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HomeMy WebLinkAbout01-21-14 TSHA Agenda Packet Page 1 of 2 AGENDA BOARD OF DIRECTORS OF THE TEXAS STUDENT HOUSING AUTHORITY (AN INSTRUMENTALITY OF THE TOWN OF WESTLAKE) January 21, 2014 6:00 PM TEXAS STUDENT HOUSING OFFICE 3 VILLAGE CIRCLE, COUNCIL CHAMBERS/MUNICIPAL COURT ROOM WESTLAKE, TEXAS 1. CALL TO ORDER 2. WELCOME NEW MEMBER LIZ GARVIN. 3. REVIEW AND APPROVE MINUTES FOR THE MEETING ON OCTOBER 22, 2013. 4. DISCUSS AND CONSIDER APPROVAL OF TSHA, CAMBRIDGE, TOWN LAKE, AND AUSTIN BALLPARK ANNUAL AUDITS FOR FY 2012-2013 PRESENTED BY PATTILLO BROWN & HILL, L.L.P. 5. DISCUSSION AND CONSIDERATION AUTHORIZING THE EXECUTIVE DIRECTOR TO EXECUTE AN AGREEMENT WITH MORRIS SCHORSCH & STAPLETON PC LAW FIRM TO RETAIN MR. JIM MORRIS AS LEGAL COUNS EL FOR LITIGATION SERVICES REGARDING TEXAS STUDENT HOUSING AUTHORITY v. BRAZOS COUNTY APPRAISAL DISTRICT AND APPRAISAL REVIEW BOARD FOR BRAZOS COUNTY APPRAISAL DISTRICT. 6. DISCUSSION REGARDING PENDING LITIGATION - TEXAS STUDENT HOUSING AUTHORITY v. BRAZOS COUNTY APPRAISAL DISTRICT AND APPRAISAL REVIEW BOARD FOR BRAZOS COUNTY APPRAISAL DISTRICT. 7. DISCUSS AND CONSIDER THE NUMBER OF FULL SCHOLARSHIPS TO OFFER FOR THE 2014-2015 SCHOOL YEAR. 8. EXECUTIVE DIRECTORS REPORT. Page 2 of 2 9. 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 15, 2014 , 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 Min 10/22/13 Page 1 of 3 MINUTES OF THE BOARD OF DIRECTORS OF THE TEXAS STUDENT HOUSING AUTHORITY (AN INSTRUMENTALITY OF THE TOWN OF WESTLAKE) October 22, 2013 PRESENT: President Jim Carter, Directors, Scott Bradley, George Ledak, Gregg Malone and Tracy Shornack. ABSENT: OTHERS PRESENT: Executive Director Pete Ehrenberg and Secretary Kelly Edwards. 1. CALL TO ORDER President Carter called the meeting to order at 6:10 p.m. President Carter welcomed new director Tracy Shornack. 2. REVIEW AND CONSIDER APPROVAL OF THE MINUTES FOR THE MEETING ON JULY 1, 2013. MOTION: Director Malone made a motion to approve the July 1, 2013, minutes with a revision of the amount paid to the Town. Director Ledak seconded the motion. The motion carried by a vote of 5-0. 3. REVIEW AND CONSIDER APPROVAL OF THE MINUTES FOR THE MEETING ON JULY 9, 2013. MOTION: Director Bradley made a motion to approve the July 9, 2013, minutes. Director Ledak seconded the motion. The motion carried by a vote of 5-0. TSHA Min 10/22/13 Page 2 of 3 4. DISCUSSION REGARDING PENDING LITIGATION - TEXAS STUDENT HOUSING AUTHORITY v. BRAZOS COUNTY APPRAISAL DISTRICT AND APPRAISAL REVIEW BOARD FOR BRAZOS COUNTY APPRAISAL DISTRICT. Executive Director Ehrenberg provided an overview of the process regarding appeal to the Supreme Court and the legal fees. President Carter and General Counsel Bradley provided an overview of the case for Director Shornack. 5. CONSIDERATION AND DISCUSSION REGARDING THE EMPLOYMENT STATUS OF THE EXECUTIVE DIRECTOR’S POSITION. Executive Director Ehrenberg provided an overview of the item. Discussion ensued regarding the position being an employee or contractor. MOTION: Director Bradley made a motion to continue with the Executive Director position as an employee of Texas Student Housing. Director Malone seconded the motion. The motion carried by a vote of 4-1-0. President Carter opposed. 6. EXECUTIVE DIRECTOR’S REPORT. Executive Director Ehrenberg provided an overview regarding the status of the audit, 2014-2015 applications, number of full and partial scholarships, the liens filed against the Townlake property in Austin, and progress of the renovations at Ballpark. 7. ADJOURN President Carter asked for a motion to adjourn. MOTION: Director Bradley made a motion to adjourn the meeting. Director Ledak seconded the motion. The motion carried by a vote of 5-0. There being no further business before the board, President Carter declared the meeting adjourned at 6:59 p.m. APPROVED BY THE TEXAS STUDENT HOUSING AUTHORITY BOARD OF DIRECTORS ON ___________, 2013. __________________________________ Jim Carter, President TSHA Min 10/22/13 Page 3 of 3 ATTEST _______________________________ Kelly Edwards, Secretary To the Board of Directors Texas Student Housing Authority Westlake, Texas We have audited the financial statements of Texas Student Housing Authority (the “Authority”) for the year ended August 31, 2013. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated October 22, 2013. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Authority are described in Note II to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2013. We noted no transactions entered into by the governmental unit during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. We noted no sensitive estimates affecting the Authority’s financial statements. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements. 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 2 Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated January 14, 2014. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the governmental unit’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Information in Documents Containing Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. 3 Significant Forthcoming Accounting Standards Items Previously Reported as Assets and Liabilities Governmental Accounting Standards Board Statement No. 65 (“GASB 65”), Items Previously Reported as Assets and Liabilities, is effective for periods beginning after December 15, 2012. The objective of this statement is to do one of the following:  Properly classify certain items previously reported as assets and liabilities as deferred outflows of resources and deferred inflows of resources  Recognize certain items previously reported as assets or liabilities as deferred outflows of resources (expenses or expenditures) or deferred inflows of resources (revenues) In addition, GASB 65 amends or supersedes requirements for the determination of major funds and addresses other presentation issues related to the statement of net position and governmental funds balance sheet. Some examples of transactions that will be impacted by the adoption of GASB 65:  Bond Refunding: the difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources or a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.  Debt Issuance Costs: debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred. Prepaid insurance costs should be reported as an asset and recognized as an expense in a systematic and rational manner over the duration of the related debt.  Revenue Recognition in Governmental Funds - When an asset is recorded in governmental fund financial statements but the revenue is not available; the government should report a deferred inflow of resources until such time as the revenue becomes available. January 14, 2014 TEXAS STUDENT HOUSING AUTHORITY FINANCIAL REPORT AUGUST 31, 2013   TEXAS STUDENT HOUSING AUTHORITY TABLE OF CONTENTS AUGUST 31, 2013 Page Number FINANCIAL SECTION Independent Auditors’ Report ............................................................................................. 1 – 2 Management’s Discussion and Analysis ............................................................................ 3 – 4 Financial Statements: Statement of Net Position ................................................................................................ 5 Statement of Revenues, Expenses and Changes in Net Position ..................................... 6 Statement of Cash Flows ................................................................................................. 7 Notes to Financial Statements .......................................................................................... 8 – 11 SUPPLEMENTAL INFORMATION Budgetary Comparison Schedule ........................................................................................ 12 THIS PAGE LEFT BLANK INTENTIONALLY FINANCIAL SECTION THIS PAGE LEFT BLANK INTENTIONALLY 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, TX), as of and for the year ended August 31, 2013, and the related notes to the financial statements, which collectively comprise the Authority’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements 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. 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. 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 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Authority as of August 31, 2013 and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 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 3 through 4 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 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 of 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 Authority’s financial statements. The budgetary comparison schedule is presented for purposes of additional analysis and is not a required part of the basic financial statements. The budgetary comparison schedule is the responsibility of management and was derived from and relates 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 budgetary comparison schedule is fairly stated, in all material respects, in relation to the financial statements as a whole. January 14, 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS THIS PAGE LEFT BLANK INTENTIONALLY 3 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, 2013. 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 $405,274, an increase of $118,368 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 $449,720, an increase of $131,900 over the prior fiscal year.  All revenues are generated from management of the properties and scholarship activity of the authority and totaled $819,381. Total expenses incurred were $701,013. