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Home My WebLink About01-18-11 THSA Agenda Packet Page 1 of 2 AGENDA BOARD OF DIRECTORS OF THE TEXAS STUDENT HOUSING AUTHORITY (AN INSTRUMENTALITY OF THE TOWN OF WESTLAKE) January 18, 2011 5:30 PM TEXAS STUDENT HOUSING OFFICE 3 VILLAGE CIRCLE, COUNCIL CHAMBERS/MUNICIPAL COURT ROOM WESTLAKE, TEXAS 1. CALL TO ORDER 2. REVIEW AND APPROVE MINUTES FOR THE MEETING ON DECEMBER 7, 2010. 3. REVIEW AND APPROVE MINUTES FOR THE MEETING ON DECEMBER 14, 2010. 4. DISCUSS AND CONSIDER THE SUMMER CAMP ANALYSIS AT CAMBRIDGE. 5. DISCUSS AND CONSIDER THE FORMATION OF A DISTINGUISHED ALUMNI AWARD HONORING SCHOLARSHIP STUDENTS. 6. DISCUSS AND CONSIDER THE NUMBER AND TYPES OF SCHOLARSHIPS AWARDED FOR THE 2011-2012 SCHOOL YEAR. 7. EXECUTIVE SESSION The Board will conduct a closed session pursuant to Texas Government Code, annotated, Chapter 551, Subchapter D for the following: a. Section 551.071: Consultation with Attorney - to seek advice of counsel on legal matters involving pending or contemplated litigation, settlement offers, or other legal matters not related directly to litigation or settlement. Pending or contemplated litigation and settlement offers include but are not limited to the following: Texas Student Housing Authority vs. Brazos County Appraisal District and Appraisal Review Board for Brazos County Appraisal District – CAUSE NO. 06-002328-CV-272 Page 2 of 2 8. RECONVENE MEETING 9. TAKE ANY ACTION, IF NEEDED, FROM EXECUTIVE SESSION ITEMS. 10. DISCUSS AND CONSIDER APPROVAL OF CAMBRIDGE, TOWN LAKE, AND AUSTIN BALLPARK ANNUAL AUDIT FOR FY 2009-2010 PRESENTED BY PATTILLO BROWN & HILL, L.L.P. 11. ADJOURN ANY ITEM ON THIS POSTED AGENDA COULD BE DISCUSSED IN EXECUTIVE SESSION AS LONG AS IT IS WITHIN ONE OF THE PERMITTED CATEGORIES UNDER SECTIONS 551.071 THROUGH 551.076 AND SECTION 551.087 OF THE TEXAS GOVERNMENT CODE. CERTIFICATION I certify that the above notice was posted at the Town Hall of the Town of Westlake, 3 Village Circle, Westlake, Texas, on January 13, 2011, by 5:00 p.m. under the Open Meetings Act, Chapter 551 of the Texas Government Code. _____________________________________ Kelly Edwards, 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. TSHA Minutes 12/07/10 Page 1 of 3 MINUTES OF THE BOARD OF DIRECTORS OF THE TEXAS STUDENT HOUSING AUTHORITY (AN INSTRUMENTALITY OF THE TOWN OF WESTLAKE) December 7, 2010 PRESENT: President Jim Carter, Directors, George Ledak, Gregg Malone and Chuck Shultz and Jill McKean arrived at 5:53 p.m. ABSENT: General Counsel Scott Bradley OTHERS PRESENT: Executive Director Pete Ehrenberg and Secretary Kelly Edwards. 1. CALL TO ORDER President Carter called the meeting to order at 5:35 p.m. 2. REVIEW AND APPROVE MINUTES FOR THE MEETING ON SEPTEMBER 21, 2010. MOTION: Director Schultz made a motion to approve the minutes. Director Ledak seconded the motion. The motion carried by a vote of 5-0. 3. DISCUSS AND CONSIDER THE SUMMER CAMP ANALYSIS AT CAMBRIDGE. Executive Director Ehrenberg provided an overview of the Summer Camp analysis. Discussion ensued regarding the benefit of the camp and if it is still profitable to continue offering the camp. Brazos County has said if we do away with the summer camps we will receive the property tax exemption. Executive Director Ehrenberg stated that without the summer camps we must continue to pay the bond holders and staff on-site for tours of prospective renters. No action taken TSHA Minutes 12/07/10 Page 2 of 3 President Carter recessed the meeting at 6:07 p.m. to convene the TSH Denton Project meeting. President Carter reconvened the TSH Authority meeting at 6:13 p.m. 4. DISCUSS THE PROPERTY TAX EXEMPTION AT CAMBRIDGE. Kelly Hill, Pennington & Hill, stated that the case is set for December 20, 2010. The case will be stipulated on facts for an allotted time of two (2) hours. The case will address the years of 2005-2008 issues raised regarding the exemption and $3.7 million in taxes and penalties and if there are grounds for a settlement. Executive Director Ehrenberg stated that this Board does not have the authority to make the recommendation for the attorney. The bond holders must advise the attorney to proceed with any future action. President Carter provided the background information regarding this item for Director Malone. The Board will conduct a meeting on Tuesday, December 14, 2010, at 9:00 a.m. to discuss this item in Executive Session. 5. DISCUSS AND CONSIDER THE NUMBER AND TYPES OF SCHOLARSHIPS AWARDED FOR THE 2011-2012 SCHOOL YEAR. Item was discussed prior to item 4 Executive Director Ehrenberg provided an overview of the current number of scholarships and the number we could offer with and without adding an additional property. Discussion ensued regarding the number of full and incremental offers and if we should change the number offered, the scholarship scenarios provided to the Board. The Board asked Mr. Ehrenberg to provide a breakdown that shows the current population of students by offer year and location so they can understand the breakdown of available scholarships and asked that this item be included on the January agenda for further discussion. No action taken TSHA Minutes 12/07/10 Page 3 of 3 6. EXECUTIVE DIRECTOR’S REPORT Executive Director Ehrenberg provided an overview of the pre-leasing report for the properties and amount owed for the Townlake property. Director Ehrenberg stated that occupancy levels for all of the properties are doing well and some are ahead of last year. 7. ADJOURN President Cater asked for a motion to adjourn. MOTION: Director Malone made a motion to adjourn the meeting. Director McKean seconded the motion. The motion carried by a vote of 4-0. There being no further business before the board, Director Irvine declared the meeting adjourned at 7:09 p.m. APPROVED BY THE TEXAS STUDENT HOUSING AUTHORITY BOARD OF DIRECTORS ON JANUARY 18, 2011. ______________________________________ Jim Carter, President ATTEST ____________________________________ Kelly Edwards, Secretary TSHA Minutes 12/14/10 Page 1 of 2 MINUTES OF THE BOARD OF DIRECTORS OF THE TEXAS STUDENT HOUSING AUTHORITY (AN INSTRUMENTALITY OF THE TOWN OF WESTLAKE) December 14, 2010 PRESENT: President Jim Carter, Directors, George Ledak, Gregg Malone, Jill McKean and Chuck Shultz. ABSENT: OTHERS PRESENT: Executive Director Pete Ehrenberg, Secretary Kelly Edwards and General Counsel Scott Bradley. 1. CALL TO ORDER President Carter called the meeting to order at 9:03 a.m. 2. EXECUTIVE SESSION The Board convened into executive session at 9:05 a.m. The Board will conduct a closed session pursuant to Texas Government Code, annotated, Chapter 551, Subchapter D for the following: a. Section 551.071: Consultation with Attorney - to seek advice of counsel on legal matters involving pending or contemplated litigation, settlement offers, or other legal matters not related directly to litigation or settlement. Pending or contemplated litigation and settlement offers include but are not limited to the following: Texas Student Housing Authority vs. Brazos County Appraisal District and Appraisal Review Board for Brazos County Appraisal District – CAUSE NO. 06-002328-CV-272 TSHA Minutes 12/14/10 Page 2 of 2 3. RECONVENE MEETING President Carter reconvened the meeting to order at 10:13 a.m. 4. TAKE ANY ACTION, IF NEEDED, FROM EXECUTIVE SESSION ITEMS. - No Action taken 5. DISCUSS AND CONSIDER THE SUMMER CAMP ANALYSIS AT CAMBRIDGE. Discussion ensued regarding the college’s participation and the types of camp that are conducted in the future. 6. ADJOURN President Cater asked for a motion to adjourn. MOTION: Director Malone made a motion to adjourn the meeting. Director McKean seconded the motion. The motion carried by a vote of 4-0. There being no further business before the board, Director Irvine declared the meeting adjourned at 10:16 a.m. APPROVED BY THE TEXAS STUDENT HOUSING AUTHORITY BOARD OF DIRECTORS ON JANUARY 18, 2011. ______________________________________ Jim Carter, President ATTEST ____________________________________ Kelly Edwards, Secretary TEXAS STUDENT HOUSING AUTHORITY FINANCIAL REPORT AUGUST 31, 2010 TEXAS STUDENT HOUSING AUTHORITY TABLE OF CONTENTS AUGUST 31, 2010 FINANCIAL SECTION Page Number Independent Auditors' Report............................................................................................. 1 Management's Discussion and Analysis............................................................................ 2-3 Financial Statements: Statement of Net Assets .................................................................................................. . 4 Statement ofRevenues, Expenses and Changes in Net Assets ....................................... . 5 Statement of Cash Flows ................................................................................................ . 6 Notes to Financial Statements ......................................................................................... . 7-10 SUPPLEMENTAL INFORMATION Budgetary Comparison Schedule........................................................................................ 11 FINANCIAL STATEMENTS IH~11 PATTILLO. B R 0 W N & HILL. T..L.P. CERTIFIED PUBLIC ACCOUNTANTS. BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors Texas Student Housing Authority Westlake, Texas We have audited the accompanying financial statements of Texas Student Housing Authority (the "Authority") (a component unit of the Town of Westlake), as of and for the year ended August 31, 2010, which collectively comprise the Authority's basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the Authority'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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Texas Student Housing Authority as of August 31,2010, and the respective changes in its 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 management's discussion and analysis on pages 2 through 3 is not a required part of the basic financial statements but is 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 financial statements that collectively comprise the Authority's basic financial statements. The accompanying supplemental information on page 11 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 basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. fatt.iJk f3~ ~ 1/iJl L.L.P. I I January 7, 2011 1 401 WEST HIGHWAY 6 • P. 0. