented restricted cash. 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, 2012, restricted cash consists of the following funds and accounts: Fund/Account Description Revenue Funds $ 49 Bond Fund-Series 2001A 124,639 Bond Fund-Series 2001 B 2 Debt Service Reserve Fund-A 6 Debt Reserve Fund-CD 1,876,976 Debt Service Reserve Fund-B 365 Repair and Replacement Fund 13 Series B Principal Fund 3 Denton(UNT)Oper Reserve 7 Denton(UNT)Ser A Princ ( 16) Total $ 2,002,044 (continued) 12 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. (continued) 13 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 2001E 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 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 Authority—The Ridge at North Texas Project is not significantly exposed to interest rate risk as all investments earn a variable rate. Credit Risk 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 Authority—The Ridge at North Texas Project holds all of its cash and investments with the bond Trustee and commercial banks. (continued) 14 III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) Concentration of Credit Risk The investment policy of Texas Student Housing Authority — The Ridge at North Texas Project is subject to the indenture agreement of the bonds. As of August 31, 2012, the Project held all of its restricted cash balances with the Trustee, which represents 74.8% of the total cash and investments held at August 31, 2012. Custodial Credit Risk 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, 2012, the Project has unrestricted cash of $674,819 (bank balance, $513,429). Of the bank balances, $250,000 was covered by federal depository insurance while the remaining $263,429 was collateralized by a Bank Deposit Guarantee Bond from the Project's depository in the amount of$2,647,869. (continued) 15 III. DETAILED NOTES ON ALL FUNDS (Continued) C. Capital Assets Capital asset activity for the Project for the year ended August 31, 2012, was as follows: Beginning Deletions/ Ending Balance Additions Reclass Balance Capital assets,not being depreciated: Land $ 2,200,000 $ - $ - $ 2,200,000 Total capital assets, not being depreciated 2,200,000 - - 2,200,000 Capital assets,being depreciated: Building 25,705,000 - - 25,705,000 Furniture and fixtures 1,253,841 - - 1,253,841 Total capital assets, being depreciated 26,958,841 - - 26,958,841 Less accumulated depreciation for: Building ( 6,477,733) ( 856,833) ( 2,447,615) ( 9,782,181) Furniture and fixtures ( 3,603,449) ( 8,529) 2,447,615 ( 1,164,363) Total accumulated depreciation ( 10,081,182) ( 865,362) - ( 10,946,544) Total capital assets, being depreciated,net 16,877,659 ( 865,362) - 16,012,297 Capital assets,net $ 19,077,659 $( 865,362) $ - $ 18,212,297 D. Bonds Payable 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) 16 III. DETAILED NOTES ON ALL FUNDS (Continued) D. Bonds Payable (Continued) At August 31, 2012, 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, 2012. The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2012: Amounts Beginning Ending Due Within Interest Balance Increases Decreases Balance One Year Paid Revenue Bonds: 2001A Bonds $ 25,775,000 $ - $( 645,000) $ 25,130,000 $ 685,000 $ 1,756,793 2001B Bonds 3,240,000 - - 3,240,000 - - Less discounts ( 709,809) - 37,485 ( 672,324) ( 37,485) - Total $ 28,305,191 $ - $( 607,515) $ 27,697,676 $ 647,515 $ 1,756,793 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, 2012, are as follows and have not been adjusted for the default of the bonds. Under the original terms of the Indenture, a total of$645,000 in principal and $1,976,793 in interest is due in fiscal 2012. The total interest to be paid will depend on the ultimate maturities of the bonds. Year Ending August 31, Principal Interest Total 2012 $ 28,370,000 $ 23,542,340 $ 51,912,340 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 — The component of net assets that reports the difference between capital assets less both the accumulated depreciation and the outstanding balance of debt, excluding unspent proceeds,that is directly attributable to the acquisition, construction, or improvement of these capital assets. (continued) 17 III. DETAILED NOTES ON ALL FUNDS (Continued) E. Net Assets (Continued) Restricted for Debt Service — The component of net assets calculated by reducing the carrying value of restricted assets by the amount of any related debt outstanding. Unrestricted — The difference between the assets and liabilities that is not reported in net assets invested in capital assets, net of related debt and restricted net assets. 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. I 18 SUPPLEMENTAL SCHEDULES i TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT SCHEDULE I-SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL FOR THE YEAR ENDED AUGUST 31,2012 Budget Actual Variance REVENUES AND OTHER SUPPORT Rental $ 4,478,773 $ 4,411,645 $( 67,128) Other 244,550 222,933 ( 21,617) Interest - 22,433 22,433 Total revenues and other support 4,723,323 4,657,011 ( 66,312) OPERATING EXPENSES Personnel 381,947 339,149 42,798 Contract services 99,420 98,195 1,225 Utilities 904,500 804,220 100,280 Repairs and maintenance 79,940 103,313 ( 23,373) Turnover 382,550 425,027 ( 42,477) Advertising and promotion 89,100 104,411 ( 15,311) Management fees 132,000 132,000 - Administration 126,650 141,455 ( 14,805) Travel - 2,528 ( 2,528) Total operating expenses 2,196,107 2,150,298 45,809 REVENUES AVAILABLE FOR FIXED CHARGES 2,527,216 2,506,713 ( 20,503) OTHER EXPENSES Depreciation and amortization - 936,786 ( 936,786) Interest expense - 2,703,839 ( 2,703,839) Total other expenses - 3,640,625 ( 3,640,625) EXCESS OF EXPENSES OVER REVENUES $ 2,527,216 $(_L,133,912 $( 3,661,128) 19 TEXAS STUDENT HOUSING AUTHORITY THE RIDGE AT NORTH TEXAS PROJECT SCHEDULE II-CERTIFICATE OF THE FIXED CHARGES COVERAGE RATIO FOR THE YEAR ENDED AUGUST 31,2012 We are providing this letter, as required by the Trust Indenture by and between Texas Student Housing Authority—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 Authority — 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, 2012. 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, 2012, to be $2,506,713. Based on the above revenues and fixed charges, we calculate that the fixed charges coverage ratio as of August 31, 2012, to be .65, which is based on one year of operations and is not in compliance with the Indenture. 20