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Authority’s basic financial statements. The Authority’s report consists of three parts, Management’s Discussion and Analysis, the basic financial statements, and notes to financial statements. The basic financial statements include a statement of net position, statement of revenues, expenses and changes in net position, a statement of cash flows and supplemental schedules. The statement of net position presents information on the Authority’s assets and liabilities with the difference between the two reported as net position. The statement of revenues, expenses and changes in net position accounts for all of the Authority’s revenues and expenses regardless of when cash is paid or received. The statement of cash flows reflects cash inflows and outflows by operating, noncapital financing and capital related financing activities during the year. 4 NOTES TO THE FINANCIAL STATEMENTS The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. ECONOMIC FACTORS AND NEXT YEAR’S BUDGET It is anticipated that fiscal year 2013/2014 will end with less income to the Authority as we have less scholarships at our facilities in Austin, Texas. CONTACTING THE AUTHORITY’S FINANCIAL MANAGEMENT This financial report is designed to provide the reader with a general overview of the Authority’s finances and to demonstrate the Authority’s accountability for the money it receives. If you have any questions about this report, or need additional information, please contact Pete Ehrenberg at (817) 490-5723. FINANCIAL STATEMENTS THIS PAGE LEFT BLANK INTENTIONALLY ASSETS Current assets: Cash 449,720$ Accounts receivable 973 Total current assets 450,693 Total assets 450,693 LIABILITIES Current liabilities: Accrued liabilities 5,591 Unearned revenue 39,828 Total liabilities 45,419 NET POSITION Unrestricted 405,274 Total net position 405,274$ The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY STATEMENT OF NET POSITION AUGUST 31, 2013 5 THIS PAGE LEFT BLANK INTENTIONALLY OPERATING REVENUES Basic property administration220,187$ Scholarship value 422,100 Scholarship administration 176,783 Total operating revenues 819,070 OPERATING EXPENSES Scholarship 422,100 Scholarship expense 112,395 Labor 117,061 Professional fees 6,000 Office and other 43,457 Total operating expenses 701,013 OPERATING INCOME 118,057 NONOPERATING REVENUES (EXPENSES) Interest income 311 Total nonoperating revenues (expenses)311 CHANGE IN NET POSITION 118,368 NET POSITION, BEGINNING 286,906 NET POSITION, ENDING 405,274$ The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY STATEMENT OF REVENUES, EXPENSES FOR THE YEAR ENDED AUGUST 31, 2013 AND CHANGES IN NET POSITION 6 THIS PAGE LEFT BLANK INTENTIONALLY CASH FLOWS FROM OPERATING ACTIVITIES Cash received from scholarships and scholarship properties396,970$ Cash paid to contract services6,000)( Cash paid to others 259,381)( Net cash provided for operating activities 131,589 CASH FLOWS FROM INVESTING ACTIVITIES Interest received 311 Net cash provided by investing activities 311 NET CHANGE IN CASH AND CASH EQUIVALENTS 131,900 CASH AND CASH EQUIVALENTS, BEGINNING 317,820 CASH AND CASH EQUIVALENTS, ENDING 449,720$ RECONCILIATION OF OPERATING GAIN TO NET CASH USED FOR OPERATING ACTIVITIES Operating gain 118,057$ Adjustments to reconcile operating income to net cash provided (used) by operating activities: Accrued liabilities5,591 Deferred revenue 7,941 Net cash provided for operating activities 131,589$ The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2013 7 THIS PAGE LEFT BLANK INTENTIONALLY 8 TEXAS STUDENT HOUSING AUTHORITY NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2013 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 Authoritys in Texas. The accompanying financial statements do not present the Authoritys, but the scholarship administration of the Authority. II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Authority’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 and 61. 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 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. 9 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 position 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 Position 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, 2013, 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, 2013, 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. 10 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, 2013, 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, 2013, the Authority’s cash balances totaled $449,720 (bank balance of $464,709). 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 $214,709. 11 B. Net Position Net position represent the residual assets after liabilities are deducted. These assets are reported in the following categories: Unrestricted Net Position consists of the portion of net position after net investment in capital assets and restricted for net position has been satisfied. At August 31, 2013, the Authority has no restricted net position or capital assets. All net position is 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 usually charges an oversight fee to the Authority. The town did not charge a fee in FY 2013. The Authority also received revenues of $220,187 related to its oversight of the various properties. SUPPLEMENTAL INFORMATION THIS PAGE LEFT BLANK INTENTIONALLY BudgetActualVariance REVENUES Basic property administration217,140$ 220,187$ 3,047$ Scholarship value422,100 422,100 - Scholarship administration177,480 176,783 697)( Interest income - 311 311 Total revenues 816,720 819,381 2,661 EXPENSES Scholarships422,100 422,100 - Scholarship expense106,600 112,395 5,795)( Contract labor116,640 117,061 421)( Professional fees6,000 6,000 - Contingency fund100,000 - 100,000 Office and other 28,950 43,457 14,507)( Total expenditures 780,290 701,013 79,277 CHANGE IN NET POSITION 36,430 118,368 81,938 NET POSITION, BEGINNING 286,906 286,906 - NET POSITION, ENDING 323,336$ 405,274$ 81,938$ FOR THE YEAR ENDED AUGUST 31, 2013 TEXAS STUDENT HOUSING AUTHORITY BUDGETARY COMPARISON SCHEDULE 12 THIS PAGE LEFT BLANK INTENTIONALLY To the Board of Directors Texas Student Housing Authority – Cambridge College Station Project Westlake, Texas We have audited the financial statements of Texas Student Housing Authority – Cambridge College Station Project (the “Project”) for the year ended August 31, 2013. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated October 22, 2013. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Project are described in Note I to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2013. We noted no transactions entered into by the governmental unit during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the Project’s financial statements was: Management’s estimate of the accumulated depreciation is based on the straight-line method. We evaluated the key factors and assumptions used to develop the accumulated depreciation in determining that it is reasonable in relation to the financial statements taken as a whole. 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 2 Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statements were: The disclosure of operating as a going concern in the notes to the financial statements is necessary since the Project is in default on some of its bonds which gives the bondholders the right to accelerate and demand payment of the bonds in full. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. The following material misstatements detected as a result of audit procedures were corrected by management: adjustments to properly state beginning fund balance, and accrued interest. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated January 14, 2014. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the governmental unit’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. 3 Other Information in Documents Containing Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. Significant Forthcoming Accounting Standards Items Previously Reported as Assets and Liabilities Governmental Accounting Standards Board Statement No. 65 (“GASB 65”), Items Previously Reported as Assets and Liabilities, is effective for periods beginning after December 15, 2012. The objective of this statement is to do one of the following:  Properly classify certain items previously reported as assets and liabilities as deferred outflows of resources and deferred inflows of resources  Recognize certain items previously reported as assets or liabilities as deferred outflows of resources (expenses or expenditures) or deferred inflows of resources (revenues) In addition, GASB 65 amends or supersedes requirements for the determination of major funds and addresses other presentation issues related to the statement of net position and governmental funds balance sheet. Some examples of transactions that will be impacted by the adoption of GASB 65:  Bond Refunding: the difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources or a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.  Debt Issuance Costs: debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred. Prepaid insurance costs should be reported as an asset and recognized as an expense in a systematic and rational manner over the duration of the related debt.  Revenue Recognition in Governmental Funds - When an asset is recorded in governmental fund financial statements but the revenue is not available; the government should report a deferred inflow of resources until such time as the revenue becomes available. 4 This information is intended solely for the use of the Board of Directors and management of Texas Student Housing – Cambridge College Station Project and is not intended to be and should not be used by anyone other than these specified parties. January 14, 2014 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION FINANCIAL REPORT AUGUST 31, 2013   TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION TABLE OF CONTENTS AUGUST 31, 2013 Page Number FINANCIAL SECTION Independent Auditors’ Report ............................................................................................. 1 – 3 Management’s Discussion and Analysis ............................................................................ 4 - 6 Financial Statements: Statement of Net Position ................................................................................................ 7 Statement of Revenues, Expenses and Changes in Net Position ..................................... 8 Statement of Cash Flows ................................................................................................. 