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS . . MANAGEMENT'S DISCUSSION AND ANALYSIS As staff of the Texas Student Housing Authority (the "Authority''), we offer the readers of the Authority's financial statements this narrative overview and analysis of the financial activities of the Authority for the fiscal year ended August 31, 2010. We encourage readers to consider the information presented herein in conjunction with the Authority's financial statements. The Authority is a component unit of the Town of Westlake and is considered a governmental entity; accordingly, the Authority has adopted 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 Authority itself. Properties managed by the Authority are reported individually by property under separate cover. FINANCIAL HIGHLIGHTS • The assets of the Authority exceeded its liabilities at the close of the fiscal year by $525,450, an increase of $57,270 over the prior fiscal year. All of the assets and liabilities of the Authority are classified as current. • At the end of the current fiscal year, the total cash balances were $529,092, an increase of $72,948 over the prior fiscal year. • All revenues are generated from management of the properties and scholarship activity of the authority and totaled $895,146. Total expenses incurred were $837,876. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Authority's basic financial statements. The Authority'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 statement of net assets presents information on the Authority's assets and liabilities with the difference between the two reported as net assets. The statement of revenues, expenses and changes in net assets accounts for all of the Authority's revenues and expenses regardless of when cash is paid or received. The statement of cash flows reflects cash inflows and outflows by operating, noncapital financing and capital related financing activities during the year. 2 NOTES TO THE FINANCIAL STATEMENTS The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGET It is anticipated that fiscal year 2010/2011 will end with less income to the Authority as we have increased scholarships at our facility in College Station. CONTACTING THE AUTHORITY'S FINANCIAL MANAGEMENT This financial report is designed to provide the reader with a general overview of the Authority's finances and to demonstrate the Authority'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. 3 ASSETS Current assets: Cash Accounts receivable Prepaid expenses Total current assets Total assets LIABILITIES Accounts payable Deferred revenue T otalliabilities NET ASSETS Unrestricted Total net assets TEXAS STUDENT HOUSING AUTHORITY STATEMENT OF NET ASSETS AUGUST 31, 2010 The accompanying notes are an integral part of these financial statements. 4 $ 529,092 17,868 12,724 559,684 559,684 2,484 31,750 34,234 525,450 $ 525,450 TEXAS STUDENT HOUSING AUTHORITY OPERATING REVENUES Basic property administration Scholarship value Scholarship administration Total operating revenues OPERATING EXPENSES Scholarship Scholarship expense Labor Professional fees Office and other Total operating expenses OPERATING INCOME STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31, 2010 NONOPERATING REVENUES (EXPENSES) Interest income Other income Total nonoperating revenues (expenses) CHANGE IN NET ASSETS NET ASSETS, BEGINNING NET ASSETS, ENDING The accompanying notes are an integral part of these financial statements. 5 $ 159,140 527,016 204,695 890,851 527,016 163,328 113,392 5,483 28,657 837,876 52,975 659 3,636 4,295 57,270 468,180 $ 525,450 TEXAS STUDENT HOUSING AUTHORITY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from scholarships and scholarship properties Cash paid to contract services Cash paid to others Net cash provided for operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Miscellaneous other income Net cash provided by investing activities NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING CASH AND CASH EQUIVALENTS, ENDING RECONCILIATION OF OPERATING GAIN TO NET CASH USED FOR OPERATING ACTIVITIES Operating gain Adjustments to reconcile operating income to net cash provided (used) by operating activities: Accounts receivable Prepaid assets Accounts payable Deferred revenue Net cash provided for operating activities The accompanying notes are an integral part of these financial statements. 6 $ 895,358 ( 5,483) { 821,222) 68,653 659 3,636 4,295 72,948 456,144 $ 529,092 $ 52,975 4,507 10,690 2,484 ( 2,003) $ 68,653 TEXAS STUDENT HOUSING AUTHORITY NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2010 I. GENERAL STATEMENT Texas Student Housing Authority (the "Authority''), a higher education authority, was established on January 23, 1995, as a duly constituted authority of the Town of Westlake (the "Town"), Texas, pursuant to Section 53.11 of Chapter 53 of the Texas Education Code, as amended. The Authority's purpose among other things is to acquire, finance, and operate student housing facilities and to provide scholarships to students from high schools and community colleges in Texas. The Authority operates several student housing projects in Texas. The accompanying financial statements do not present the projects, but the scholarship administration of the Authority. II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Authority's significant accounting policies consistently applied m the preparation ofthe 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 Accountability -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 fmancial burdens on, the primary government. Additionally, the primary government may be fmancially 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. (continued) 7 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 Authority 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. Cash and Cash Equivalents The Authority considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. At August 31, 2010, the Authority had no such investments included in cash and cash equivalents. Accounts Receivable Accounts receivable are stated at amounts management expects to collect from outstanding balances. 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. As of August 31, 2010, management has determined that all accounts doubtful of collection have been charged to operations and an allowance is not required. Capital Assets Texas Student Housing Authority utilizes space within the Town of Westlake offices and does not have capital assets at this time. 8 III. DETAILED NOTES ON ALL FUNDS A. Cash and Investments 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 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 holds all of its cash and investments with commercial banks. Concentration of Credit Risk Texas Student Housing Authority holds no investments at August 31, 2010, and is not exposed to concentration of credit risk. 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, 2010, the Authority's cash balances totaled $529,092 (bank balance of $527,591). Of the bank balance, $250,000 was covered by federal depository insurance while the remaining amount was collateralized by a Bank Deposit Guarantee Bond from the Authority's depository in the amount of$277,591. (continued) 9 III. DETAILED NOTES ON ALL FUNDS (Continued) B. Net Assets Net assets represent the residual assets after liabilities are deducted. These assets are reported in the following categories: Unrestricted Net Assets consists of the portion of net assets after invested in capital assets, net of related debt and restricted for net assets has been satisfied. At August 31, 2010, the Authority has no restricted net assets or capital assets. All net assets are unrestricted. C. Concentrations The Authority services scholarships for Texas students attending Texas higher education facilities and is dependent upon the geographic areas and the higher education facilities in Texas. D. Related Party Transactions The Town of Westlake charges an oversight fee to the Authority. The fee of $0 is included in expenses at August 31,2010. The Authority also received revenues of$159,140 related to its oversight of the various properties. 10 SUPPLEMENTAL INFORMATION TEXAS STUDENT HOUSING AUTHORITY BUDGETARYCOMPARJSONSCHEDULE FOR THE YEAR ENDED AUGUST 31, 2010 Budget Actual Variance REVENUES Basic property administration $ 235,812 $ 159,140 $( 76,672) Scholarship value 527,016 527,016 Scholarship administration 190,740 204,695 13,955 Interest income 659 659 Other income 3,636 3,636 Total revenues 953,568 895,146 ( 58,422) EXPENDITURES Scholarships 527,016 527,016 Scholarship expense 229,530 163,328 66,202 Contract labor 137,000 113,392 23,608 Professional fees 5,500 5,483 17 Contingency fund 25,000 25,000 Insurance 13,500 13,500 Reserve Office and other 15,900 28,657 ( 12,757) Total expenditures 953,446 837,876 115,570 CHANGE IN NET ASSETS OVER EXPENSES 122 57,270 57,148 NET ASSETS, BEGINNING 468,180 468,180 NET ASSETS, ENDING $ 468,302 $ 525,450 $ 57,148 11 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT FINANCIAL REPORT AUGUST 31, 2010 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT TABLE OF CONTENTS AUGUST 31,2010 Page Number FINANCIAL SECTION Independent Auditors' Report............................................................................................. 1 -2 Management's Discussion and Analysis ............................................................................ 3 -6 Financial Statements: Statementof Net Assets................................................................................................... 7 Statement of Revenues, Expenses and Changes in Net Assets........................................ 8 Statement of Cash Flows ................................................................................................. 9 Notes to Financial Statements.......................................................................................... 10- 18 SUPPLEMENTAL SCHEDULES Schedule I—Schedule of Revenues and Expenses............................................................. 19 Schedule II—Certificate of the Fixed Charges Coverage Ratio......................................... 20-21 rMKI PATTILLO, BROWN & HILL, I..L.P. CERTIFIED PUBLIC ACCOUNTANTS ■ BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors Texas Student Housing Authority— Ballpark Austin Project Westlake, Texas We have audited the accompanying financial statements of Texas Student Housing Authority— Ballpark Austin Project (the "Project"), as of and for the year ended August 31, 2010, as listed in the table of contents. Texas Student Housing Authority—Ballpark Austin Project is a component unit of the Town of Westlake. These financial statements are the responsibility of the Project 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 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, 2010, 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 Authority— Ballpark Austin Project at August 31, 2010, and the respective changes in its 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 Authority—Ballpark Austin 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 the Trustee or Service Agent 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. 