CORRESP 1 filename1.txt CENTURY PACIFIC TAX CREDIT HOUSING FUND II 1 E. STOW ROAD MARLTON, NEW JERSEY 08053 VIA FEDEX and FAX (202)772-9209 June 6, 2005 United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Mail Stop 4561 Attention: Cicely Luckey, Accounting Branch Chief RE: Century Pacific Tax Credit Housing Fund - II Form 10-K for the fiscal year ended March 31, 2004 Filed January 25, 2005 File No. 033-24537 Dear Ms. Luckey: We are responding to the letter from the United States Securities and Exchange Commission dated May 19, 2005 regarding the above referenced filing. Notes to the Financial Statements, pages F-7 - F-14 --------------------------------------------------- Note 1. Summary of Significant Accounting Policies, pages F-7 - F-8 -------------------------------------------------------------------- Investments in Operating Partnerships, page F-7 1. We note your response to comment 1 and your reliance on paragraph 4h of FIN46R as your basis for not evaluating whether the Laurel-Clayton limited partnership is a variable interest entity ("VIE"). Supplementally, please provide us with a detailed analysis that shows how the Laurel-Clayton limited partnership meets the definition of a business. In addition, please provide an expanded response to how you determined that you did not trigger the conditions in parts (2) and (3) of paragraph 4h that would require you to determine whether this is a variable interest entity under FIN 46R. Response: Appendix C of FIN 46R ("the Interpretation"), related to EITF Issue No.98-3, defines a business for use in the Interpretation as follows: "A business is a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. A business consists of (a) inputs, (b) processes applied to those inputs, and (c) resulting outputs that are used to generate revenues. For a set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to conduct normal operations, which include the ability to sustain a revenue stream by providing its outputs to customers." CENTURY PACIFIC TAX CREDIT HOUSING FUND II 1 E. STOW ROAD MARLTON, NEW JERSEY 08053 As noted in the December 31, 2003 financial statements of Laurel-Clayton Limited Partnership ("Laurel-Clayton"), Laurel-Clayton owns and operates a 430 unit apartment complex in Worcester, Massachusetts. Further review of these financial statements reveals that the inputs, processes and outputs described in Appendix C exist within the operations of Laurel-Clayton. On this basis, the Registrant determined that Laurel-Clayton is a business within the definition of FIN46R. The December 31, 2003 financial statements of Laurel-Clayton Limited Partnership are attached to this response. Paragraph 4h of FIN46R list four conditions which would require a business to be evaluated as a variable interest entity, including condition (2) "the entity is designed so that substantially all of it activities either involve or are conducted on behalf of the reporting enterprise and its related parties" and condition (3) the reporting enterprise and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the entity based on an analysis of the fair values of the interests in the entity. As it relates to condition (2), the Registrant is a limited partner of Laurel-Clayton. In that capacity, the Registrant did not participate in the design of Laurel-Clayton, whose apartment complex is operated under an agreement with, and subsidized by, the U.S. Department of Housing and Urban Development. As it relates to condition (3), the Laurel-Clayton financial statements state that the general partner, an unrelated entity of the Registrant, provided more than half of the total equity and subordinated debt of Laurel-Clayton. On the basis of the above, Laurel-Clayton does not meet the criteria for consideration as a VIE with respect to the Registrant. In connection with the SEC's comments, Century Pacific Tax Credit Housing Fund II acknowledges the following: 1. Century Pacific Tax Credit Housing Fund II is responsible for the adequacy and accuracy of the disclosure in our filings; 2. staff comments or changes to disclosures in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and 3. Century Pacific Tax Credit Housing Fund II may not assert staff comments as a defense in any proceedings initiated by the Commission or any person under the federal securities laws of the United States. Sincerely, /s/ James V. Bleiler Mr. James V. Bleiler Chief Financial Officer cc: Michael D. Byrnes, CPA, Asher & Company, Ltd. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC TABLE OF CONTENTS PAGE MORTGAGOR'S CERTIFICATION 4 MANAGING AGENT'S CERTIFICATION 5 INDEPENDENT AUDITORS' REPORT 6 FINANCIAL STATEMENTS BALANCE SHEET 8 STATEMENT OF OPERATIONS 10 STATEMENT OF PARTNERS' EQUITY (DEFICIT) 13 STATEMENT OF CASH FLOWS 14 NOTES TO FINANCIAL STATEMENTS 16 SUPPLEMENTAL INFORMATION BALANCE SHEET DATA 26 STATEMENT OF OPERATIONS DATA 28 STATEMENT OF PARTNERS' EQUITY (DEFICIT) DATA 32 STATEMENT OF CASH FLOWS DATA 33 RESERVE FOR REPLACEMENTS 35 COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS AND RESIDUAL RECEIPTS 36 CHANGES IN FIXED ASSET ACCOUNTS 37 DETAIL OF ACCOUNTS - BALANCE SHEET 39 Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC TABLE OF CONTENTS PAGE SUPPLEMENTAL INFORMATION (CONTINUED) OTHER INFORMATION 40 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL 41 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO MAJOR HUD PROGRAMS 43 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO FAIR HOUSING AND NON-DISCRIMINATION 45 Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC TABLE OF CONTENTS MORTGAGOR'S CERTIFICATION We hereby certify that we have examined the accompanying financial statements and supplemental data of Laurel-Clayton Limited Partnership and, to the best of our knowledge and belief, the same are complete and accurate. GENERAL PARTNER ______________________________________ Charles M. Moran, Jr. Date ______________________________________ Beverly Bates Date Telephone Number: (617) 695-9595 Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC TABLE OF CONTENTS MANAGING AGENT'S CERTIFICATION I hereby certify that I have examined the accompanying financial statements and supplemental data of Laurel-Clayton Limited Partnership and, to the best of my knowledge and belief, the same are complete and accurate. MANAGING AGENT The Community Builders, Inc. ______________________________________ Maria Correla Keven Spillane Property Manager Managing Agent Taxpayer Identification Number: 04-2324773 Reznick Group, P.C. 7700 Old Georgetown Road * Suite 400 * Bethesda, MD 20814-6224 (301) 652-9100 * Fax (301) 652-1848 INDEPENDENT AUDITORS' REPORT To the Partners Laurel-Clayton Limited Partnership We have audited the accompanying balance sheet of Laurel-Clayton Limited Partnership as of December 31, 2003, and the related statements of operations, partners' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Laurel-Clayton Limited Partnership as of December 31, 2003, and the results of its operations, the changes in partners' equity (deficit) and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards and the "Consolidated Audit Guide for Audits of HUD Programs," we have also issued reports dated January 28, 2004 on our consideration of Laurel-Clayton Limited Partnership's internal control and on its compliance with specific requirements applicable to major HUD programs and fair housing and non-discrimination. Those reports are an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplemental information on pages 26 through 40 is presented for purposes of additional analysis and is not a required part of the basic financial statements of the Partnership. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. Bethesda, Maryland Taxpayer Identification Number: January 28, 2004 52-1088612 Lead Auditor: Karen D. Donahoe, CPA Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC BALANCE SHEET December 31, 2003
ASSETS CURRENT ASSETS Cash and cash equivalents - operations $ 483,213 Tenant accounts receivable $ 17,578 Allowance for doubtful accounts (13,000) ----------- 4,578 Accounts receivable - HUD 8,854 Accounts and notes receivable - operations 5,624 Interest reduction payment receivable 4,622 Payroll deposit 106,999 Miscellaneous prepaid expenses 138,535 ------------ Total current assets 752,425 DEPOSITS HELD IN TRUST - FUNDED Tenant deposits 93,012 RESTRICTED DEPOSITS AND FUNDED RESERVES Escrow deposits 225,537 Reserve for replacements 989,007 ----------- 1,214,544 RENTAL PROPERTY Land 1,100,000 Buildings 23,197,918 Office furniture and equipment 1,342,476 Maintenance equipment 22,139 Motor vehicles 6,400 ----------- 25,668,933 Less accumulated depreciation (11,893,951) ----------- 13,774,982 ------------ $ 15,834,963 ============
(continued) -5- Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC BALANCE SHEET - CONTINUED December 31, 2003