9 Notes to Financial Statements .......................................................................................... 10 – 17 SUPPLEMENTAL SCHEDULES Schedule I – Schedule of Revenues and Expenses ............................................................. 18 Schedule II – Fixed Charges Coverage Ratio ..................................................................... 19 THIS PAGE LEFT BLANK INTENTIONALLY FINANCIAL SECTION THIS PAGE LEFT BLANK INTENTIONALLY 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, 2013, and the related notes to the financial statements, 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. Management’s Responsibility for the Financial Statements 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 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 2 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. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Project as of August 31, 2013 and the respective changes in financial position and, where applicable, cash flows thereof 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 H to the financial statements, the Project is in default on its bonds. This gives the bondholders the right to accelerate and demand payment on the bonds in full. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters also are described in Note H. 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 through 6 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 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 of the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 3 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 accompanying supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplemental information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the 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 information are fairly stated, in all material respects, in relation to the basic financial statements as a whole. January 14, 2014 THIS PAGE LEFT BLANK INTENTIONALLY MANAGEMENT’S DISCUSSION AND ANALYSIS THIS PAGE LEFT BLANK INTENTIONALLY 4 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, 2013. We encourage readers to consider the information presented herein in conjunction with the Project’s financial statements which follow this section. As the Authority is a component unit of the Town of Westlake and is thus considered a governmental entity, Governmental Accounting Standards Board Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments has been implemented. The reader should note that this financial report addresses only the financial condition of the Project itself. FINANCIAL HIGHLIGHTS  The liabilities of the Project exceeded its assets at the close of the fiscal year by $12,840,019 due primarily to a decrease in net position of $1,847,275.  Major components of the expense overage were $984,657 in depreciation/ amortization, and $3,284,588 in interest expense.  At the end of the current fiscal year, the total cash balances were $4,554,177 in unrestricted cash and $2,096,666 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Project’s basic financial statements. The Project’s report consists of three parts, Management’s Discussion and Analysis, the basic financial statements, and notes to financial statements. The basic financial statements include a statement of net position, statement of revenues, expenses and changes in net position, and a statement of cash flows. The Project is being treated as a going concern as the Project is in default on its C and D certificates. They are considered an event of default by the Trustee, which gives the senior certificate holders the right to accelerate and demand payment of the certificates in full. Management and the property manager are in the process of developing plans to increase occupancy and rental rates at the property to improve its financial performance. The statement of net position presents information on all of the Project’s assets and liabilities with the difference between the two reported as net position. 5 The statement of revenues, expenses and changes in net position accounts for all of the Authority’s revenues and expenses regardless of when cash is paid or received. The statement of cash flows recaps how cash changed during the year. FINANCIAL ANALYSIS OF THE PROJECT’S FUNDS Notes to financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. Restricted cash. Restricted cash represents monies held in escrow by the trustee and are restricted for the payment of expenses as outlined in the Installment Sale Agreement. As of August 31, 2013, these balances were as follows: Replacement Fund228,437$ Series A Reserve Fund598,785 Series B Reserve Fund512,408 Series A Interest Account307,764 Series A Principal Account165,000 Series B Interest Account81,621 Series B Principal Fund165,000 Transaction Costs Payment Fund32,651 Utility Deposits 5,000 Total 2,096,666$ 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 A16,325,000$ Series B 3,785,000 Series C 4,820,000 Series D 5,380,000 Total 30,310,000$ The note is payable at the rate of $231,545 monthly. Fixed Charge Coverage Ratio The Installment Sale Agreement provides for a fixed charges coverage ratio of 1.10. At this time, the Project has realized a ratio of 1.29 and is technically in compliance with the Agreement. Upon default, the lender may accelerate maturity of the unpaid portion of the principal, however, it is not anticipated that this event will incur since foreclosure by the certificate holders would result in the loss of the Project’s tax-exempt status. 6 ECONOMIC FACTORS AND NEXT YEAR’S BUDGET Leases at the Project have a duration that encompasses the school year, primarily the months of September through May. The June to August revenue is dependent on the ability to attract various camps/meetings. As the Project is tax-exempt through the Texas Higher Education Act, only those functions sponsored by the University are eligible for acceptance. The occupancy for this school year is 100%, thus the focus for this year will be on increasing this “summer” revenue. All of the A and B certificate holders received all proceeds due to them. The 2013/2014 budget clearly indicates that operating income will be sufficient to again service the A and B certificates. CONTACTING THE PROJECT’S FINANCIAL MANAGEMENT This financial report is designed to provide the reader with a general overview of the Project’s finances and to demonstrate the Project’s accountability for the money it receives. If you have any questions about this report, or need additional information, please contact Pete Ehrenberg at (817) 490-5723. THIS PAGE LEFT BLANK INTENTIONALLY FINANCIAL STATEMENTS THIS PAGE LEFT BLANK INTENTIONALLY ASSETS Current assets: Cash 4,554,177$ Restricted cash 2,096,666 Accounts receivable 385,497 Total current assets 7,036,340 Capital assets: Land 2,899,597 Other capital assets, net of accumulated depreciation 19,593,788 22,493,385 Total capital assets 22,493,385 Total assets 29,529,725 LIABILITIES Current liabilities: Accounts payable 212,905 Accrued expenses 23,258 Unearned revenue and prepaid rent2,424,540 Accrued interest 9,399,041 Installment loan payable 30,310,000 Total current liabilities 42,369,744 NET POSITION Net investment in capital assets7,816,615)( Unrestricted 5,023,404)( Total net position 12,840,019)$( The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION STATEMENT OF NET POSITION AUGUST 31, 2013 7 THIS PAGE LEFT BLANK INTENTIONALLY OPERATING REVENUES Rental 5,507,618$ Other 439,266 Total operating revenues 5,946,884 OPERATING EXPENSES Management fees 382,886 Administration and marketing 1,260,816 Cafeteria 504,306 Utilities 631,083 Repairs and maintenance679,730 Insurance 66,414 Depreciation and amortization 984,657 Total operating expenses 4,509,892 OPERATING INCOME 1,436,992 NONOPERATING REVENUES (EXPENSES) Interest revenue 321 Interest expense 3,284,588)( Total nonoperating revenues (expenses)3,284,267)( CHANGE IN NET POSITION 1,847,275)( NET POSITION, BEGINNING 10,992,744)( NET POSITION, ENDING 12,840,019)$( The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION STATEMENT OF REVENUES, EXPENSES FOR THE YEAR ENDED AUGUST 31, 2013 AND CHANGES IN NET POSITION 8 THIS PAGE LEFT BLANK INTENTIONALLY CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants 5,209,005$ Other operating revenues 439,266 Cash paid to employees 869,410)( Cash paid to suppliers 2,589,694)( Net cash provided by operating activities 2,189,167 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal repayments on bonds410,000)( Interest paid 1,460,925)( Net cash used by capital and related financing activities 1,870,925)( CASH FLOWS FROM INVESTING ACTIVITIES Interest received 321 Net cash provided by investing activities 321 NET CHANGE IN CASH AND CASH EQUIVALENTS 318,563 CASH AND CASH EQUIVALENTS, BEGINNING 6,332,280 CASH AND CASH EQUIVALENTS, ENDING 6,650,843$ Cash 4,554,177$ Restricted cash 2,096,666 Total cash and cash equivalents 6,650,843$ RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income 1,436,992$ Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 984,656 Changes in operating assets and liabilities: Accounts receivable 3,393 Accounts payable 58,156 Accrued liabilities 7,976 Deferred revenue and prepaid rent 302,006)( Net cash provided by operating activities 2,189,167$ The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2013 9 THIS PAGE LEFT BLANK INTENTIONALLY 10 TEXAS STUDENT HOUSING AUTHORITY – CAMBRIDGE AT COLLEGE STATION NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2013 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 Nos. 39 and 61. 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. 11 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 position 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. 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: Buildings30 years Improvements15 years Equipment, furniture and fixtures5 - 20 years D. Assets, Liabilities and Net Position 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, 2013, 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. 