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 i The management's discussion and analysis on pages 3 through 6 is not a required part of the basic financial statements but is supplementary 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 financial statements that collectively comprise the Texas Student Housing Authority— Ballpark Austin Project's basic financial statements. The accompanying supplemental information on pages 20 and 21 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 basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. L.L January 7, 2011 2 MANAGEMENT'S DISCUSSION AND ANALYSIS As staff of the Texas Student Housing Authority (the "Authority") — Ballpark Austin.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, 2010. 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 for 2010. FINANCIAL HIGHLIGHTS • The liabilities of the Project exceeded its assets at the close of the fiscal year by $15,347,956. This is an increase of$1,352,073 over the prior year. • Operating revenue of$3,614,428 is $252 more than budget, and operating expense is $86,727 less than budget, not including depreciation and amortization. • At the end of the current fiscal year, the total cash balances were $508,265 in unrestricted cash and$607,739 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- BALLPARK AUSTIN PROJECT NET ASSETS Business-type Activities 2010 2009 Current and other assets $ 3,675,938 $ 4,325,408 Capital assets 23,149,360 24,010,036 Total assets 26,825,298 28,335,444 Long-term liabilities 34,868,178 35,488,094 Other liabilities 7,305,076 6,843,233 Total liabilities 42,173,254 42,331,327 Net assets: Invested in capital assets, net of related debt ( 11,083,818) ( 10,773,058) Restricted ( 5,231,793) ( 3,590,638) Unrestricted 967,655 367,813 Total net assets $( 15,347,956) $( 13,995,883) 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- BALLPARK AUSTIN PROJECT CHANGES IN NET ASSETS Business-type Activities 2010 2009 Total operating revenue $ 3,614,113 $ 3,512,050 Total operating expenses 2,836,626 3,106,219 Total operating income 777,487 405,831 Interest income 315 3,053 Interest expense ( 2,737,283) ( 2,673,271) Total nonoperating loss ( 2,736,968) ( 2,670,218) CHANGE IN NET ASSETS ( 1,959,481) ( 2,264,387) NET ASSETS,BEGINNING ( 13,995,883) ( 11,731,496) PRIOR PERIOD ADJUSTMENT 607,408 - NET ASSETS,ENDING $( 15,347,956) $( 13,995,883) 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, 2010, these balances were as follows: Bond Fund,Series 2001A Senior Interest $ 82,804 Bond Fund,Series 2001B Sub B 13,000 Bond Fund, Series 2001C Sub C 16 Debt Service Reserve 2001A Senior 299,693 Debt Service Reserve 2001B Sub B 862 Repair and Replacement Fund 1,313 Minimum Scholarship Fund 1,943 Trustee Fee Fund 3 Tax and Insurance Fund 55,870 Senior Bonds Principal 149,297 Sub B Bond Principal 2,938 Total $ 607,739 Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Bonds payable. As of August 31, 2009, the following amounts on the Series A, B and C Bonds were owed: Series A $ 30,150,000 Series B 2,365,000 Series C 3,000,000 Less discounts ( 1,281,821) Total $ 34,233,179 For the fiscal year ending August 31, 2010, the total principal and interest payment is calculated at $2,264,027. A total of$610,001 in principal was paid during fiscal year 2010. Fixed charge cover ratio. The bond indenture provides for a fixed charge coverage ratio of 1.25 when payments on the A and B Bond Series are considered and 1.15 when payments on the C Bond Series are added. At this time, the Project has only realized a ratio of .68 and .64, respectively, and is thus technically in default of the indenture. 5 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 10-month leases exist. These leases do bring a monthly premium over the 12-month leases. Occupancy for the fiscal year ending August 31, 2011, indicates a substantial increase to 100%; however, rental rates, again due to competitive pressures, will not see an increase. 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. 6 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT STATEMENT OF NET ASSETS AUGUST 31,2010 ASSETS Current assets: Cash $ 508,265 Restricted cash 607,739 Accounts receivable 42,697 Prepaid expenses 11,044 Total current assets 1,169,745 Capital assets: Land 4,788,265 Other capital assets,net of accumulated depreciation 18,361,095 Total capital assets 23,149,360 Intangible assets: Deferred financing costs,net of amortization 2,506,193 Total intangible assets 2,506,193 Total assets 26,825,298 LIABILITIES Current liabilities: Accounts payable 149,901 Accrued liabilities 219,074 Deferred revenue and prepaid rent 271,569 Accrued interest 5,839,532 Bonds payable 825,000 Total current liabilities 7,305,076 Long-term liabilities: Bonds payable 33,408,178 Deferred purchase price 1,460,000 Total long-term liabilities 34,868,178 Total liabilities 42,173,254 NET ASSETS Invested in capital assets,net of related debt ( 11,083,818) Restricted for debt service ( 5,231,793) Unrestricted 967,655 Total net assets $( 15,347,956) The accompanying notes are an integral part of these financial statements. 7 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT STATEMENT OF REVENUES,EXPENSES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31,2010 OPERATING REVENUES Rental income $ 3,494,960 Other income 119,153 Total operating revenues 3,614,113 OPERATING EXPENSES Personnel 335,366 Contract services 60,639 Utilities 542,419 Repairs and maintenance 232,835 Turnover 175,732 Advertising and promotion 78,466 Administration 189,634 Management fees 180,481 Depreciation 860,676 Amortization 180,378 Total operating expenses 2,836,626 OPERATING INCOME 777,487 NONOPERATING REVENUES (EXPENSES) Interest income 315 Interest expense ( 2,737,283) Total nonoperating revenues (expenses) ( 2,736,968) CHANGE IN NET ASSETS ( 1,959,481) PRIOR PERIOD ADJUSTMENT 607,408 NET ASSETS,BEGINNING ( 13,995,883) NET ASSETS,ENDING $( 15,347,956) The accompanying notes are an integral part of these financial statements. 8 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31,2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants $ 3,508,783 Miscellaneous other income 119,153 Cash paid to employees ( 362,818) Cash paid to suppliers ( 1,545,358) Net cash provided by operating activities 1,719,760 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable ( 610,001) Interest paid ( 1,654,026) Net cash used by capital and related financing activities ( 2,264,027) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 315 Net cash provided by investing activities 315 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 543,952) CASH AND CASH EQUIVALENTS,BEGINNING 1,659,956 CASH AND CASH EQUIVALENTS,ENDING $ 1,116,004 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 777,487 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 1,041,055 Changes in operating assets and liabilities: Accounts receivable ( 11,957) Prepaid assets ( 2,819) Trade accounts payable ( 82,334) Deferred revenue 25,780 Other current liabilities ( 27,452) Net cash provided by operating activities $ 1,719,760 The accompanying notes are an integral part of these financial statements. 9 TEXAS STUDENT HOUSING AUTHORITY— BALLPARK AUSTIN PROJECT NOTES TO FINANCIAL STATEMENTS AUGUST 31,2010 I. GENERAL STATEMENT Texas Student Housing Authority (the "Authority"), a higher education authority, was established on January 23, 1995, as a duly constituted authority of the Town of Westlake, Texas, pursuant to Section 53.11 of Chapter 53 of the Texas Education Code, as amended. The Authority's purpose among other things is to acquire, finance, and operate student housing facilities. The Authority operates several student housing facilities in Texas and one of the housing projects is the Ballpark Austin Project (the "Project"). The Project was purchased from Jefferson Commons — Austin, L.P., a Delaware limited partnership on December 27, 2001. The Project obtained its financing through the issuance of Texas Student Housing Authority — Student Housing Revenue Bonds (Austin, Texas Project), Series 2001A, Series 2001B and Subordinate Series 2001C. The bonds were issued through a trust indenture by and between the Authority and the Bank of New York, the, trustee. The Series 2001A, 2001B and Subordinate Series 2001C Bonds were issued in the face amounts of $34,175,000, $2,470,000 and $3,000,000, respectively. The accompanying financial statements present the operations of the Project, whose revenue streams are pledged for the bonds described herein. The 2010 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. 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 criterion used is as follows: (continued) 10 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A. Reporting Entity(Continued) Financial Accountability — 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 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. 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. 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, 2010, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of $607,739 that is held by the trustee for the bonds payable under provisions of the trust indenture. During the year ended August 31, 2010, the investment income received from cash was $315. See Note III for risk disclosures and breakdown of restricted cash accounts. (continued) 11 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Assets.Liabilities and Net Assets or Equity (Continued) Accounts Receivable 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. As of August 31, 2010, management has determined that all accounts doubtful of collection have been charged to operations and an allowance is not required. 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 31,2010, were approximately$78,466. 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. 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. The trust indenture (dated December 1, 2001) provides for a repair and replacement fund requirement. The covenant states that no less frequently than every five years following the date of issuance of the bonds, the Project will cause a professional engineer or firm of such engineers to conduct a physical assessment of the Project and to submit a written report concerning the physical condition of the Project and the engineer's recommendations for capital improvements needed at the Project. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Estimated Asset Class Useful Lives Building 30 Furniture,fixtures and equipment 3 -20 12 III. DETAILED NOTES ON ALL FUNDS A. Cash and Investments At August 31, 2010, the carrying amount of Texas Student Housing Authority — Ballpark Austin Project deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total $1,116,004 of which $607,739 represented restricted cash. The following is the breakdown of the 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, 2010, restricted cash consists of the following funds and accounts: Fund/Account Description Bond Fund, Series 2001A Senior Interest $ 82,804 Bond Fund, Series 2001 B Sub B 13,000 Bond Fund,Series 2001C Sub C 16 Debt Service Reserve 2001A Senior 299,693 Debt Service Reserve 2001B Sub B 862 Repair and Replacement Fund 1,313 Minimum Scholarship Fund 1,943 Trustee Fee Fund 3 Tax and Insurance Fund 55,870 Senior Bonds Principal 149,297 Sub B Bond Principal 2,938 Total $ 607,739 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 three accounts, the Series 2001A, 2001B and the Series 2001C accounts. (continued) 13 III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) Restricted Cash (Continued) 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 Ballpark Austin property, 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. 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 2001 Account—The amounts on deposit in this account are to be used for the purpose of paying 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 2001B 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. Proiect Fund— Amounts in the Project Fund are held and disbursed for costs of the Project. Residual Fund — Amounts in the Residual Fund related to three accounts — the Subordinate Bond Amortization Account — Series C, the Issuer Education Account and the Supplemental Management Fee Account. Based on release, tests funds are then transferred to each respective account. In addition, insurance funds are held to pay costs of maintaining insurance on the Project. (continued) 14 III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) Restricted Cash (Continued) Minimum Scholarship Fund—The amounts on deposit in this account represent the minimum annual scholarship amount determined as of the most recent Education Funds Transfer date. Tax and Insurance Fund— The amounts on deposit in this account represent 1/12t` of the ad valorem property taxes, if any, and 1/12th of the annual premiums for insurance due,determined in accordance with the annual budget. 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—Ballpark Austin 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 — Ballpark Austin Project holds all of its cash and investments with the bond trustee and commercial banks. Concentration of Credit Risk The investment policy of Texas Student Housing Authority —Ballpark Austin Project is subject to the indenture agreement of the bonds. As of August 31, 2010, the Project held all of its restricted cash balances with the trustee, which represents 54% of the total cash and investments held at August 31,2010. 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. (continued) 15 III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) As of August 31, 2010, $258,265 of the Project's $508,265 bank balance was collateralized with a Bank Deposit Guarantee Bond from the Project's depository. The remaining balance, $250,000,was covered by FDIC insurance. B. Capital Assets Capital asset activity for the Project for the year ended August 31, 2010, was as follows: Beginning Ending Balance Additions Retirements Balance Capital assets,not being depreciated: Land $ 4,788,265 $ - $ - $ 4,788,265 Total capital assets, not being depreciated 4,788,265 - - 4,788,265 Capital assets,being depreciated: Building 21,345,305 - - 21,345,305 Improvements,furniture and fixtures 6,993,063 - - 6,993,063 Total capital assets, being depreciated 28,338,368 - - 28,338,368 Less accumulated depreciation for: Building ( 5,454,911) ( 711,510) - ( 6,166,421) Improvements,furniture and fixtures ( 3,661,686) ( 149,166) - ( 3,810,852) Total accumulated depreciation ( 9,116,597) ( 860,676) - ( 9,977,273) Total capital assets, being depreciated,net 19,221,771 ( 860,676) - 18,361,095 Capital assets,net $ 24,010,036 $( 860,676) $ - $ 23,149,360 C. 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 December 1, 2001. The bonds are payable solely from the revenues generated by the Project and are secured by 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 4.00% 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) C. Bonds Payable (Continued) At August 31, 2006, the Project had not made interest payments on the Subordinate 2001C Bond Series since July 2003, and the Subordinate 2001C Bond is in default. In addition, the Project's fixed charges coverage ratio was not in compliance with the covenants of the indenture. These events do not constitute an event of default that accelerates the bonds. As a result, the maturities are presented under the original repayment terms. The following is a summary of long-term debt transactions of the Project for the 12-month period ended August 31, 2010: Amounts Beginning Ending Due Within Balance Increases Decreases Balance One Year Revenue Bonds: 2001A Bonds $ 30,760,000 $ - $( 610,000) $ 30,150,000 $ 640,000 2001B Bonds 2,365,000 - - 2,365,000 185,000 2001C Bonds 3,000,000 - - 3,000,000 - Less discounts ( 1,341,906) - 60,085 ( 1,281,821) - Total $ 34,783,094 $ - $( 549,915) $ 34,233,179 $ 825,000 The debt is to be amortized through 2033 with varying payment amounts ranging from $330,000 to $4,505,000 for interest and principal. The annual requirements to amortize all debts outstanding as of August 31, 2010, are as follows: Year Ending Governmental Activities August 31, Principal Interest Total 2011 $ 825,000 $ 2,280,294 $ 3,105,294 2012 715,000 2,247,194 2,962,194 2013 755,000 2,208,144 2,963,144 2014 795,000 2,166,875 2,961,875 2015 840,000 2,123,456 2,963,456 2016-2020 4,93 5,000 9,876,319 14,811,319 2021-2025 6,440,000 8,368,800 14,808,800 2026-2030 8,445,000 6,364,500 14,809,500 2031-2035 11,765,000 2,597,450 14,362,450 Totals $ 35,515,000 $ 38,233,032 $ 73,748,032 D. 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. (continued) 17 III. DETAILED NOTES ON ALL FUNDS (Continued) D. 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. E. Management Fees Beginning June 1, 2004, the Project retained Asset Campus Management for property management and recorded property management fees of approximately $180,481 for the year ended August 31, 2010, with approximately$14,762 due at August 31, 2010, and included in accounts payable. F. Concentrations The Project consists of one property in Austin, Texas, and is dependent upon the Austin area and the higher education facilities in the Austin area for revenues. G. Commitments and Contingencies The Project has a deferred purchase commitment for $1,460,000 as part of the original purchase of the Project. The deferred purchase price accrues interest at a rate of 11% per annum. The first deferred purchase price installment shall be payable on September 1 of the first year after the Series C Bonds have been paid in full (scheduled final payment on Series C Bonds is in 2033), and the remaining installments shall be paid on each anniversary thereafter until the deferred purchase price and all interest thereon has been paid in full. As of August 31, 2010,there have been no payments made on the deferred purchase price. 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. H. Prior Period Adjustment The Project recorded a prior period adjustment to remove liabilities left over from the prior management company. These liabilities were no longer enforceable against the current management and therefore no longer considered a liability. The adjustment resulted in an increase in beginning net assets of$607,408. 18 SUPPLEMENTAL SCHEDULES TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT SCHEDULE I-SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL FOR THE YEAR ENDED AUGUST 31,2010 Budget Actual Variance REVENUES AND OTHER SUPPORT Rental income $ 3,515,956 $ 3,494,960 $( 20,996) Other income 98,220 119,153 20,933 Interest income - 315 315 Total revenues and other 3,614,176 3,614,428 252 OPERATING EXPENSES Personnel 332,839 335,366 ( 2,527) Contract services 60,000 60,639 ( 639) Utilities 622,150 542,419 79,731 Repairs and maintenance 210,530 232,835 ( 22,305) Turnover 216,500 175,732 40,768 Advertising and promotion 85,950 78,466 7,484 Management fees 181,095 180,481 614 Administration 173,849 189,634 ( 15,785) Total operating expenses 1,882,913 1,795,572 87,341 REVENUES AVAILABLE FOR FIXED CHARGES 1,731,263 1,818,856 87,593 OTHER EXPENSES Depreciation and amortization 1,041,054 1,041,054 - Interest expense - 2,737,283 ( 2,737,283) Total other expenses 1,041,054 3,778,337 ( 2,737,283) EXCESS OF EXPENSES OVER REVENUES $ 690,209 $( 1,959,481) $( 2,649,690) 19 TEXAS STUDENT HOUSING AUTHORITY BALLPARK SCHEDULE II-FIXED CHARGES COVERAGE RATIO FOR THE YEAR ENDED AUGUST 31,2010 CALCULATION OF FIXED CHARGES COVERAGE RATIO Total gross revenues $ 3,614,428 Total expenses $( 5,573,909) Add: Interest Expense 2,737,283 Depreciation and amortization 1,041,054 Property management fees 180,481 Adjusted expenses ( 1,615,091) Adjusted net operating income available to pay fixed charges $ 1,999,337 Fixed charges/maximum principal and interest for fiscal year-end $ 3,105,294 Fixed charges coverage ratio 0.64 Required ratio 1.10 Pass or fail Fail 20 TEXAS STUDENT HOUSING AUTHORITY— BALLPARK AUSTIN PROJECT SCHEDULE H-CERTIFICATE OF THE FIXED CHARGES COVERAGE RATIO AUGUST 31,2010 We are providing this letter, as required by the Trust Indenture by and between Texas Student Housing Authority — Ballpark Austin Project (the "Project") and the Bank of New York (the "Trustee"), dated December 1, 2001, relating to Texas Student Housing Authority — Ballpark Austin Project Student Housing Revenue Bonds the "Indenture," to certify the Fixed Charges Coverage Ratio as of August 31, 2010. 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 12-month period ended August 31, 2010,to be$1,999,337. Based on the above revenues and fixed charges utilizing Bond A and Bond B, we calculate that the fixed charges coverage ratio as of August 31, 2010, to be .68 which is based on 12 months of operations. Based on the above revenues and fixed charges utilizing Bond A, Bond B and Bond C, we calculate that the fixed charges coverage ratio as of August 31, 2010, to be .64 which is based on 12 months of operations. Based on the above budgeted revenues and fixed charges utilizing Bond A and Bond B, we calculate that the fixed charges coverage ratio as of August 31, 2010, to be .65 which is based on 12 months of operations. 21 6 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION FINANCIAL REPORT AUGUST 31, 2010 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION TABLE OF CONTENTS AUGUST 31,2010 Page Number FINANCIAL SECTION Independent Auditors' Report............................................................................................. 