Loading...
HomeMy WebLinkAboutDenton Audit 08-31-16TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT A Component Unit of the Town of Westlake FINANCIAL REPORT AUGUST 31, 2016 C O N T E N T S Page INDEPENDENT AUDITOR’S REPORT.................................................................................... 1 MANAGEMENT’S DISCUSSION AND ANALYSIS (unaudited) ................................................ 4 BASIC FINANCIAL STATEMENTS Statement of Net Position ................................................................................................ 8 Statement of Revenues, Expenses, and Changes in Net Position ................................... 9 Statement of Cash Flows ............................................................................................... 10 Notes to Financial Statements ....................................................................................... 11 SUPPLEMENTAL INFORMATION Schedule I – Schedule of Revenues and Expenses – Budget and Actual ...................... 20 Schedule II – Certificate of the Fixed Charges Coverage Ratio ...................................... 21 INDEPENDENT AUDITOR’S REPORT To the Board of Directors Texas Student Housing Corporation - Denton Project Report on the Financial Statements We have audited the accompanying financial statements of Texas Student Housing Corporation - Denton Project (the Project), a component unit of Town of Westlake, as of and for the year ended August 31, 2016, and the related notes to the financial statements, which collectively comprise the Project’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements The Project’s management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Texas Student Housing Corporation - Denton Project Page 2 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Project as of August 31, 2016, and the changes in its financial position and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter Regarding Going Concern The accompanying financial statements have been prepared assuming that the Project will continue as a going concern. As discussed in Note 9 to the financial statements, the Project is in default on its bonds due to failure to make principal and interest payments when due and payable. This gives the bondholders the right to accelerate and demand payment on the bonds in full. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters also are described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 4 – 7 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Project’s basic financial statements. The Schedule of Revenues and Expenses – Budget and Actual and the Certificate of the Fixed Charges Coverage Ratio are presented for purposes of additional analysis and are not a required part of the basic financial statements. Texas Student Housing Corporation - Denton Project Page 3 The Schedule of Revenues and Expenses – Budget and Actual and the Certificate of the Fixed Charges Coverage Ratio are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Revenues and Expenses – Budget and Actual and the Certificate of the Fixed Charges Coverage Ratio are fairly stated, in all material respects, in relation to the basic financial statements as a whole. WEAVER AND TIDWELL, L.L.P. Dallas, Texas January 23, 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS (unaudited) TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT MANAGEMENT’S DISCUSSION AND ANALYSIS YEAR ENDED AUGUST 31, 2016 (unaudited) 4 As staff of the Texas Student Housing Corporation – Denton 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, 2016. We encourage readers to consider the information presented herein in conjunction with the Project’s financial statements which follow this section. As the Project is a component unit of the Town of Westlake and is thus considered a governmental entity, Governmental Accounting Standards Board Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments has been implemented. The reader should note that this financial report addresses only the financial condition of the Project itself. FINANCIAL HIGHLIGHTS • The liabilities of the Project exceeded its assets at the close of the fiscal year by $15,903,516, a decrease of $499,959 from the prior year. • At the end of the current fiscal year, the total cash balances were $451,153 in unrestricted cash and $1,920,451 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Project’s basic financial statements. The Project’s report consists of three parts: Management’s Discussion and Analysis, the basic financial statements (which include notes to financial statements), and supplemental information. The basic financial statements include a statement of net position, statement of revenues, expenses, and changes in net position, and a statement of cash flows. The Project is being treated as a going concern. The Project is in default on its bonds and is not financially able to make scheduled principal and interest payments on its outstanding debt. This is considered an event of default by the Trustee, which gives the bondholders the right to accelerate and demand payment of the bonds in full. Management and the property manager are in the process of developing plans to increase occupancy and rental rates at the property to improve its financial performance. The statement of net position presents information on the Project’s assets and liabilit ies with the difference between the two reported as net position. The statement of revenues, expenses, and changes in net position accounts for all of the Project’s revenues and expenses regardless of when cash is paid or received. The statement of cash flows reflects cash inflows and outflows by operating, noncapital financing, capital financing, and investing activities during the year. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT MANAGEMENT’S DISCUSSION AND ANALYSIS YEAR ENDED AUGUST 31, 2016 (unaudited) 5 Table 1 provides a summary of the statement of net position for the current and prior fiscal years: TABLE 1 - NET POSITION 2016 2015 Current and other assets 2,455,143$ 2,349,974$ Capital assets 14,751,118 15,616,401 Total assets 17,206,261 17,966,375 Current liabilities 33,109,777 33,369,932 Net position Net investment in capital assets (10,056,498) (9,988,730) Unrestricted (5,847,018) (5,414,827) Total net position (15,903,516)$ (15,403,557)$ Business-type Activities Table 2 provides a summary of the statement of revenues, expenses and changes in net position for the current and prior fiscal years: TABLE 2 - CHANGES IN NET POSITION 2016 2015 Total operating revenues 5,071,394$ 4,914,769$ Total operating expenses (2,961,342) (2,943,228) Total operating income 2,110,052 1,971,541 Interest income 4,340 1,895 Interest expense (2,614,351) (2,610,256) Total nonoperating expenses (2,610,011) (2,608,361) CHANGE IN NET POSITION (499,959) (636,820) NET POSITION, BEGINNING (15,403,557) (14,766,737) NET POSITION, ENDING (15,903,516)$ (15,403,557)$ Business-type Activities TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT MANAGEMENT’S DISCUSSION AND ANALYSIS YEAR ENDED AUGUST 31, 2016 (unaudited) 6 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. 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, 2016, these balances were as follows: Revenue Fund 5$ Bond Fund - Series 2001A 232,862 Bond Fund - Series 2001B 77 Repair and Replacement Fund 13 Series A Principal Fund 62,592 Series B Principal Fund 3 Operating Reserve Fund 7 Debt Service Reserve 2001A Account 1,624,526 Debt Service Reserve 2001B Account 366 Total 1,920,451$ Non-Restricted Cash Non-restricted cash is available for general use of the Project. Bonds Payable As of August 31, 2016, the following amounts on the Series 2001A and Series 2001B were payable: 2001A Bonds 22,090,000$ 2001B Bonds 3,240,000 Less discounts on bonds issued (522,384) Total 24,807,616$ For the fiscal year ending August 31, 2016, total principal and interest payments were $2,898,325, of which $835,000 was principal. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT MANAGEMENT’S DISCUSSION AND ANALYSIS YEAR ENDED AUGUST 31, 2016 (unaudited) 7 BUDGETARY ANALYSIS Revenues and other support of $5,075,734 is $48,742 less than budget. Operating expenses (not including depreciation and amortization and interest expense) of $2,096,059 is $76,401 less than budgeted. ECONOMIC FACTORS AND NEXT YEAR’S BUDGET Leases at the Project are primarily 12-month leases, however, due to competitive and market conditions, a relatively minor number of six and ten month leases exist. These leases do bring a monthly premium over the 12 month leases. Occupancy for the the fiscal year ending August 2017 forecasts at 98%. Rental rates will see a small increase. An increased capital expense budget has been submitted to the senior bond holders for review and approval to cover current and future capital maintenance needs. CONTACTING THE AUTHORITY’S FINANCIAL MANAGEMENT This financial report is designed to provide the reader with a general overview of the Project’s finances and to demonstrate the Project’s accountability for the money it receives. If you have any questions about this report, or need additional information, please contact Tracy Schornack at (817) 430-5874. BASIC FINANCIAL STATEMENTS TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT STATEMENT OF NET POSITION AUGUST 31, 2016 The Notes to Financial Statements are an integral part of this statement. 8 Current Assets Cash 451,153$ Restricted cash 1,920,451 Accounts receivable 48,532 Prepaid expenses 35,007 Total current assets 2,455,143 Capital Assets Land 2,200,000 Other capital assets, net of accumulated depreciation 12,551,118 Total capital assets 14,751,118 Total Assets 17,206,261 Current Liabilities Accounts payable 254,884 Accrued liabilities 13,818 Unearned revenue and prepaid rent 230,443 Accrued interest 7,803,016 Bonds payable 24,807,616 Total current liabilities 33,109,777 Net investment in capital assets (10,056,498) Unrestricted (5,847,018) Total net position (15,903,516)$ NET POSITION LIABILITIES ASSETS TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION FOR THE YEAR ENDED AUGUST 31, 2016 The Notes to Financial Statements are an integral part of this statement. 9 OPERATING REVENUES Rental income 4,916,605$ Other income 154,789 Total operating revenues 5,071,394 OPERATING EXPENSES Personnel expenses 425,223 Contract services 104,074 Utilities 775,877 Repairs and maintenance 173,477 Turnover expense 248,620 Advertising and promotion 75,840 Administration expense 136,878 Management fees 153,544 Depreciation 865,283 Travel 2,526 Total operating expenses 2,961,342 OPERATING INCOME 2,110,052 NONOPERATING REVENUES (EXPENSES) Interest income 4,340 Interest expense (2,614,351) TOTAL NONOPERATING EXPENSES (2,610,011) CHANGE IN NET POSITION (499,959) NET POSITION, BEGINNING (15,403,557) NET POSITION, ENDING (15,903,516)$ TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2016 The Notes to Financial Statements are an integral part of this statement. 