LIABILITIES AND PARTNERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable - operations $ 88,739 Accrued property taxes payable 180,000 Mortgage payable - first mortgage, current maturities 463,660 Accrued expenses 43,875 --------- Total current liabilities 776,274 DEPOSITS LIABILITY Tenant deposits held in trust (contra) 91,332 LONG-TERM LIABILITIES Accrued interest payable - other loans/notes (surplus cash) $ 8,447,461 Notes payable - surplus cash 2,800,000 Mortgage payable - first mortgage, net of current maturities 5,297,532 Other loans/notes payable 3,517,966 Accrued asset management fees 169,997 ----------- 20,232,956 CONTINGENCY - PARTNERS' EQUITY (DEFICIT) (5,265,599) ------------ $ 15,834,963 ============
See notes to financial statements Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC STATEMENT OF OPERATIONS Year ended December 31, 2003
RENTAL REVENUE Rent revenue - gross potential $ 2,025,690 Tenant assistance payments 2,597,584 Rent revenue - stores and commercial 24,776 Miscellaneous rent revenue 33,002 ----------- Total rental revenue $ 4,681,052 VACANCIES Apartments (20,015) Rental concessions (2,008) ----------- Total vacancies (22,023) ---------- Net rental revenue 4,659,029 FINANCIAL REVENUE Financial revenue - project operations 19,923 Revenue from investments - replacement reserve 9,181 ----------- Total financial revenue 29,104 OTHER REVENUE Laundry and vending 9,237 Tenant charges 15,233 Interest reduction payments revenue 130,859 Miscellaneous revenue 11,188 ----------- Total other revenue 166,517 ----------- Total revenue 4,854,650 -----------
(continued) Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC STATEMENT OF OPERATIONS - CONTINUED Year ended December 31, 2003
ADMINISTRATIVE EXPENSES Advertising and marketing 890 Resident services 184,645 Office salaries 228,245 Office expenses 39,240 Management fee 279,829 Administrative rent free unit 6,276 Legal expense - project 20,502 Auditing expense 9,800 Bad debts 5,947 Miscellaneous administrative expenses 41,315 ----------- Total administrative expenses 816,689 UTILITIES EXPENSE Electricity 298,807 Water 223,966 Gas 382,425 ----------- Total utilities expense 905,198 OPERATING AND MAINTENANCE EXPENSES Payroll 371,638 Supplies 75,134 Contracts 291,848 Garbage and trash removal 49,093 Snow removal 2,811 Vehicle and maintenance equipment operation and repairs 8,195 ----------- Total operating and maintenance expenses 798,719
(continued) Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC STATEMENT OF OPERATIONS - CONTINUED Year ended December 31, 2003
TAXES AND INSURANCE Real estate taxes 180,000 Payroll taxes 54,010 Property and liability insurance 173,955 Workmen's compensation 14,164 Health insurance and other employee benefits 156,343 Miscellaneous taxes, licenses, permits and insurance 86 ------------ Total taxes and insurance 578,558 FINANCIAL EXPENSES Interest on notes payable - long-term 224,000 Mortgage insurance premium/service charge 29,775 Miscellaneous financial expenses 10,059 ----------- Total financial expenses 263,834 ---------- Total cost of operations before depreciation and amortization 3,362,998 ---------- Income (loss) before depreciation and amortization 1,491,652 ---------- DEPRECIATION AND AMORTIZATION Depreciation expense 848,101 ----------- Total depreciation and amortization 848,101 ---------- Operating income (loss) 643,551 ---------- CORPORATE OR MORTGAGOR ENTITY REVENUE AND EXPENSES Interest on notes payable 751,578 Asset management fees 46,641 ----------- Net entity expenses 798,219 ---------- Total expenses 5,009,318 ---------- Net income (loss) $ (154,668) ==========
See notes to financial statements Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC STATEMENT OF PARTNERS' EQUITY (DEFICIT) Year ended December 31, 2003
General partners Limited partners Total ----------------- ----------------- ------------ Partners' equity (deficit) December 31, 2002 $ (3,549,909) $ (1,561,022) $ (5,110,931) Net income (loss) (1,547) (153,121) (154,668) ------------ ------------ ------------ Partners' equity (deficit) December 31, 2003 $ (3,551,456) $ (1,714,143) $ (5,265,599) ============ ============ ============
See notes to financial statements Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC STATEMENT OF CASH FLOWS Year ended December 31, 2003