1 -2 Management's Discussion a n d 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- 16 SUPPLEMENTAL SCHEDULES Schedule I—Schedule of Revenues and Expenses............................................................. 17 Schedule II—Fixed Charges Coverage Ratio..................................................................... 18 V"4 I PATTILLO, BROWN & HILL, T._L.P. CERTIFIED PUBLIC ACCOUNTANTS ■ BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors Texas Student Housing Authority— Cambridge at College Station Westlake, Texas We have audited the accompanying financial statements of Texas Student Housing Authority — Cambridge at College Station (the "Project"), as of and for the year ended August 31, 2010, which collectively comprise the Project's basic financial statements as listed in the table of contents. Texas Student Housing Authority — Cambridge at College Station 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 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, 2010, 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 Authority — Cambridge at College Station as of August 31, 2010, and the respective 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 Authority — Cambridge at College Station will continue as a going concern. As discussed in Note II, H to the financial statements, the Project is in default on its certificates and certificate holders may choose to continue as a going concern. Management's plans in regard to these matters are discussed in Note II, H. 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 The management's discussion and analysis on pages 3 through 5 is not a required part of the basic financial statements but is supplementary 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 financial statements that collectively comprise the business-type activities of Texas Student Housing Authority — Cambridge at College Station's basic financial statements. The accompanying supplementary information on pages 17 and 18 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 basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. P&J&J � P. January 7, 2011 2 MANAGEMENT'S DISCUSSION AND ANALYSIS As staff of the Texas Student Housing Authority (the "Authority") — Cambridge College Station (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, 2010. 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 for 2010. FINANCIAL HIGHLIGHTS • The liabilities of the Project exceeded its assets at the close of the fiscal year by $7,451,364 due primarily to a decrease in net assets of 1,286,194 . • Major components of the expense overage were $1,018,101 in depreciation/ amortization, and$2,755,846 in interest expense. • At the end of the current fiscal year, the total cash balances were $3,256,674 in unrestricted cash and$1,870,127 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 C and D certificates which gives the senior certificate holder the right to accelerate. They are considered an event of default by the Trustee, which gives the senior certificate holders the right to accelerate and demand payment of the certificates in fall. 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. 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. 3 The statement of revenues, expenses and changes in net assets accounts for all of the Authority's revenues and expenses regardless of when cash is paid or received. The statement of cash flows recaps how cash increased year over year. 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 Installment Sale Agreement. As of August 31, 2009, these balances were as follows: Replacement Fund $ 159,948 Series A Reserve Fund 682,275 Series B Reserve Fund 512,400 Series A Interest Account 98,893 Series A Principal Account 105,000 Series B Interest Account 29,036 Series B Principal Fund 102,083 Transaction Costs Payment Fund 32,650 Utility Deposits 5,000 Emergency Fund 75,000 Current Receipts Fund 67,842 Total $ 1,870,127 Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Installment note payable. The Project's developer refinanced the original Installment Sale Agreement effective December 1, 2004,by issuing debt certificates in the following classes: Series A $ 16,900,000 Series B 4,350,000 Series C 4,820,000 Series D 5,380,000 Total $ 31,450,000 The note is payable at the rate of$231,545 monthly. Fixed Charge Coverage Ratio The Installment Sale Agreement provides for a fixed charges coverage ratio of 1.1. At this time, the Project has only realized a ratio of 1.05 and is thus technically in default of the Agreement. Upon default, the lender may accelerate maturity of the unpaid portion of the principal, however, it is not anticipated that this event will incur since foreclosure by the certificate holders would result in the loss of the Project's tax-exempt status. 4 ECONOMIC FACTORS AND NEXT YEAR'S BUDGET Leases at the Project have a duration that encompasses the school year, primarily the months of September through May. The June to August revenue is dependent on the ability to attract various camps/meetings. As the Project is tax-exempt through the Texas Higher Education Act, only those functions sponsored by the University are eligible for acceptance. The occupancy for this school year is 100%,thus the focus for this year will be on increasing this "summer"revenue. Although the fixed charges coverage ratio was only 1.05, all of the A and B certificate holders received all proceeds due them. The 2009/2010 budget clearly indicates that operating income will be sufficient to again service the A and B certificates. 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 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION STATEMENT OF NET ASSETS AUGUST 31,2010 ASSETS Current assets: Cash $ 3,256,674 Restricted cash 1,870,127 Accounts receivable,net of$64,045 allowance 462,105 Prepaid expenses 24,612 Total current assets 5,613,518 Capital assets: Land 2,899,597 Other capital assets,net of accumulated depreciation 22,547,375 25,446,972 Total capital assets 25,446,972 Total assets 31,060,490 LIABILITIES Current liabilities: Accounts payable 124,384 Accrued expenses 15,929 Deferred revenue and prepaid rent 2,244,087 Accrued interest 4,677,454 Installment loan payable 31,450,000 Total current liabilities 38,511,854 NET ASSETS Invested in capital assets,net of related debt ( 6,003,028) Unrestricted ( 1,448,336) Total net assets $( 7,451,364) The accompanying notes are an integral part of these financial statements. 6 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION STATEMENT OF REVENUES,EXPENSES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31,2010 OPERATING REVENUES Rental $ 5,196,326 Other 4,569 Total operating revenues 5,200,895 OPERATING EXPENSES Management fees 280,800 Administration and marketing 1,497,867 Cafeteria 456,904 Utilities 679,173 Repairs and maintenance 274,417 Insurance 53,325 Depreciation and amortization 1,018,101 Total operating expenses 4,260,587 OPERATING INCOME 940,308 NONOPERATING REVENUES (EXPENSES) Interest revenue 384 Interest expense ( 2,755,846) Total nonoperating revenues (expenses) ( 2,755,462) CHANGE IN NET ASSETS ( 1,815,154) NET ASSETS,BEGINNING ( 6,165,170) PRIOR PERIOD ADJUSTMENT 528,960 NET ASSETS,ENDING $( 7,451,364) The accompanying notes are an integral part of these financial statements. 7 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31,2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants $ 5,313,717 Other operating revenues 4,569 Cash paid to employees ( 1,284,413) Cash paid to suppliers ( 772,551) Net cash provided by operating activities 3,261,322 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal repayments on bonds ( 325,000) Interest paid ( 2,755,846) Net cash used by capital and related financing activities ( 3,080,846) CASH FLOWS FROM INVESTING ACTIVITIES Interest received 384 Net cash provided by investing activities 384 NET CHANGE IN CASH AND CASH EQUIVALENTS 180,860 CASH AND CASH EQUIVALENTS,BEGINNING 4,945,941 CASH AND CASH EQUIVALENTS,ENDING $ 5,126,801 Cash $ 3,256,674 Restricted cash 1,870,127 Total cash and cash equivalents $ 5,126,801 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 940,308 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 1,018,101 Changes in operating assets and liabilities: Accounts receivable 283,012 Other assets 3,864 Accounts payable ( 4,302) Accrued interest 1,212,671 Accrued liabilities ( 26,710) Deferred revenue and prepaid rent ( 165,622) Net cash provided by operating activities $ 3,261,322 The accompanying notes are an integral part of these financial statements. 8 TEXAS STUDENT HOUSING AUTHORITY— CAMBRIDGE AT COLLEGE STATION NOTES TO FINANCIAL STATEMENTS AUGUST 31,2010 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations Texas Student Housing Authority — Cambridge at College Station (the "Project"), a duly constituted authority of the Town of Westlake, Texas (the "Town") pursuant to Section 53.35(b) of the Texas Education Code, as amended (the "Act"). The Authority was established to acquire educational facilities and housing facilities to be used by the students, faculty and staff of institutions of higher education within the State of Texas. The Project's purpose is to own and operate a student housing facility known as Cambridge at College Station (the "College Station Project") in College Station, Texas. Cambridge at College Station was purchased from Cambridge Student Housing Development, L.P. (the "Developer") effective September 1, 2004. The Project obtained its financing through a seller-financed installment sale agreement. The accompanying financial statements present the operations of the Project,whose revenues are pledged for the installment note described herein. Cambridge at College Station is operated and managed under the terms of the First Amended and Restated Property Project Management and Leasing Agreement by and between the Authority and Asset Campus Housing, Inc. for the period audited. The Project's significant accounting policies are as 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. (continued) 9 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A. Reporting Entity (Continued) The criteria set forth require governmental reporting entities to determine their primary government for the purposes of annual reporting. The primary government is deemed to be financially accountable if it appoints a voting majority of the organization's governing body and (1) it 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 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. Capitalization,Depreciation and Impairment Policies Property and Depreciation Property and equipment are recorded at cost. Such costs include carpet and appliance replacements. Expenditures for routine maintenance and repairs are expensed as incurred. Property and equipment are depreciated using the straight-line method over the following useful lives: Buildings 30 years Improvements 15 years Equipment, furniture and fixtures 5 -20 years (continued) 10 L I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) D. Assets,Liabilities and Net Assets or Equity Cash and Cash Equivalents For the purpose of the statement of cash flows, the Project considers unrestricted cash and highly liquid investments with maturities of three months or less at the date of purchase to be cash and cash equivalents. Concentration of Credit Risk As of and during the year ended August 31, 2010, the Project had cash deposits with financial institutions in excess of the $250,000 amount insured by the Federal Deposit Insurance Corporation. Any amounts over the FDIC limit are insured with pledged securities by the Project's depository. Taxes The Project is an instrumentality of the Town of Westlake, therefore, its income is not subject to federal income taxation pursuant to Section 115 of the Internal Revenue Code. Additionally,the Project is exempt from local property taxes. Accounts Receivable 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. Advertising Costs All advertising costs are expensed as they are incurred. Advertising costs for the year ended August 31, 2010, were approximately$122,034. 