12 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 charge to expenses and a credit to accounts receivable based on its assessment of the outstanding receivables. At year- end, management assesses the accounts receivable balance and establishes a valuation allowance based on historical experience and an evaluation of the outstanding balances. Advertising Costs All advertising costs are expensed as they are incurred. Advertising costs for the year ended August 31, 2013, were approximately $124,841. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. II. DETAILED NOTES ON ALL FUNDS A. Restricted Cash Restricted cash represents amounts held in escrow, which are restricted for the payment of expenses as required by the installment sale agreement. As of August 31, 2013, restricted cash consists of the following: Replacement Fund228,437$ Series A Reserve598,785 Series B Reserve512,408 Series A Principal165,000 Series A Interest307,764 Series B Principal165,000 Series B Interest81,621 TR Costs Pymt FD32,651 Utility Deposits 5,000 2,096,666$ 13 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. 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. 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. 14 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 bond trustee and commercial banks. Concentration of Credit Risk The investment policy of the Project is subject to the indenture agreement of the bonds. As of August 31, 2013, the Project held all of its restricted cash balances with the trustee, which represents 31.5% of the total cash and investments held at August 31, 2013. 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, 2013, $4,200,437 of the Project’s $4,450,437 bank balance was collateralized with a Bank Deposit Guarantee Bond from the Project’s depository. The remaining balance, $250,000, was covered by FDIC insurance. B. Installment Note Payable The Project’s installment note payable is summarized as follows: Interest Lender/Security/Due DateRateBalance CambridgeStudent HousingFinancingCompany,L.P.; substantiallyallassetsandassignmentofrents;due November 1, 2039.8.00%30,310,000$ The Project’s installment note is payable monthly with principal and interest payments of $231,545 until November 1, 2039. 15 The following is a summary of long-term debt transactions of the Project for the year ended August 31, 2013: BeginningEndingDue Within Interest BalanceIncreasesDecreasesBalanceOne Year Paid Installment note 30,720,000$ -$ 410,000$ 30,310,000$ 440,000$ 1,460,925$ 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 A16,530,000$ B3,990,000 C4,820,000 D 5,380,000 Total 30,720,000$ The debt is to be amortized through 2040 with varying payments. The annual requirements to amortize Class A and B debts outstanding as of August 31, 2013 are as follows: Year Ending August 31, 2013PrincipalInterestTotal 2014440,000$ 1,429,050$ 1,869,050$ 2015470,000 1,394,925 1,864,925 2016505,000 1,358,350 1,863,350 2017545,000 1,318,950 1,863,950 2018585,000 1,276,525 1,861,525 2019-20233,330,000 5,617,050 8,947,050 2024-20282,480,000 4,619,050 7,099,050 2029-20333,475,000 3,586,375 7,061,375 2034-20384,875,000 2,137,725 7,012,725 2039-204313,605,000 288,325 3,693,325 Totals30,310,000$ 23,026,325$ 43,136,325$ Governmental Activities Class C and D bonds are in default and the property does not generate enough revenue to pay the debt obligations so the maturity schedules are not included. All of the Class C and D bonds issued remain outstanding as of August 31, 2013. 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. 16 At August 31, 2013, the Project was 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, 2013, was as follows: BeginningEnding BalanceIncreaseDecreaseReclassBalance 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: Building27,727,646 - - - 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: Building7,060,819)( 896,614)( - - 7,957,433)( Furniture and fixtures 2,682,668)( 88,561)( - - 2,771,229)( Total accumulated depreciation 9,743,487)( 985,175)( - - 10,728,662)( Total capital assets, being depreciated, net 20,578,963 985,175)( - - 19,593,788 Capital assets, net 23,478,560$ 985,175)$( -$ -$ 22,493,385$ 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 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. 17 Restricted Net Position– The component of net position calculated by reducing the carrying value of restricted assets by the amount of any related debt outstanding. Unrestricted – The difference between the assets and liabilities that is not reported in net position net investment in capital assets and restricted net position. 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, 2013. 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, 2013. 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 owned by the Project. The County is also seeking back property taxes previously not paid as the Project was under tax-exempt status. The original suit filed by the Project was lost during a non-jury trial. The Project appealed that judgment and the case was assigned to the Seventh Court of Appeals. The Appellate Court held that the Project was entitled to tax exempt status for 2005, but not for years 2006- 2008. In August and September 2013, both the Project and the County filed petitions for review of this case with the Texas Supreme Court Review by the Texas Supreme Court is discretionary. As of this date, the Texas Supreme Court has not decided whether it will hear this case as requested by both parties. The ultimate status of this appeal is unknown at this time and a liability has not been recorded. Should the County prevail, the Project would owe the county a material amount of property taxes, from both current and prior periods. 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 2013 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. SUPPLEMENTAL SCHEDULES THIS PAGE LEFT BLANK INTENTIONALLY BudgetActualVariance REVENUES AND OTHER SUPPORT Rental 5,333,963$ 5,507,618$ 173,655$ Other 616,884 439,266 177,618)( Interest 1,020 321 699)( Total revenues and other support 5,951,867 5,947,205 4,662)( OPERATING EXPENSES Administrative and marketing1,411,097 1,260,816 150,281 Management fees382,884 382,886 2)( Cafeteria535,033 504,306 30,727 Utilities640,143 631,083 9,060 Repairs and maintenance690,079 679,730 10,349 Insurance 62,162 66,414 4,252)( Total operating expenses 3,721,398 3,525,235 196,163 REVENUE AVAILABLE FOR FIXED CHARGES 2,230,469 2,421,970 191,501 OTHER EXPENSES Depreciation and amortization- 984,657 984,657)( Interest - 3,284,588 3,284,588)( Total other expenses - 4,269,245 4,269,245)( EXCESS OF EXPENSES OVER REVENUES 2,230,469$ 1,847,275)$( 4,077,744)$( FOR THE YEAR ENDED AUGUST 31, 2013 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION SCHEDULE I - SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL 18 THIS PAGE LEFT BLANK INTENTIONALLY CALCULATION OF FIXED CHARGES COVERAGE RATIO Total gross revenues 5,947,205$ Total expenses7,794,480)$( Add: Interest 3,284,588 Depreciation and amortization 984,657 Adjusted expenses 3,525,235)( Adjusted net operating income available to pay fixed charges 2,421,970$ Fixed charges/maximum principal and interest for fiscal year-end (for A&B certificates)1,870,925$ Fixed charges coverage ratio 1.29 Required ratio 1.10 Pass or fail Pass FOR THE YEAR ENDED AUGUST 31, 2013 TEXAS STUDENT HOUSING AUTHORITY CAMBRIDGE AT COLLEGE STATION SCHEDULE II - FIXED CHARGES COVERAGE RATIO 19 THIS PAGE LEFT BLANK INTENTIONALLY To the Board of Directors Texas Student Housing Authority – Town Lake Austin Project Westlake, Texas We have audited the financial statements of Texas Student Housing Authority – Town Lake Austin Project (the “Project”) for the year ended August 31, 2013. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated October 22, 2013. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Project are described in Note II to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2013. We noted no transactions entered into by the governmental unit during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the Project’s financial statements was: Management’s estimate of the accumulated depreciation is based on the straight-line method. We evaluated the key factors and assumptions used to develop the accumulated depreciation in determining that it is reasonable in relation to the financial statements taken as a whole. 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 2 Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosure affecting the financial statements was: The disclosure of operating as a going concern in the notes to the financial statements is necessary since the Project is in default on some of its bonds which gives the bondholders the right to accelerate and demand payment of the bonds in full. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. The following material misstatements detected as a result of audit procedures were corrected by management: adjustments to properly state beginning fund balance, depreciation expense, accounts payable, and accrued interest. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated January 14, 2014. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the governmental unit’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. 3 Other Information in Documents Containing Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. Significant Forthcoming Accounting Standards Items Previously Reported as Assets and Liabilities Governmental Accounting Standards Board Statement No. 65 (“GASB 65”), Items Previously Reported as Assets and Liabilities, is effective for periods beginning after December 15, 2012. The objective of this statement is to do one of the following:  Properly classify certain items previously reported as assets and liabilities as deferred outflows of resources and deferred inflows of resources  Recognize certain items previously reported as assets or liabilities as deferred outflows of resources (expenses or expenditures) or deferred inflows of resources (revenues) In addition, GASB 65 amends or supersedes requirements for the determination of major funds and addresses other presentation issues related to the statement of net position and governmental funds balance sheet. Some examples of transactions that will be impacted by the adoption of GASB 65:  Bond Refunding: the difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources or a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.  