10 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants 5,087,425$ Cash paid to suppliers (2,122,201) Net cash provided by operating activities 2,965,224 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable (835,000) Interest paid (2,063,325) Net cash used in capital and related financing activities (2,898,325) CASH FLOWS FROM INVESTING ACTIVITIES Interest received 4,340 Net change in cash and cash equivalents 71,239 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,300,365 CASH AND CASH EQUIVALENTS AT END OF YEAR 2,371,604$ Cash 451,153$ Restricted cash 1,920,451 Total cash and cash equivalents 2,371,604$ RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income 2,110,052$ Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 865,283 Changes in operating assets and liabilities: Accounts receivable (26,888) Prepaid expenses (7,042) Accounts payable (19,100) Unearned revenue and prepaid rent 42,919 Net cash provided by operating activities 2,965,224$ TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 11 NOTE 1. GENERAL STATEMENT Texas Student Housing Corporation – Denton Project (the Project), a Texas nonprofit organization, was incorporated on May 17, 2001 as a component unit of the Town of Westlake, Texas (the Town) pursuant to Section 53.35(b) of the Texas Education Code, as amended (the Act). The Project’s primary purpose is to purchase, own, and operate a student housing facility known as The Ridge at North Texas. The Project was purchased from Jefferson Commons – Denton, L.P. on July 1, 2001. The Project obtained its financing through the issuance of Texas Student Housing Corporation – Denton Project Texas Student Housing Revenue Bonds (University of North Texas Project), Series 2001A and Subordinate Series 2001B (the Bonds). The Bonds were issued through a Trust Indenture (the Indenture) by and between the Texas Student Housing Authority (the Authority) and The Bank of New York (the Trustee). The Series 2001A and Subordinate Series 2001B bonds were issued in the face amounts of $29,105,000 and $5,250,000, respectively. The accompanying financial statements present the operations of the Project, whose revenue streams are pledged for the bonds described herein. The Authority was also established to acquire educational facilities and housing facilities to be used by the students, faculty and staff of institutions of higher education and facilities incidental, subordinate or related thereto or appropriate within the State of Texas. The Project is managed and operated by Asset Campus Housing (ACH) under the terms of a Property Management and Leasing Agreement dated March 1, 2005. NOTE 2. 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: 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 the Governmental Accounting Standards Board (GASB) Statement No. 14 as amended by GASB statements No. 39 and 61. The criteria used are 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) 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. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 12 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Reporting Entity – Continued 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. Accordingly, the Project reports no component units. 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 Project 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 position and the operating statement presents increases (revenues) and decreases (expenses) in net total position. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized at the time the liability is incurred. GASB is the accepted standards setting body for establishing generally accepted accounting principles (GAAP) for governments. Management uses estimates and assumptions in preparing financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that are used. 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. As of August 31, 2016, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash that is held by the Trustee for the Bonds payable under provisions of the Indenture. During the year ended August 31, 2016, the investment income received from cash was $4,340. See Note 3 for risk disclosures and breakdown of restricted cash accounts. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 13 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED 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, 2016, management has determined that all accounts doubtful of collection have been charged to operations and an allowance is not required. Advertising Costs All advertising costs are expensed as they are incurred. Advertising costs for the year ended August 31, 2016 were approximately $76,000. 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. Expenses directly related to the improvement of property are capitalized at cost. The Project capitalizes the cost of roof replacements and expenditures or other major property improvements. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Estimated Useful Lives Building 30 years Furniture and fixtures 5-20 years Asset Class Subsequent Events The Project has evaluated all events or transactions that occurred after August 31, 2016, and up through January 23, 2017, the date the financial statements were issued. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 14 NOTE 3. CASH AND INVESTMENTS At August 31, 2016, the carrying amount of the Texas Student Housing Corporation – Denton Project deposits (cash with interest bearing accounts and restricted cash held in interest bearing accounts) was in total, $2,371,604, of which $1,920,451 represented restricted cash. Restricted Cash Restricted cash represents amounts placed on deposit in accounts and held by the Trustee, which are restricted for the payment of expenses as required by the Indenture. As of August 31, 2016, restricted cash consists of the following funds and accounts: Revenue Fund 5$ Bond Fund - Series 2001A 232,862 Bond Fund - Series 2001B 77 Repair and Replacement Fund 13 Series A Principal Fund 62,592 Series B Principal Fund 3 Operating Reserve Fund 7 Debt Service Reserve 2001A Account 1,624,526 Debt Service Reserve 2001B Account 366 Total 1,920,451$ Fund/Account Description The following is a brief description of the funds and accounts making up the restricted cash balance at year end, as defined by the 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 Indenture. Amounts in the Bond Fund shall be used solely to fund the payment of principal and interest on the Bonds, for the redemption of the Bonds at or prior to maturity, and to purchase Bonds on the open market. In the event of default, amounts in this fund may pay the fees and expenses of the Trustee prior to making any payments to the bondholders. This fund has two accounts, the Series 2001A and the Series 2001B accounts. Repair and Replacement Fund - Amounts in the repair and replacement fund may be (a) used to pay the maintenance and repair costs related to the Denton Property, which the Project is obligated to pay pursuant to the 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. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 15 NOTE 3. CASH AND INVESTMENTS – CONTINUED Restricted Cash – Continued 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 2001A 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. 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. The 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. The Project holds all of its cash and investments with the Trustee and commercial banks. Concentration of Credit Risk The investment policy of the Project is subject to the Indenture of the Bonds. As of August 31, 2016, the Project held all of its restricted cash balances with the Trustee, which represents 81% of the total cash and investments held as of August 31, 2016. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 16 NOTE 3. CASH AND INVESTMENTS – CONTINUED 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, 2016, the Project’s unrestricted cash is $451,153 (bank balance $488,490). When the bank balance exceeds $250,000 it is no longer covered by federal depository insurance and the remaining portion is collateralized with a Bank Deposit Guarantee Bond from the Project’s primary depository. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 17 NOTE 4. CAPITAL ASSETS Capital asset activity for the Project for the year ended August 31, 2016 was as follows: Beginning Ending Balance Additions Deletions Balance Capital assets, not being depreciated Land 2,200,000$ -$ -$ 2,200,000$ Total capital assets, not being depreciated 2,200,000 - - 2,200,000 Capital assets, being depreciated Building 25,705,000 - - 25,705,000 Furniture and fixtures 1,253,841 - - 1,253,841 Total capital assets, being depreciated 26,958,841 - - 26,958,841 Less accumulated depreciation for: Building (12,352,680) (856,833) - (13,209,513) Furniture and fixtures (1,189,760) (8,450) - (1,198,210) Total accumulated depreciation (13,542,440) (865,283) - (14,407,723) Total capital assets, being depreciated, net 13,416,401 (865,283) - 12,551,118 Capital assets, net 15,616,401$ (865,283)$ -$ 14,751,118$ NOTE 5. 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 Indenture dated July 1, 2001. The Bonds are payable solely from the revenues generated by the Denton Property and are secured by the revenues pledged and assigned under the terms of the Indenture. The Town does not have any liability for the payment of the bonds as the bonds are non-recourse to both the Town and the Authority. Interest rates on the bonds range from 5.00% to 11.00% and are payable semi-annually on July 1 and January 1 of each year thereafter. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 18 NOTE 5. BONDS PAYABLE – CONTINUED The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2016: Amounts Beginning Ending Due Within Balance Increases Decreases Balance One Year Revenue Bonds: 2001A Bonds 22,925,000$ -$ (835,000)$ 22,090,000$ 895,000$ 2001B Bonds 3,240,000 - - 3,240,000 1,295,000 Less discounts (559,869) - 37,485 (522,384) - Total 25,605,131$ -$ (797,515)$ 24,807,616$ 2,190,000$ The annual requirements to amortize all debts outstanding as of August 31, 2016 are as follows: Year Ending August 31,Prinicpal Interest Total Past Due 1,240,000$ 7,515,007$ 8,755,007$ 2017 950,000 1,728,055 2,678,055 2018 1,020,000 1,661,593 2,681,593 2019 1,085,000 1,589,980 2,674,980 2020 1,165,000 1,513,768 2,678,768 2021 1,250,000 1,431,730 2,681,730 2022-2026 7,705,000 5,691,360 13,396,360 2027-2031 10,915,000 2,483,760 13,398,760 25,330,000$ 23,615,253$ 48,945,253$ As of August 31, 2016, the Project was not in compliance with certain covenants of the Indenture including insufficient funds in some of the required funds discussed in Note 3 and a fixed charges ratio less than 1.25. In addition, all required principal payments on the Series B bonds had not been made as of August 31, 2016. Upon certain events of default either the Trustee, or owners of not less than 25% in aggregate principal of the bonds then outstanding, may declare the principal and all interest then due to be immediately due and payable. GAAP require that if the events of default occur, the liability should be disclosed as current on the financial statements. TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT NOTES TO FINANCIAL STATEMENTS 19 NOTE 6. NET POSITION Net position represents the residual assets after liabilities are deducted. Net position is reported in the following categories. Net Investment in Capital Assets – The component of net position that reports the difference between capital assets less both the accumulated depreciation and the outstanding balance of debt, excluding unspent proceeds, that is directly attributable to the acquisition, construction, or improvement of these capital assets. Unrestricted Net Position – The difference between the assets and liabilities that is not reported in net investment in capital assets and restricted net position. NOTE 7. RELATED PARTY TRANSACTIONS During the year ending August 31, 2016, the Project owed management fees of $51,544 to the Authority. NOTE 8. CONCENTRATIONS The Project consists of one property in Denton, Texas and is dependent upon the Denton area and the higher education facilities in the Denton area for revenue. NOTE 9. GOING CONCERN The 2016 financial statements were prepared assuming the Project will continue as a going concern. The Project’s bonds payable are considered to be in default due to the discontinuance of principal and interest payments and failure to maintain a fixed charges ratio of at least 1.25. These are considered an event of default by the Trustee, which gives the bondholders the right to accelerate and demand payment of the bonds in full. This condition raises substantial doubt about the Project’s ability to continue as a going concern. Management and the property manager are in the process of developing and implementing plans to increase occupancy and rental rates at the property to improve its financial performance. SUPPLEMENTAL INFORMATION TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT SCHEDULE I – SCHEDULE OF REVENUES AND EXPENSES - BUDGET AND ACTUAL FOR THE YEAR ENDED AUGUST 31, 2016 20 Original and Final Budget Actual Variance Revenues and Other Support: Rental income 4,816,088$ 4,916,605$ 100,517$ Other income 308,388 154,789 (153,599) Interest income - 4,340 4,340 Total revenues and other support 5,124,476 5,075,734 (48,742) Operating Expenses Personnel expenses 492,045 425,223 66,822 Contract services 123,820 104,074 19,746 Utilities 825,782 775,877 49,905 Repairs and maintenance 165,550 173,477 (7,927) Turnover expense 257,390 248,620 8,770 Advertising and promotion 105,973 75,840 30,133 Administration expenses 142,155 136,878 5,277 Travel - 2,526 (2,526) Management fees 59,745 153,544 (93,799) Total operating expenses 2,172,460 2,096,059 76,401 Revenue available for fixed charges 2,952,016$ 2,979,675$ 27,659$ TEXAS STUDENT HOUSING CORPORATION – DENTON PROJECT SCHEDULE II - CERTIFICATE OF THE FIXED CHARGES COVERAGE RATIO 21 We are providing this letter, as required by the Trust Indenture by and between Texas Student Housing Corporation – Denton Project (the Project) and The Bank of New York (the Trustee), dated July 1, 2001, as amended on March 22, 2005, relating to Texas Student Housing Corporation – Denton Project Texas Student Housing Revenue Bonds (University of North Texas project) the “Indenture,” to certify the fixed charges coverage ratio as of August 31, 2016. The fixed charges coverage ratio is defined in the Indenture as the ratio of revenue available for fixed charges to fixed charges. Further, fixed charges are defined in the Indenture as the sum of all cash outflows related to the Project that the Issuer cannot avoid without violating long-term contractual or legal obligations (those obligations which extend for a period greater than one year), including, but not limited to, (i) interest on indebtedness other than short-term indebtedness, and (ii) scheduled payments of principal on indebtedness other than short-term indebtedness, provided that maximum annual debt service shall be used for purposes of computing (i) and (ii) above. The audited financial statements indicate revenue available for fixed charges for the year ended August 31, 2016, to be $2,979,675. Based on the above revenues available and fixed charges of $2,678,055, we calculate that the fixed charges coverage ratio as of August 31, 2016, to be 1.11, which is based on one year of operations and is not in compliance with the Indenture.