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 the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 11 II. DETAILED NOTES ON ALL FUNDS A. Restricted Cash Restricted cash represents amounts held in escrow, which are restricted for the payment of expenses as required by the installment sale agreement. As of August 31, 2010, restricted cash consists of the following: Current Receipts $ 67,842 Emergency Fund 75,000 Replacement Fund 159,948 Series A Reserve 682,275 Series B Reserve 512,400 Series A Principal 105,000 Series A Interest 98,893 Series B Principal 102,083 Series B Interest 29,036 TR Costs Pymt FD 32,650 Utility Deposits 5,000 $ 1,870,127 The following is a brief description of the funds and accounts comprising the restricted cash balance at year-end, as defined by the installment sale agreement and the trust agreement: Replacement Fund— Amounts in the Replacement Fund may be used to pay the maintenance and repair costs related to the College Station Property, which the Project is obligated to pay pursuant to the installment sale agreement. Series A Reserve Fund—The amounts on deposit in this account were required to be contributed by the Developer and are to be used for the purpose of paying principal and interest on the Series A certificates as they become due in the event there should be insufficient funds in the Debt Service Fund. Series B Reserve Fund—The amounts on deposit in this account were required to be contributed by the Developer and are to be used for the purpose of paying principal and interest on the Series B certificates as they become due in the event there should be insufficient funds in the Debt Service Fund. Series A Principal Fund — Amounts in the Series A Principal Fund represent payments set aside for the repayment of the principal balance on the Series A certificates. Transaction Costs Payment Fund— Amounts in the Transaction Costs Payment Fund are to be used to pay for debt issuance costs. Emergency Operating Fund— Amounts in the Emergency Operating Fund may be used to pay operating expenses in the event that funds from the depository account are less than operating expenses. (continued) 12 II. DETAILED NOTES ON ALL FUNDS (Continued) A. Restricted Cash (Continued) Series D Interest Fund — Amounts in the Series D Interest Fund are used to accumulate funds to pay interest on the Series D certificates. Current Receipts Fund—Amounts in the Current Receipts Fund are to be used to accumulate funds from the collections of rent payments and other income from the College Station Project. B. Installment Note Pam The Project's installment note payable is summarized as follows: Interest Lender/Security/Due Date Rate Balance Cambridge Student Housing Financing Company, L.P.; substantially all assets and assignment of rents; due November 1,2039. 8.00% $ 31,450,000 The Project's installment note is payable monthly with principal and interest payments of $231,545 until November 1, 2039. The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2010: Amounts Beginning Ending Due Within Balance Increases Decreases Balance One Year Installment note $ 31,775,000 $ - $ 325,000 $ 31,450,000 $ 31,450,000 The Project's original Developer refinanced the installment note through a secondary offering with Cambridge Student Housing Financing Company, L.P. The debt certificates were sold to private investors in the following classes: Class(Series) Offering Total A $ 16,900,000 B 4,350,000 C 4,820,000 D 5,380,000 Total $ 31,450,000 (continued) 13 II. DETAILED NOTES ON ALL FUNDS (Continued) B. Installment Note Payable(Continued) Each class has certain rights and privileges, as contained in the private placement memorandum. As a part of the offering, the Project entered into a trust agreement with J. P. Morgan Trust Company, N.A. (the "Trustee") for the purpose of determining that each class is paid in accordance with the private placement memorandum. At August 31, 2010, the Project was not in compliance with the fixed charge coverage ratio. Should the project default, the lender may accelerate the maturity of the unpaid portion of the principal payable under the installment sale agreement. However, the Authority does not anticipate this event will occur, since foreclosure by private interests would result in the loss of tax-exempt status for the Project. C. Capital Assets Capital asset activity for the Project for the year ended August 31, 2010, was as follows: Beginning Ending Balance Increase Decrease Reclass Balance Capital assets,not being depreciated: Land $ 2,899,597 $ - $ - $ - $ 2,899,597 Total capital assets, not being depreciated 2,899,597 - - - 2,899,597 Capital assets,being depreciated: Building 27,727,646 - - - 27,727,646 Furniture and fixtures 2,594,804 - - - 2,594,804 Total capital assets, being depreciated 30,322,450 - - - 30,322,450 Less accumulated depreciation for: Building ( 4,372,287) ( 896,177) - ( 5,268,464) Furniture and fixtures ( 2,384,687) ( 121,924) - ( 2,506,611) Total accumulated depreciation ( 6,756,974) ( 1,018,101) - ( 7,775,075) Total capital assets, being depreciated,net 23,565,476 ( 1,018,101) 22,547,375 Capital assets,net $ 26,465,073 $( 1,018,101) $ $ - $ 25,446,972 (continued) 14 II. DETAILED NOTES ON ALL FUNDS (Continued) D. Geography and Concentration Resident leases generally have a duration that encompasses the school year. This enables the Project to pass on inflationary increases in operating expenses on a timely basis; however, this exposes the Project to rental rate decreases during economic downturns. Additionally, competition from nearby university housing properties in College Station, Texas influences the housing rates charged to students. Despite these risks, the Project believes there will be a continued strong demand for its dwelling units. E. Net Assets Net assets represent the residual assets after liabilities are deducted. Net 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 certificates, notes, and other debt that are attributed to the acquisition, construction, or improvement of those assets. Restricted for Debt Service—consists of net assets for which conditions are either externally imposed by creditors, grantors and the like, or imposed by law through constitutional provisions or enabling legislation. At August 31, 2010, the total funds available for debt service were less than the accrued interest due at August 31,2010. As a result,net assets restricted for debt service is shown at zero. Unrestricted—available for general use of the Project without restriction. F. Management Fees/Related Party Transactions The Project pays Asset Campus Housing asset management fees for the management of the College Station Property. The Project recorded property management fees of approximately $280,800 for the period ended August 31, 2010. Administration and marketing expenses include approximately $102,087 for administrative fees earned by Texas Student Housing Authority. There were no administrative fees included in accounts payable at August 31, 2010. G. Commitments and Contingencies During fiscal year 2006, the Brazos County Tax — Assessor's office filed suit against the Project in order to eliminate the Project's tax-exempt status. This would force the Project to begin paying property taxes on the property owed by the Project. The County is also seeking back property taxes previously not paid as the Project was under tax-exempt status. The status of this suit is unknown at this time and a liability has not been booked. Should the county prevail, the Project would owe the county a material amount of property taxes, from both current and prior periods. (continued) 15 II. DETAILED NOTES ON ALL FUNDS (Continued) G. Commitments and Contingencies (Continued) The Project has not 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. H. Going Concern The 2010 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 partial non- payment 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. This condition raises substantial doubt about the Project's ability to continue as a going concern. 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. I. Prior Period Adjustment The Project recorded a prior period adjustment to remove liabilities left over from the prior management company. These liabilities were no longer enforceable against the current management and therefore no longer considered a liability. The adjustment resulted in an increase in beginning net assets of$528,960. 