Debt Issuance Costs: debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred. Prepaid insurance costs should be reported as an asset and recognized as an expense in a systematic and rational manner over the duration of the related debt.  Revenue Recognition in Governmental Funds - When an asset is recorded in governmental fund financial statements but the revenue is not available; the government should report a deferred inflow of resources until such time as the revenue becomes available. 4 This information is intended solely for the use of the Board of Directors and management of Texas Student Housing – Town Lake Austin Project and is not intended to be and should not be used by anyone other than these specified parties. January 14, 2014 TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT FINANCIAL REPORT AUGUST 31, 2013   TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT TABLE OF CONTENTS AUGUST 31, 2013 Page Number FINANCIAL SECTION Independent Auditors’ Report ............................................................................................. 1 – 3 Management’s Discussion and Analysis ............................................................................ 4 – 6 Financial Statements: Statement of Net Position ................................................................................................ 7 Statement of Revenues, Expenses and Changes in Net Position ..................................... 8 Statement of Cash Flows ................................................................................................. 9 Notes to Financial Statements .......................................................................................... 10 – 17 SUPPLEMENTAL SCHEDULES Schedule I – Schedule of Revenues and Expenses ............................................................. 18 THIS PAGE LEFT BLANK INTENTIONALLY FINANCIAL SECTION THIS PAGE LEFT BLANK INTENTIONALLY 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, 2013, and the related notes to the financial statements, 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. Management’s Responsibility for the Financial Statements 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 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 2 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. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Project as of August 31, 2013 and the respective changes in financial position and, where applicable, cash flows thereof 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 I to the financial statements, the Project is in default on its bonds. This gives the bondholders the right to accelerate and demand payment on the bonds in full. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters also are described in Note I. 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 through 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 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 of the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 3 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 accompanying supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplemental information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the 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 information are fairly stated, in all material respects, in relation to the basic financial statements as a whole. January 14, 2014 THIS PAGE LEFT BLANK INTENTIONALLY MANAGEMENT’S DISCUSSION AND ANALYSIS THIS PAGE LEFT BLANK INTENTIONALLY 4 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, 2013. We encourage readers to consider the information presented herein in conjunction with the Project’s financial statements which follow this section. As the Authority is a component unit of the Town of Westlake and is thus considered a governmental entity, Governmental Accounting Standards Board Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments has been implemented. The reader should note that this financial report addresses only the financial condition of the Project itself. FINANCIAL HIGHLIGHTS  The liabilities of the Project exceeded its assets at the close of the fiscal year by $8,814,788, a decrease of $1,127,725 over the prior year.  Operating revenue of $3,061,901 is $137,999 more than budget; and operating expenses were $86,757 more than budget.  At the end of the current fiscal year, the total cash balances were $377,017 in unrestricted cash and $185,033 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Project’s basic financial statements. The Project’s report consists of three parts, Management’s Discussion and Analysis, the basic financial statements, and notes to financial statements. The basic financial statements include a statement of net position, statement of revenues, expenses and changes in net position, a statement of cash flows and a supplemental schedule. The Project is being treated as a going concern. The Project is in default on its bonds and is not financially able to make scheduled principal and interest payments on its outstanding debt. They are considered an event of default by the Trustee, which gives the bondholders the right to accelerate and demand payment of the bonds in full. Management and the property manager are in the process of developing plans to increase occupancy and rental rates at the property to improve its financial performance. 5 The statement of net position presents information on all of the Project’s assets and liabilities with the difference between the two reported as net position. 20132012 Current and other assets1,176,896$ 1,088,410$ Capital assets 13,538,493 14,171,565 Total assets 14,715,389 15,259,975 Current liabilities3,552,532 2,643,238 Noncurrent liabilities 19,977,645 20,303,800 Total liabilities 23,530,177 22,947,038 Net position: Net investment in capital assets6,767,257)( 6,435,918)( Unrestricted 2,047,531)( 1,251,145)( Total net position 8,814,788)$( 7,687,063)$( Business-type Activities TABLE 1 TEXAS STUDENT HOUSING AUTHORITY - TOWN LAKE AUSTIN PROJECT 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. 20132012 Total operating revenue3,061,901$ 2,811,775$ Total operating expenses2,189,675 2,247,050 Total operating income872,226 564,725 Interest income31 - Interest expense1,999,982)( 1,968,384)( Total nonoperating loss1,999,951)( 1,968,384)( CHANGE IN NET POSITION 1,127,725)( 1,403,659)( NET POSITION, BEGINNING 7,687,063)( 6,283,404)( NET POSITION, ENDING 8,814,788)$( 7,687,063)$( Business-type Activities TABLE 2 TEXAS STUDENT HOUSING AUTHORITY - TOWN LAKE AUSTIN PROJECT CHANGES IN NET POSITION The statement of cash flows recaps how cash changed from year to year. 6 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, 2013, these balances were as follows: Bond Proceeds Interest Fund, Series 2002 A-25,240$ Revenue Fund26,361 Debt Service Reserve Fund71,875 Repair and Replacement Fund67,963 Fee and Expense Fund13,603 Initial Purchase Fund 9)( Total 185,033$ Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Bonds payable. As of August 31, 2013, the following amounts on the Series 2002 A-1 and 2002 A-2 were payable: Series 2002 A-115,216,509$ Series 2002 A-2 5,089,241 Total 20,305,750$ For the fiscal year ending August 31, 2013, the total principal and interest payment is calculated at $1,891,637. A total of $301,733 in principal was paid during 2013. ECONOMIC FACTORS AND NEXT YEAR’S BUDGET Leases at the Project are primarily 12-month leases, however, due to competitive and market conditions, a relatively minor number of 10-month leases exist. These leases do bring a monthly premium over the 12-month leases. Occupancy for the fiscal year ending August 31, 2013, forecasts at 100%. However, rental rates, again due to competitive pressures will not see a large increase. CONTACTING THE PROJECT’S FINANCIAL MANAGEMENT This financial report is designed to provide the reader with a general overview of the Project’s finances and to demonstrate the Project’s accountability for the money it receives. If you have any questions about this report, or need additional information, please contact Pete Ehrenberg at (817) 490-5723. THIS PAGE LEFT BLANK INTENTIONALLY FINANCIAL STATEMENTS THIS PAGE LEFT BLANK INTENTIONALLY ASSETS Current assets: Cash 377,017$ Restricted cash 185,033 Accounts receivable 13,273 Total current assets 575,323 Capital assets: Land 2,182,816 Other capital assets, net of accumulated depreciation 11,355,677 Total capital assets 13,538,493 Intangible assets: Debt issue costs, net of amortization 601,573 Total intangible assets 601,573 Total assets 14,715,389 LIABILITIES Current liabilities: Accounts payable 280,085 Accrued liabilities 6,714 Bonds payable - current maturities328,105 Unearned revenue and prepaid rent181,013 Accrued interest 2,756,615 Total current liabilities 3,552,532 Noncurrent liabilities: Bonds payable 19,977,645 Total noncurrent liabilities 19,977,645 Total liabilities 23,530,177 NET POSITION Net investment in capital assets6,767,257)( Unrestricted 2,047,531)( Total net position 8,814,788)$( The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT STATEMENT OF NET POSITION AUGUST 31, 2013 7 THIS PAGE LEFT BLANK INTENTIONALLY OPERATING REVENUES Rental 2,972,670$ Other 89,231 Total operating revenues 3,061,901 OPERATING EXPENSES Personnel 288,996 Contract services 59,777 Utilities 550,169 Travel 2,358 Repairs and maintenance 56,077 Turnover 243,421 Advertising and promotion 44,490 Administration 139,487 Management fees 124,927 Depreciation and amortization 679,973 Total operating expenses 2,189,675 OPERATING INCOME 872,226 NONOPERATING REVENUES (EXPENSES) Interest income 31 Interest expense 1,999,982)( Total nonoperating revenues (expenses)1,999,951)( CHANGE IN NET POSITION 1,127,725)( NET POSITION, BEGINNING 7,687,063)( NET POSITION, ENDING 8,814,788)$( The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT STATEMENT OF REVENUES, EXPENSES FOR THE YEAR ENDED AUGUST 31, 