Cash flows from operating activities Rental receipts $ 4,636,348 Interest receipts 29,104 Other operating receipts 166,517 ----------- Total receipts 4,831,969 ----------- Administrative expenses paid (320,835) Management fees paid (279,829) Utilities paid (875,598) Salaries and wages paid (599,883) Operating and maintenance paid (410,824) Real estate taxes paid (180,000) Property insurance paid (157,080) Miscellaneous taxes and insurance paid (86) Net tenant security deposits received (paid) 106 Other operating expenses paid (194,823) Interest paid on notes (303,822) Mortgage insurance premium paid (28,141) Miscellaneous financial expenses paid (10,059) Entity/construction expenses paid Interest paid $ (276,055) Asset management fees (44,134) ---------- (320,189) ---------- Total disbursements (3,681,063) ---------- Net cash provided by (used in) operating activities 1,150,906 ---------- Cash flows from investing activities Net deposits to mortgage escrows (13,256) Net deposits to reserve for replacements (130,973) Net purchases of fixed assets (525,989) -------- Net cash provided by (used in) investing activities (670,218) --------- Cash flows from financing activities Mortgage principal payments - first mortgage (426,006) Principal payments on notes and loans payable (405,895) --------- Net cash provided by (used in) financing activities (831,901) --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (351,213) Cash and cash equivalents, beginning 834,426 --------- Cash and cash equivalents, end $ 483,213 =========
(continued) Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC STATEMENT OF CASH FLOWS - CONTINUED Year ended December 31, 2003
Reconciliation of net income (loss) to net cash provided by (used in) operating activities Net income (loss) $ (154,668) ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation 848,101 Changes in asset and liability accounts (Increase) decrease in assets Tenant accounts receivable 5,576 Accounts receivable - other (6,591) Miscellaneous prepaid expenses 18,509 Tenant security deposits funded 21,146 Increase (decrease) in liabilities Accounts payable 21,532 Accrued interest payable (50,128) Tenant security deposits held in trust (21,040) Prepaid revenue (9,561) Entity/construction liability accounts (include detail) Accrued interest - entity $ 475,523 Accrued asset management fee 2,507 --------- 478,030 ----------- Total adjustments 1,305,574 ----------- Net cash provided by (used in) operating activities $ 1,150,906 ===========
See notes to financial statements Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE A - ORGANIZATION Laurel-Clayton Limited Partnership (the "Partnership") was formed on December 1, 1987 as a Massachusetts limited partnership for the purpose of acquiring and operating Plumley Village East, a 430-unit apartment complex in Worcester, Massachusetts (the "Project") providing residential housing for families of low and moderate income. The Project is operated under the terms of a U.S. Department of Housing and Urban Development ("HUD") regulatory agreement under Section 236 of the National Housing Act. The Project has a HUD mortgage note under this program, with an interest rate subsidy which effectively can lower the interest rate to 1%. The Section 236 program is a major program of the Project. The Project is also subsidized by HUD under its Section 8 Housing Assistance Program. Each building of the Project has qualified for and been allocated low-income housing credits pursuant to Internal Revenue Code Section 42 ("Section 42") which regulates the use of the Project as to occupant eligibility and unit gross rent, among other requirements. Each building of the Project must meet the provisions of these regulations during each of fifteen consecutive years in order to remain qualified to receive the credits. In addition, Laurel-Clayton Limited Partnership has executed an Extended Low-income Housing Extended Use Commitment which requires the utilization of the Project pursuant to Section 42 for a minimum of 30 years, even if the Partnership disposes of the Project. On December 10, 1987, The Community Builders, Inc. ("TCB") entered into a purchase and sale agreement to acquire the assets and liabilities of the Project for $1,750,000, payable to the seller upon syndication of the Partnership. On December 30, 1987, TCB assigned its rights and obligations under the purchase and sale agreement to the Partnership for $4,250,000 (see note D) and the Partnership acquired the assets and liabilities of the Project. In connection