16 SUPPLEMENTAL SCHEDULES TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION SCHEDULE I-SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL FOR THE YEAR ENDED AUGUST 31,2010 Budget Actual Variance REVENUES AND OTHER SUPPORT Rental $ 5,336,519 $ 5,196,326 $( 140,193) Other 602,272 4,569 ( 597,703) Interest - 384 384 Total revenues and other support 5,938,791 5,201,279 ( 737,512) OPERATING EXPENSES Administrative and marketing 1,515,662 1,497,867 17,795 Management fees 280,800 280,800 - Cafeteria 931,223 456,904 474,319 Utilities 463,847 679,173 ( 215,326) Repairs and maintenance 197,110 274,417 ( 77,307) Insurance 117,150 53,325 63,825 Total operating expenses 3,505,792 3,242,486 263,306 REVENUE AVAILABLE FOR FIXED CHARGES 2,432,999 1,958,793 ( 474,206) OTHER EXPENSES Depreciation and amortization - 1,018,101 ( 1,018,101) Interest - 2,755,846 ( 2,755,846) Total other expenses - 3,773,947 ( 3,773,947) EXCESS OF EXPENSES OVER REVENUES $ 2,432,999 $( 1,815,154) $( 4,248,153) 17 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION SCHEDULE II-FIXED CHARGES COVERAGE RATIO FOR THE YEAR ENDED AUGUST 31,2010 CALCULATION OF FIXED CHARGES COVERAGE RATIO Total gross revenues $ 5,201,279 Total expenses $( 7,016,433) Add: Interest 2,755,846 Depreciation and amortization 1,018,101 Property management fees in excess of base property management fee - Adjusted expenses ( 3,242,486) Adjusted net operating income available to pay fixed charges $ 1,958,793 Fixed charges/maximum principal and interest for fiscal year-end $ 1,872,700 Fixed charges coverage ratio 1.05 Required ratio 1.10 Pass or fail Fail 18 TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT FINANCIAL REPORT AUGUST 31, 2010 i TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT TABLE OF CONTENTS AUGUST 31,2010 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 Statementof Cash Flows ................................................................................................. 8 Notes to Financial Statements.......................................................................................... 9- 17 SUPPLEMENTAL SCHEDULES - Schedule I—Schedule of Revenues and Expenses............................................................. 18 i rff4zK1 PATTILLO, BROWN & HILL, r._L.P. CERTIFIED PUBLIC ACCOUNTANTS ■ BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors Texas Student Housing Authority— Town Lake Austin Project Westlake, Texas We have audited the accompanying financial statements of Texas Student Housing Authority — Town Lake Austin Project (the "Project"), as of and for the year ended August 31, 2010, which collectively comprise the Project's basic financial statements as listed in the table of contents. Texas Student Housing Authority— Town Lake Austin Project is a component unit of the Town of Westlake. These financial statements are the responsibility of the Project 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 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, 2010, 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 Authority—Town Lake Austin Project as of August 31, 2010, and the respective changes in its 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 Authority—Town Lake Austin 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 the Trustee or Service Agent 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. 1 401 WEST HIGHWAY 6■P.O.BOX 20725■WACO,TX 76702-0725■(254)772-4901 ■FAX:(254)772-4920■www.pbhepa.com AFFILIATE OFFICES:BROWNSVILLE,TX(956)544-7778■HILLSBORO,TX(254)582-2583 TEMPLE,TX(254)791-3460■ALBUQUERQUE,NM(505)266-5904 The management's discussion and analysis on pages 3 through 5 is not a required part of the basic financial statements but is 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 financial statements that collectively comprise the Texas Student Housing Authority — Town Lake Austin Project's basic financial statements. The accompanying supplemental information on page 18 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 basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. PO" 4RAN04", January 7, 2011 2 MANAGEMENT'S DISCUSSION AND ANALYSIS As staff of the Texas Student Housing Authority (the "Authority") — Town Lake Austin 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, 2010. 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 for 2010. FINANCIAL HIGHLIGHTS • The liabilities of the Project exceeded its assets at the close of the fiscal year by $5,372,345, an increase of$1,080,655 over the prior year. • Operating revenue of$2,811,265 is $98,302 less than budget; and operating expenses were $20,786 more than budget. • At the end of the current fiscal year, the total cash balances were $285,397 in unrestricted cash and $359,716 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 a supplemental schedule. 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- TOWN LAKE AUSTIN PROJECT NET ASSETS Business-type Activities 2010 2009 Current and other assets $ 1,448,362 $ 1,999,838 Capital assets 15,483,507 16,116,089 Total assets 16,931,869 18,115,927 Current liabilities 1,158,969 1,181,508 Noncurrent liabilities 21,145,245 21,384,493 Total liabilities 22,304,214 22,566,001 Net assets: Invested in capital assets, net of related debt ( 5,661,738) ( 5,268,404) Restricted ( 447,694) 265,266 Unrestricted 737,087 553,064 Total net assets $( 5,372,345) $( 4,450,074) 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- TOWN LAKE AUSTIN PROJECT CHANGES IN NET ASSETS Business-type Activities 2010 2009 Total operating revenue $ 2,810,752 $ 2,887,751 Total operating expenses 2,240,752 2,309,003 Total operating income 570,000 578,748 Interest income 513 1,489 Interest expense ( 1,651,168) ( 1,668,647) Total nonoperating loss ( 1,650,655) ( 1,667,158) CHANGE IN NET ASSETS ( 1,080,655) ( 1,088,410) NET ASSETS,BEGINNING ( 4,450,074) ( 3,361,664) PRIOR PERIOD ADJUSTMENT 158,384 - NET ASSETS,ENDING $( 5,372,345) $( 4,450,074) 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, 2010, these balances were as follows: Bond Proceeds Interest Fund, Series 2002 A-2 $ 5,240 Debt Service Reserve Fund 85,791 Repair and Replacement Fund 174,357 Deferred Debt Service 16,426 Tax and Insurance Fund 2,120 Fee and Expense Fund 75,791 Initial Purchase Fund ( 9) Total $ 359,716 Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Bonds payable. As of August 31, 2010, the following amounts on the Series 2002 A-1 and 2002 A-2 were payable: Series 2002 A-1 $ 16,056,004 Series 2002 A-2 5,089,241 Total $ 21,145,245 For the fiscal year ending August 31, 2010, the total principal and interest payment is calculated at $1,497,038. A total of$239,248 in principal was paid during 2010. 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 10-month leases exist. These leases do bring a monthly premium over the 12-month leases. Occupancy for the fiscal year ending August 31, 2010, forecasts at 100%. However, rental rates, again due to competitive pressures will not see a large increase. 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 TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT STATEMENT OF NET ASSETS AUGUST 31,2010 ASSETS Current assets: Cash $ 285,397 Restricted cash 359,716 Accounts receivable 40,411 Prepaid expenses 20,562 Total current assets 706,086 Capital assets: Land 2,182,816 Other capital assets,net of accumulated depreciation 13,300,691 Total capital assets 15,483,507 Intangible assets: Debt issue costs,net of amortization 742,276 Total intangible assets 742,276 Total assets 16,931,869 LIABILITIES Current liabilities: Accounts payable 164,589 Accrued liabilities 5,414 Deferred revenue and prepaid rent 181,556 Accrued interest 807,410 Total current liabilities 1,158,969 Noncurrent liabilities: Bonds payable 21,145,245 Total noncurrent liabilities 21,145,245 Total liabilities 22,304,214 NET ASSETS Invested in capital assets,net of related debt ( 5,661,738) Restricted for debt service ( 447,694) Unrestricted 737,087 Total net assets $( 5,372,345) The accompanying notes are an integral part of these financial statements. 6 TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT STATEMENT OF REVENUES,EXPENSES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED AUGUST 31,2010 OPERATING REVENUES Rental $ 2,703,931 Other 106,821 Total operating revenues 2,810,752 OPERATING EXPENSES Personnel 296,405 Contract services 54,168 Utilities 520,775 Travel 418 Repairs and maintenance 86,257 Turnover 89,622 Advertising and promotion 62,327 Administration 129,173 Management fees 128,641 Replacements 193,483 Depreciation and amortization 679,483 Total operating expenses 2,240,752 OPERATING INCOME 570,000 NONOPERATING REVENUES(EXPENSES) Interest income 513 Interest expense ( 1,651,168) Total nonoperating revenues(expenses) ( 1,650,655) CHANGE IN NET ASSETS ( 1,080,655) NET ASSETS,BEGINNING ( 4,450,074) PRIOR PERIOD ADJUSTMENT 158,384 NET ASSETS,ENDING $( 5,372,345) The accompanying notes are an integral part of these financial statements. 7 TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31,2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants $ 2,545,479 Cash paid to employees ( 494,937) Cash paid to suppliers ( 1,085,523) Net cash provided by operating activities 965,019 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable ( 239,248) Interest paid ( 1,257,790) Net cash used in capital and related financing activities ( 1,497,038) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 513 Net cash provided by investing activities 513 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 531,506) CASH AND CASH EQUIVALENTS,BEGINNING 1,176,619 CASH AND CASH EQUIVALENTS,ENDING $ 645,113 Cash $ 285,397 Restricted cash 359,716 Total cash and cash equivalents $ 645,113 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 570,000 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 679,482 Changes in operating assets and liabilities: Accounts receivable ( 21,368) Prepaids ( 5,562) Trade accounts payable 105,720 Management fees payable ( 79,200) Deferred revenue ( 243,905) Other current liabilities ( 40,148) Net cash provided by operating activities $ 965,019 The accompanying notes are an integral part of these financial statements. 8 TEXAS STUDENT HOUSING AUTHORITY— TOWN LAKE AUSTIN PROJECT NOTES TO FINANCIAL STATEMENTS AUGUST 31,2010 I. GENERAL STATEMENT Texas Student Housing Authority (the "Authority"), a higher education authority, was established on January 23, 1995, as a duly constituted authority of the Town of Westlake, Texas, pursuant to Section 53.11 of Chapter 53 of the Texas Education Code, as amended. The Authority's purpose among other things is to acquire, finance, and operate student housing facilities. The Authority operates several student housing facilities in Texas and one of the housing projects is the Town Lake Austin Project (the "Project"). The Project was purchased from Jefferson Commons — Austin, L.P., a Delaware limited partnership on December 17, 2002. The Project obtained its financing through the issuance of Texas Student Housing Authority — Student Housing Revenue Bonds (Jefferson Commons at Town Lake Project), Series 2002 A-1 and A-2 (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 2002 A-1 and Series 2002 A-2 Bonds were issued in the face amounts of$19,480,000 and $5,670,000, respectively. The accompanying financial statements present the operations of the one Project, whose revenue streams are pledged for the Bonds described herein. 