2013 AND CHANGES IN NET POSITION 8 THIS PAGE LEFT BLANK INTENTIONALLY CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants 3,157,620$ Cash paid to employees 290,957)( Cash paid to suppliers 1,191,695)( Net cash provided by operating activities 1,674,968 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on bonds payable 301,733)( Interest paid 1,194,979)( Net cash used in capital and related financing activities 1,496,712)( NET CHANGE IN CASH AND CASH EQUIVALENTS 178,287 CASH AND CASH EQUIVALENTS, BEGINNING 383,763 CASH AND CASH EQUIVALENTS, ENDING 562,050$ Cash 377,017$ Restricted cash 185,033 Total cash and cash equivalents 562,050$ RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income 872,226$ Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization679,973 Changes in operating assets and liabilities: Accounts receivable 42,900 Trade accounts payable 29,011 Deferred revenue 52,819 Other current liabilities 1,961)( Net cash provided by operating activities 1,674,968$ The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2013 9 THIS PAGE LEFT BLANK INTENTIONALLY 10 TEXAS STUDENT HOUSING AUTHORITY – TOWN LAKE AUSTIN PROJECT NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2013 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 2013 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 Nos. 39 and 61. The criteria used is as follows: 11 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 Position 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, 2013, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of $185,033 that is held by the Trustee for the Bonds payable under provisions of the Trust Indenture. During the year ended August 31, 2013, the interest income received from cash was $31. See Note III for risk disclosures and breakdown of restricted cash accounts. 12 Accounts Receivable Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management writes off uncollectible amounts through a charge to expense. 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, 2013, 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, 2013, were $44,490. 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 ClassUseful Lives Building30 Furniture, fixtures and equipment3 - 20 III. DETAILED NOTES ON ALL FUNDS A. Cash and Investments At August 31, 2013, 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 $562,050 of which $185,033 represented restricted cash. 13 Restricted Cash Restricted cash represents amounts placed on deposit in accounts and held by the Trustee, which are restricted for the payment of expenses as required by the Trust Indenture. At August 31, 2013, restricted cash consists of the following funds and accounts: Fund/Account Description Bond Proceeds Interest Fund, Series 2002 A-25,240$ Debt Service Reserve 71,875 Repair and Replacement Fund67,963 Revenue Fund26,361 Fee and Expense Fund13,603 Initial Purchase Fund 9)( Total 185,033$ 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. Project Fund – Amounts in the Project Fund are held and disbursed for costs of the Project. 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, 2013. 14 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 1/12th 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. 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, 2013, the Project held all of its restricted cash balances with the Trustee, which represents 32.9% of the total cash and investments held at August 31, 2013. 15 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, 2013, the Project has unrestricted cash of $377,017 (bank balance $363,518). Of the bank balance, $250,000 was covered by federal depository insurance, while $113,518 was collateralized. B. Capital Assets Capital asset activity for the Project for the year ended August 31, 2013, was as follows: BeginningRetirements/Ending BalanceAdditionsReclassificationsBalance Capital assets, not being depreciated: Land 2,182,816$ -$ -$ 2,182,816$ Total capital assets, not being depreciated 2,182,816 - - 2,182,816 Capital assets, being depreciated: Building and improvements13,270,150 - - 13,270,150 Capitalized purchase costs887,095 - - 887,095 Land improvements2,806,596 - - 2,806,596 Unit appliances295,134 - - 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 costs256,356)( 28,484)( - 284,840)( Building and equipment 5,929,821)( 604,588)( - 6,534,409)( Total accumulated depreciation 6,186,177)( 633,072)( - 6,819,249)( Total capital assets, being depreciated, net 11,988,749 633,072)( - 11,355,677 Capital assets, net 14,171,565$ 633,072)$( -$ 13,538,493$ 16 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 monthly each year thereafter. The following is a summary of long-term debt transactions of the Project for the 12-month period ended August 31, 2013: Amounts BeginningEndingDue Within Interest BalanceIncreasesDecreasesBalanceOne Year Paid Revenue Bonds: 2002 A-1 Bonds15,518,242$ -$ 301,733$ 15,216,509$ 328,105$ 1,194,979$ 2002 A-2 Bonds 5,089,241 - - 5,089,241 - - Total 20,607,483$ -$ 301,733$ 20,305,750$ 328,105$ 1,194,979$ 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 $167,675 starting November 1, 2033. The A-2 Bonds have no regular principal payments until the year 2033. The Bonds also had a clause for an initial purchase release draw. The requirements for that draw were not met and during 2006, the funds held in the initial Purchase Fund were applied to principal on the Bonds. The annual requirements to amortize all debts outstanding as of August 31, 2013, are as follows: Year Ending August 31,PrincipalInterestTotal 2014328,105$ 1,563,532$ 1,891,637$ 2015354,491 1,537,146 1,891,637 2016382,998 1,508,639 1,891,637 2017413,797 1,477,840 1,891,637 2018447,074 1,444,563 1,891,637 2019-20232,836,079 6,622,106 9,458,185 2024-20284,175,185 4,102,458 8,277,643 2029-2033 11,368,021 3,312,414 14,680,435 Totals 20,305,750$ 21,568,698$ 41,874,448$ Governmental Activities 17 D. Net Position Net position represent the residual assets after liabilities are deducted. These assets are reported in the following categories: Net investment in capital assets 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. Restricted Net Position 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 Position consists of the portion of net position after net investment in capital assets 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 2013, the Project recorded management fees of $124,927 to ACH. F. Concentrations The Project consists of one property in Austin, Texas, and is dependent upon the Austin area and the higher education facilities in the Austin area for revenues. G. Commitments and Contingencies The Project has yet to have an arbitrage calculation performed for its outstanding debt. After that analysis, the Project may incur a liability for interest earned in accordance with Internal Revenue Service regulations. SUPPLEMENTAL SCHEDULE THIS PAGE LEFT BLANK INTENTIONALLY BudgetActualVariance REVENUES AND OTHER SUPPORT Rental 2,817,411$ 2,972,670$ 155,259$ Other 106,491 89,231 17,260)( Total revenues and other support 2,923,902 3,061,901 137,999 OPERATING EXPENSES Personnel295,903 288,996 6,907 Contract services81,240 59,777 21,463 Utilities485,573 550,169 64,596)( Repairs and maintenance60,120 56,077 4,043 Turnover197,695 243,421 45,726)( Advertising and promotion74,900 44,490 30,410 Travel- 2,358 2,358)( Management fees116,956 124,927 7,971)( Administration 110,558 139,487 28,929)( Total operating expenses 1,422,945 1,509,702 86,757)( REVENUES AVAILABLE FOR FIXED CHARGES 1,500,957 1,552,199 51,242)( NONOPERATING REVENUES (EXPENSES) Depreciation and amortization- 679,973)( 679,973 Interest- 31 31)( Interest expense - 1,999,982)( 1,999,982 Total other expenses - 2,679,924)( 2,679,924)( EXCESS OF EXPENSES OVER (UNDER) REVENUES 1,500,957$ 1,127,725)$( 2,628,682)$( FOR THE YEAR ENDED AUGUST 31, 2013 TEXAS STUDENT HOUSING AUTHORITY TOWN LAKE AUSTIN PROJECT SCHEDULE I - SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL 18 THIS PAGE LEFT BLANK INTENTIONALLY To the Board of Directors Texas Student Housing Authority – Ballpark Austin Project Westlake, Texas We have audited the financial statements of Texas Student Housing Authority – Ballpark Austin Project (the “Project”) for the year ended August 31, 2013. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated October 22, 2013. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Project are described in Note II to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2013. We noted no transactions entered into by the governmental unit during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the Project’s financial statements was: Management’s estimate of the accumulated depreciation is based on the straight-line method. We evaluated the key factors and assumptions used to develop the accumulated depreciation in determining that it is reasonable in relation to the financial statements taken as a whole. 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 2 Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosure affecting the financial statements was: The disclosure of operating as a going concern in the notes to the financial statements is necessary since the Project is in default on some of its bonds which gives the bondholders the right to accelerate and demand payment of the bonds in full. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. The following material misstatements detected as a result of audit procedures were corrected by management: adjustments to properly state accounts payable, accrued interest, depreciation expense, and amortization expense. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated January 14, 2014. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the governmental unit’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. 