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 February 2005. The Project is now managed and operated by Asset Campus Housing under the terms of a Property Management and Leasing Agreement dated March 1,2005. The Property Management Agreements are collectively referred to as the"Agreements." The 2010 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 not making full 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. 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: (continued) 9 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A. Reporting Entity (Continued) Financial Accountability — 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 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. 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. 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, 2010, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of $359,716 that is held by the Trustee for the Bonds payable under provisions of the Trust Indenture. During the year ended August 31, 2010, the investment income received from cash was $513. See Note III for risk disclosures and breakdown of restricted cash accounts. (continued) 10 II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Assets,Liabilities and Net Assets or Equity (Continued) Accounts Receivable 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. As of August 31, 2010,management has determined that all accounts doubtful of collection have been charged to operations and an allowance is not required. 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, 2010, were $62,327. 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. 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. The indenture provides for a replacement fund requirement. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Estimated Asset Class Useful Lives Building 30 Furniture,fixtures and equipment 3-20 i 11 III. DETAILED NOTES ON ALL FUNDS A. Cash and Investments At August 31, 2010, the carrying amount of Texas Student Housing Authority—Town Lake Austin Project deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total $645,113 of which $359,716 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, 2010,restricted cash consists of the following funds and accounts: Fund/Account Description Bond Proceeds Interest Fund, Series 2002 A-2 $ 5,240 Debt Service Reserve Fund 85,791 Repair and Replacement Fund 174,357 Deferred Debt Service 16,426 Tax and Insurance Fund 2,120 Fee and Expense Fund 75,791 Initial Purchase Fund ( 9) Total $ 359,716 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 Proceeds Fund — The Trustee makes monthly deposits in the Bond Proceeds Fund pursuant to the Trust Indenture. Amounts in the Bond Proceeds 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. Debt Service Reserve Fund— The amounts on deposit in this account are to be used for the purpose of paying principal and interest on the Bonds in the event the principal and interest is not paid by issuer in accordance with the terms of the indenture and written notice of the Servicing Agent. Proiect Fund— Amounts in the Project Fund are held and disbursed for costs of the Project. (continued) 12 III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) Restricted Cash (Continued) Repair and Replacement Fund— Amounts in the Repair and Replacement Fund may be used to make mandatory repairs of the Project pursuant to the Trust Indenture. 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. Temporary Funds and Accounts—The Trustee may establish and maintain for so long as is necessary one or more Temporary Funds and accounts under this indenture. The Deferred Debt Service Reserve Fund, Tax and Insurance Fund, and Initial Purchase Funds are Temporary Funds at August 31, 2010. Residual 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 Residual Fund. Deferred Debt Service Fund— The amounts on deposit in this account are to be used to pay the next interest payment on the Series A-2 Bonds. Tax and Insurance Fund — The amounts on deposit in this account represent 1/12 th of the ad valorem property taxes, if any, and 1/12th of the annual premiums for insurance due, determined in accordance with the annual budget. Initial Purchase Fund—The amounts on deposit in this account represent monies that were withheld from the seller at closing and were to be paid once certain operating criteria were met. These conditions have not been met yet. Fee and Expense Fund — The amounts on deposit in this account represent money set aside for future payments to the Program Administrator. 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 — Town Lake Austin Project is not significantly exposed to interest rate risk as all investments earn a variable rate. (continued) 13 III. DETAILED NOTES ON ALL FUNDS (Continued) A. Cash and Investments (Continued) 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—Town Lake Austin Project holds all of its cash and investments with the Bond Trustee and commercial banks. Concentration of Credit Risk The investment policy of Texas Student Housing Authority — Town Lake Austin Project is subject to the indenture agreement of the Bonds. As of August 31, 2010, the Project held all of its restricted cash balances with the Trustee, which represents 56% of the total cash and investments held at August 31, 2010. 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 parry. 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, 2010,the Project has unrestricted cash of$285,397 (bank balance $295,366). Of the bank balance, $250,000 was covered by federal depository insurance while the remaining $45,366 was collateralized by a Bank Deposit Guarantee Bond from the Project's depository in the amount of$2,700,000. (continued) 14 III. DETAILED NOTES ON ALL FUNDS (Continued) B. Capital Assets Capital asset activity for the Project for the year ended August 31, 2010,was as follows: Beginning Ending Balance Additions Retirements Balance Capital assets,not being depreciated: Land $ 2,182,816 $ - $ - $ 2,182,816 Total capital assets, not being depreciated 2,182,816 - - 2,182,816 Capital assets,being depreciated: Building and improvements 13,270,150 - - 13,270,150 Capitalized purchase costs 887,095 - - 887,095 Land improvements 2,806,596 - - 2,806,596 Unit appliances 295,134 - - 295,134 Furniture and fixtures 915,951 - - 915,951 Total capital assets, being depreciated 18,174,926 - - 18,174,926 Less accumulated depreciation for: Capitalized purchase costs 175,248 28,484 - 203,732 Building and equipment 4,066,405 604,098 - 4,670,503 Total accumulated depreciation 4,241,653 632,582 - 4,874,235 Total capital assets, being depreciated,net 13,933,273 ( 632,582) - 13,300,691 Capital assets,net $ 16,116,089 $( 632,582) $ - $ 15,483,507 C. 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 November 1, 2002. The Bonds are payable solely from the revenues generated by the Project and are secured by 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 7.76% to 8.69% and are payable semi-annually on July 1 and January 1 of each year thereafter. (continued) 15 III. DETAILED NOTES ON ALL FUNDS (Continued) C. Bonds Payable(Continued) The following is a summary of long-term debt transactions of the Project for the 12-month period ended August 31, 2010: Amounts Beginning Ending Due Within Balance Increases Decreases Balance One Year Revenue Bonds: 2002 A-1 Bonds $ 16,295,252 $ - $ 239,248 $ 16,056,004 $ 260,159 2002 A-2 Bonds 5,089,241 - - 5,089,241 5,089,241 Total $ 21,384,493 $ - $ 239,248 $ 21,145,245 $ 5,349,400 The debt is to be amortized on the A-1 Bonds through 2033 with monthly payments of $124,726 and the A-2 Bonds through 2038 with monthly payments of $167,675 starting November 1, 2033. The A-2 Bonds have no regular principal payments until the year 2033. The Bonds also had a clause for an initial purchase release draw. The requirements for that draw were not met and during 2006, the funds held in the initial Purchase Fund were applied to principal on the Bonds. The annual requirements to amortize all debts outstanding as of August 31, 2010, are as follows: Year Ending Governmental Activities August 31, Principal Interest Total 2011 $ 260,159 $ 1,631,478 $ 1,891,637 2012 281,080 1,610,557 1,891,637 2013 303,683 1,587,954 1,891,637 2014 328,105 1,563,532 1,891,637 2015 354,491 1,537,146 1,891,637 2016-2020 2,248,765 7,209,420 9,458,185 2021-2025 3,310,558 6,147,627 9,458,185 2026-2030 4,873,699 4,584,486 9,458,185 2031-2035 9,184,705 1,707,029 10,891,734 Totals $ 21,145,245 $ 27,579,229 $ 48,724,474 D. 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. (continued) 16 III. DETAILED NOTES ON ALL FUNDS (Continued) D. 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. Unrestricted Net Assets consists of the portion of net assets after invested in capital assets, net of related debt and restricted for debt service has been satisfied. E. Management Fees The Project paid JPI property and asset management fees for the Project through February 28, 2005. Effective March 1, 2005, the Project entered into a management agreement with ACH and began paying management fees to ACH at that date. During 2010, the Project recorded management fees of$128,641 to ACH. F. Concentrations The Project consists of one property in Austin, Texas, and is dependent upon the Austin area and the higher education facilities in the Austin area for revenues. 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. H. Prior Period Adjustment The Project recorded a prior period adjustment to remove liabilities left over from the prior management company. These liabilities were no longer enforceable against the current management and therefore no longer considered a liability. The adjustment resulted in an increase to beginning net assets of$158,384. 17 SUPPLEMENTAL SCHEDULE I TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT SCHEDULE I-SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL FOR THE YEAR ENDED AUGUST 31,2010 Budget Actual Variance REVENUES AND OTHER SUPPORT Rental $ 2,829,167 $ 2,703,931 $( 125,236) Other 80,400 106,821 26,421 Interest - 513 513 Total revenues and other support 2,909,567 2,811,265 ( 98,302) OPERATING EXPENSES Personnel 303,074 296,405 6,669 Contract services 57,060 54,168 2,892 Utilities 490,950 520,775 ( 29,825) Repairs and maintenance 42,725 86,257 ( 43,532) Turnover 103,350 89,622 13,728 Advertising and promotion 70,175 62,327 7,848 Travel - 418 ( 418) Administration 151,025 129,173 21,852 Total operating expenses 1,218,359 1,239,145 ( 20,786) REVENUES AVAILABLE FOR FIXED CHARGES 1,691,208 1,572,120 ( 119,088) OTHER EXPENSES Management fees 116,383 128,641 ( 12,258) Replacements 188,550 193,483 ( 4,933) Depreciation and amortization - 679,483 ( 679,483) Interest - 1,651,168 ( 1,651,168) Total other expenses 304,933 2,652,775 2,347,842 EXCESS OF EXPENSES OVER(UNDER)REVENUES $ 1,386,275 $L1,080,655) $( 2,466,930) 18