3 Other Information in Documents Containing Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. Significant Forthcoming Accounting Standards Items Previously Reported as Assets and Liabilities Governmental Accounting Standards Board Statement No. 65 (“GASB 65”), Items Previously Reported as Assets and Liabilities, is effective for periods beginning after December 15, 2012. The objective of this statement is to do one of the following:  Properly classify certain items previously reported as assets and liabilities as deferred outflows of resources and deferred inflows of resources  Recognize certain items previously reported as assets or liabilities as deferred outflows of resources (expenses or expenditures) or deferred inflows of resources (revenues) In addition, GASB 65 amends or supersedes requirements for the determination of major funds and addresses other presentation issues related to the statement of net position and governmental funds balance sheet. Some examples of transactions that will be impacted by the adoption of GASB 65:  Bond Refunding: the difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources or a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.  Debt Issuance Costs: debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred. Prepaid insurance costs should be reported as an asset and recognized as an expense in a systematic and rational manner over the duration of the related debt.  Revenue Recognition in Governmental Funds - When an asset is recorded in governmental fund financial statements but the revenue is not available; the government should report a deferred inflow of resources until such time as the revenue becomes available. 4 This information is intended solely for the use of the Board of Directors and management of Texas Student Housing – Ballpark Austin Project and is not intended to be and should not be used by anyone other than these specified parties. January 14, 2014 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT FINANCIAL REPORT AUGUST 31, 2013   TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT TABLE OF CONTENTS AUGUST 31, 2013 Page Number FINANCIAL SECTION Independent Auditors’ Report ............................................................................................. 1 – 3 Management’s Discussion and Analysis ............................................................................ 4 – 7 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 – 19 SUPPLEMENTAL SCHEDULES Schedule I – Schedule of Revenues and Expenses ............................................................. 20 Schedule II – Certificate of the Fixed Charges Coverage Ratio ......................................... 21 – 22 THIS PAGE LEFT BLANK INTENTIONALLY FINANCIAL SECTION THIS PAGE LEFT BLANK INTENTIONALLY 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, 2013, and the related notes to the financial statements, which collectively comprise the Project’s basic financial statements as listed in the table of contents. Texas Student Housing Authority – Ballpark Austin Project is a component unit of the Town of Westlake. Management’s Responsibility for the Financial Statements 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 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 2 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. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Project as of August 31, 2013 and the respective changes in financial position and, where applicable, cash flows thereof 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 I to the financial statements, the Project is in default on its bonds. This gives the bondholders the right to accelerate and demand payment on the bonds in full. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters also are described in Note I. 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 through 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 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 of the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 3 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 accompanying supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplemental information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the 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 information are fairly stated, in all material respects, in relation to the basic financial statements as a whole. January 14, 2014 THIS PAGE LEFT BLANK INTENTIONALLY MANAGEMENT’S DISCUSSION AND ANALYSIS THIS PAGE LEFT BLANK INTENTIONALLY 4 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, 2013. We encourage readers to consider the information presented herein in conjunction with the Project’s financial statements which follow this section. As the Authority is a component unit of the Town of Westlake and is thus considered a governmental entity, Governmental Accounting Standards Board Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments has been implemented. The reader should note that this financial report addresses only the financial condition of the Project itself. FINANCIAL HIGHLIGHTS  The liabilities of the Project exceeded its assets at the close of the fiscal year by $19,553,532. This is a decrease of $1,652,825 over the prior year.  Operating revenue of $3,834,799 is $110,276 more than budget, and operating expense is $429,285 more than budget, not including depreciation and amortization.  At the end of the current fiscal year, the total cash balances were $380,577 in unrestricted cash and $1,119,010 in restricted cash. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the Project’s basic financial statements. The Project’s report consists of three parts, Management’s Discussion and Analysis, the basic financial statements, and notes to financial statements. The basic financial statements include a statement of net position, statement of revenues, expenses and changes in net position, a statement of cash flows and supplemental schedules. The Project is being treated as a going concern. The Project is in default on its bonds and is not financially able to make scheduled principal and interest payments on its outstanding debt. They are considered an event of default by the Trustee, which gives the bondholders the right to accelerate and demand payment of the bonds in full. Management and the property manager are in the process of developing plans to increase occupancy and rental rates at the property to improve its financial performance. 5 The statement of net position presents information on all of the Project’s assets and liabilities with the difference between the two reported as net position. 20132012 Current and other assets3,661,147$ 3,394,321$ Capital assets 20,567,331 21,428,008 Total assets 24,228,478 24,822,329 Long-term liabilities33,858,434 33,518,348 Other liabilities 9,923,576 9,204,688 Total liabilities 43,782,010 42,723,036 Net position Net investment in capital assets13,996,103)( 13,075,340)( Unrestricted 5,557,429)( 4,825,367)( Total net position 19,553,532)$( 17,900,707)$( Business-type Activities TABLE 1 TEXAS STUDENT HOUSING AUTHORITY - BALLPARK AUSTIN PROJECT 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. 20132012 Total operating revenue3,834,672$ 3,782,426$ Total operating expenses3,084,203 2,759,120 Total operating income750,469 1,023,306 Interest income127 - Interest expense2,403,421)( 2,689,697)( Total nonoperating loss2,403,294)( 2,689,697)( CHANGE IN NET POSITION 1,652,825)( 1,666,391)( NET POSITION, BEGINNING 17,900,707)( 17,334,572)( PRIOR PERIOD ADJUSTMENT - 1,100,256 NET POSITION, ENDING 19,553,532)$( 17,900,707)$( Business-type Activities TABLE 2 TEXAS STUDENT HOUSING AUTHORITY - BALLPARK AUSTIN PROJECT CHANGES IN NET POSITION The statement of cash flows recaps how cash changed from year to year. 6 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, 2013, these balances were as follows: Admin Exp Fund36,408$ Bond Fund, Series 2001A Senior Interest394,311 Bond Fund, Series 2001B Sub B13,002 Bond Fund, Series 2001C Sub C16 Debt Service Reserve 2001A Senior108,518 Debt Service Reserve 2001B Sub B863 Repair and Replacement Fund1,313 Minimum Scholarship Fund1,944 Trustee Fee Fund706 Tax and Insurance Fund166,541 Senior Bonds Principal392,450 Sub B Bond Principal 2,938 Total 1,119,010$ Nonrestricted cash. Nonrestricted cash is available for general use of the Project. Bonds payable. As of August 31, 2013, the following amounts on the Series A, B and C Bonds were owed: Series A28,840,000$ Series B 2,365,000 Series C 3,000,000 Deferred purchase price1,460,000 Less discounts 1,101,566)( Total 34,563,434$ 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 .73 and .65, respectively, and is thus technically in default of the indenture. 7 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, 2013, 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. FINANCIAL STATEMENTS THIS PAGE LEFT BLANK INTENTIONALLY ASSETS Current assets: Cash 380,577$ Restricted cash 1,119,010 Accounts receivable 16,249 Total current assets 1,515,836 Capital assets: Land 4,788,265 Other capital assets, net of accumulated depreciation 15,779,066 Total capital assets 20,567,331 Intangible assets: Deferred financing costs, net of amortization 2,145,311 Total intangible assets 2,145,311 Total assets 24,228,478 LIABILITIES Current liabilities: Accounts payable 224,618 Accrued liabilities 950,997 Unearned revenue and prepaid rent192,187 Accrued interest 7,850,774 Bonds payable 705,000 Total current liabilities 9,923,576 Long-term liabilities: Bonds payable 32,398,434 Deferred purchase price 1,460,000 Total long-term liabilities 33,858,434 Total liabilities 43,782,010 NET POSITION Net investment in capital assets13,996,103)( Unrestricted 5,557,429)( Total net position 19,553,532)$( The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT STATEMENT OF NET POSITION AUGUST 31, 2013 8 THIS PAGE LEFT BLANK INTENTIONALLY OPERATING REVENUES Rental income 3,733,076$ Other income 101,596 Total operating revenues 3,834,672 OPERATING EXPENSES Personnel 338,583 Contract services 56,767 Utilities 588,850 Repairs and maintenance107,862 Turnover 431,063 Advertising and promotion56,941 Administration 274,739 Management fees 188,342 Depreciation 860,677 Amortization 180,379 Total operating expenses 3,084,203 OPERATING INCOME 750,469 NONOPERATING REVENUES (EXPENSES) Interest income 127 Interest expense 2,403,421)( Total nonoperating revenues (expenses)2,403,294)( CHANGE IN NET POSITION 1,652,825)( NET POSITION, BEGINNING 17,900,707)( NET POSITION, ENDING 19,553,532)$( The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT STATEMENT OF REVENUES, EXPENSES FOR THE YEAR ENDED AUGUST 31, 2013 AND CHANGES IN NET POSITION 9 THIS PAGE LEFT BLANK INTENTIONALLY CASH FLOWS FROM OPERATING ACTIVITIES Cash received from tenants 3,675,889$ Miscellaneous other income 101,596 Cash paid to employees 330,606)( Cash paid to suppliers 1,633,614)( Net cash provided by operating activities 1,813,265 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Interest paid 1,423,370)( Net cash used by capital and related financing activities 1,423,370)( NET CHANGE IN CASH AND CASH EQUIVALENTS 390,022 CASH AND CASH EQUIVALENTS, BEGINNING 1,109,565 CASH AND CASH EQUIVALENTS, ENDING 1,499,587$ RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income 750,469$ Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization1,041,057 Changes in operating assets and liabilities: Accounts receivable 2,902 Trade accounts payable 70,949 Unearned revenue 60,089)( Accrued liabilities 7,977 Net cash provided by operating activities 1,813,265$ The accompanying notes are an integral part of these financial statements. TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 2013 10 THIS PAGE LEFT BLANK INTENTIONALLY 11 TEXAS STUDENT HOUSING AUTHORITY – BALLPARK AUSTIN PROJECT NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2013 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 2013 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 certain 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 Nos. 39 and 61. The criterion used is as follows: 12 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 Position 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, 2013, the Project had no such investments included in cash and cash equivalents. In addition, the Project has restricted cash of $1,119,010 that is held by the trustee for the bonds payable under provisions of the trust indenture. During the year ended August 31, 2013, the Authority did not receive any investment income from cash. See Note III for risk disclosures and breakdown of restricted cash accounts. 13 Accounts Receivable Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management writes off uncollectible amounts through a charge-off to expense. 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, 2013, 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, 2013, were approximately $56,941. 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 ClassUseful Lives Building30 Furniture, fixtures and equipment3 - 20 14 III. DETAILED NOTES ON ALL FUNDS A. Cash and Investments At August 31, 2013, 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 $1,499,587 of which $1,119,010 represented restricted cash. The following is the breakdown of the restricted cash. Restricted Cash Restricted cash represents amounts placed on deposit in accounts and held by the trustee, which are restricted for the payment of expenses as required by the trust indenture. At August 31, 2013, restricted cash consists of the following funds and accounts: Fund/Account Description Admin Exp Fund36,408$ Bond Fund, Series 2001A Senior Interest394,311 Bond Fund, Series 2001 B Sub B13,002 Bond Fund, Series 2001C Sub C16 Debt Service Reserve 2001A Senior108,518 Debt Service Reserve 2001B Sub B863 Repair and Replacement Fund1,313 Minimum Scholarship Fund1,944 Trustee Fee Fund706 Tax and Insurance Fund166,541 Senior Bonds Principal392,450 Sub B Bond Principal 2,938 Total 1,119,010$ 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. 15 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. Project 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. 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 1/12th 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. 16 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, 2013, the Project held all of its restricted cash balances with the trustee, which represents 74.6% of the total cash and investments held at August 31, 2013. 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, 2013, $101,217 of the Project’s $351,217 bank balance was collateralized with a Bank Deposit Guarantee Bond from the Project’s depository. The remaining balance, $250,000, was covered by FDIC insurance. 17 B. Capital Assets Capital asset activity for the Project for the year ended August 31, 2013, was as follows: BeginningEnding BalanceAdditionsRetirementsBalance Capital assets, not being depreciated: Land 4,788,265$ -$ -$ 4,788,265$ Total capital assets, not being depreciated 4,788,265 - - 4,788,265 Capital assets, being depreciated: Building21,345,305 - - 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: Building7,589,442)( 711,510)( - 8,300,952)( Improvements, furniture and fixtures 4,109,184)( 149,166)( - 4,258,350)( Total accumulated depreciation 11,698,626)( 860,676)( - 12,559,302)( Total capital assets, being depreciated, net 16,639,742 860,676)( - 15,779,066 Capital assets, net 21,428,007$ 860,676)$( -$ 20,567,331$ 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. At August 31, 2013, 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. 18 The following is a summary of long-term debt transactions of the Project for the 12-month period ended August 31, 2013: 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, 2013, there have been no payments made on the deferred purchase price. The debt is to be amortized through 2033 with varying payment amounts ranging from $330,000 to $4,505,000 for interest and principal. The annual requirements to amortize all debts outstanding as of August 31, 2013, are as follows: D. Net Position Net position represent the residual assets after liabilities are deducted. These assets are reported in the following categories: Net Investment in Capital Assets – The component of net position that reports the difference between capital assets less both the accumulated depreciation and the outstanding balance of debt, excluding unspent proceeds, that is directly attributable to the acquisition, construction, or improvement of these capital assets. Amounts BeginningEndingDue WithinInterest BalanceIncreasesDecreasesBalanceOne YearPaid Revenue Bonds: 2001A Bonds28,840,000$ -$ 28,840,000$ 705,000$ 1,806,931$ 2001B Bonds2,365,000 - - 2,365,000 - 2001C Bonds3,000,000 - - 3,000,000 - - Deferred purchase price1,460,000 - - 1,460,000 - - Less discounts 1,161,651)( - 60,085)( 1,101,566)( - - Total 34,503,349$ -$ 60,085)$( 34,563,434$ 705,000$ 1,806,931$ Year Ending August 31,PrincipalInterestTotal 20141,035,000$ 2,006,275$ 3,041,275$ 2015800,000 1,962,856 2,762,856 2016845,000 1,916,950 2,761,950 2017890,000 1,868,556 2,758,556 2018940,000 1,817,406 2,757,406 2019-20235,510,000 8,218,281 13,728,281 2024-20287,210,000 6,433,000 13,643,000 2029-203312,470,000 4,062,075 16,532,075 2034-2038 4,505,000 - 4,505,000 Totals 34,205,000$ 28,285,399$ 62,490,399$ Governmental Activities 19 Restricted Net Position – The component of net position calculated by reducing the carrying value of restricted assets by the amount of any related debt outstanding. Unrestricted – The difference between the assets and liabilities that is not reported in net position net investment in capital assets and restricted net position. E. Management Fees Beginning June 1, 2004, the Project retained Asset Campus Management for property management and recorded property management fees of approximately $188,342 for the year ended August 31, 2013. F. Concentrations The Project consists of one property in Austin, Texas, and is dependent upon the Austin area and the higher education facilities in the Austin area for revenues. G. Commitments and Contingencies The Project has yet to have an arbitrage calculation performed for its outstanding debt. After that analysis, the Project may incur a liability for interest earned in accordance with Internal Revenue Service regulations. THIS PAGE LEFT BLANK INTENTIONALLY SUPPLEMENTAL SCHEDULES THIS PAGE LEFT BLANK INTENTIONALLY BudgetActualVariance REVENUES AND OTHER SUPPORT Rental income3,595,073$ 3,733,076$ 138,003$ Other income129,450 101,596 27,854)( Interest income - 127 127 Total revenues and other 3,724,523 3,834,799 110,276 OPERATING EXPENSES Personnel329,681 338,583 8,902)( Contract services83,520 56,767 26,753 Utilities533,227 588,850 55,623)( Repairs and maintenance87,670 107,862 20,192)( Turnover243,875 431,063 187,188)( Advertising and promotion89,000 56,941 32,059 Management fees185,509 188,342 2,833)( Administration 61,380 274,739 213,359)( Total operating expenses 1,613,862 2,043,147 429,285)( REVENUES AVAILABLE FOR FIXED CHARGES 2,110,661 1,791,652 319,009)( OTHER EXPENSES Depreciation and amortization- 1,041,056 1,041,056)( Interest expense - 2,403,421 2,403,421)( Total other expenses - 3,444,477 3,444,477)( EXCESS OF EXPENSES OVER REVENUES 2,110,661$ 1,652,825)$( 3,763,486)$( FOR THE YEAR ENDED AUGUST 31, 2013 TEXAS STUDENT HOUSING AUTHORITY BALLPARK AUSTIN PROJECT SCHEDULE I - SCHEDULE OF REVENUES AND EXPENSES BUDGET AND ACTUAL 20 CALCULATION OF FIXED CHARGES COVERAGE RATIO Total gross revenues 3,834,799$ Total expenses5,487,624)$( Add: Interest expense2,403,421 Depreciation and amortization1,041,056 Property management fees 188,342 Adjusted expenses 1,854,805)( Adjusted net operating income available to pay fixed charges 1,979,994$ Fixed charges/maximum principal and interest for fiscal year-end 3,032,544$ Fixed charges coverage ratio 0.65 Required ratio 1.15 Pass or fail Fail FOR THE YEAR ENDED AUGUST 31, 2013 TEXAS STUDENT HOUSING AUTHORITY BALLPARK SCHEDULE II - FIXED CHARGES COVERAGE RATIO 21 22 TEXAS STUDENT HOUSING AUTHORITY – BALLPARK AUSTIN PROJECT SCHEDULE II – CERTIFICATE OF THE FIXED CHARGES COVERAGE RATIO AUGUST 31, 2013 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, 2013. 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, 2013, to be $1,979,994. 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, 2013, to be .73 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, 2013, to be .65 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, 2013, to be .69 which is based on 12 months of operations. THIS PAGE LEFT BLANK INTENTIONALLY Texas Student Housing Authority Item # 9 - Adjournment