with the acquisition, the Partnership also agreed to pay an acquisition fee of $1,000,000 to TCB, which was forgiven in 1989. The purchase price of the Project was allocated to property and equipment based on fair market values determined at the date of acquisition. The Partnership is made up of the managing general partner with a 0.5% share, the supervising general partners with a 0.5% share, the investor limited partner with a 60% share, Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE A - ORGANIZATION (Continued) and the class A limited partners with a 39% share. The managing general partner is owned 76% by a corporation which in turn is owned 100% by The Community Builders, Inc., which manages the Project. Except as specified in the partnership agreement, all items of income, expense, gain, loss, tax credits, tax preferences and cash are allocated to the partners based on their ownership percentages. Certain special items of loss generated by bridge loan interest expense, seller loan interest, refinance fees and contingent interest expense are allocated exclusively to the class A limited partners. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable and Bad Debts --------------------------------- Tenant receivables are reported net of an allowance for doubtful accounts. Management's estimate of the allowance is based on historical collection experience and a review of the current status of tenant accounts receivable. It is reasonably possible that management's estimate of the allowance will change. Rental Property --------------- Rental property is carried at cost. Depreciation is computed using the straight-line method for the buildings and land improvements and the double declining balance method for equipment over the estimated useful lives of the assets. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. All leases between the Partnership and tenants of the property are operating leases. Cash Equivalents ---------------- For purposes of the statement of cash flows, the Partnership considers all highly liquid treasury bills purchased with a maturity of three months or less to be cash equivalents. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE C - MORTGAGE PAYABLE The Partnership has a mortgage payable to HUD, secured by the real property of the Project. Monthly installments of $77,965 include principal and interest at 8.5%. The monthly mortgage interest reduction is equal to the difference between the payment that would be required for principal and interest at 8.5% on the actual mortgage note and the amount that would be required for principal and interest if the mortgage note carried an interest rate of 1%. The interest reduction is then passed on to eligible tenants in the form of lower rents. The amount received in the current year totaled $640,428. Final payment is due September 2012. Under agreements with HUD, the Partnership is also required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions. The liability of the Partnership under the mortgage note is limited to the underlying value of the real estate collateral plus other amounts deposited with the lender. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE C - MORTGAGE PAYABLE (Continued) Aggregate annual maturities of the mortgage payable over each of the next five years following December 31, 2003 and thereafter are as follows: December 31, 2004 $ 463,660 2005 504,644 2006 549,250 2007 597,798 2008 650,638 Thereafter 2,995,202 ---------- $5,761,192 ========== NOTE D - NOTES PAYABLE Related Party ------------- A note payable to TCB in the original amount of $4,250,000 is secured by the assets of the Project and subordinated to both the mortgage note and the residual receipts note. Interest is compounded annually on the outstanding principal and interest balance at 8.38%, a portion of which is payable out of surplus cash (see note G). Principal and unpaid interest are due on the earlier of the date of sale or refinancing of the Project, or the 90th day after the close of the Low-Income Housing Credit Compliance Period, as defined in Section 42(i) of the Internal Revenue Code. During 2003, $751,578 of interest was incurred. The Partnership distributed $276,055 from available surplus cash during 2003 to pay accrued interest. At December 31, 2003, the note principal balance was $3,517,966 and unpaid interest of $5,935,296 was included in accrued interest payable - other loans/notes. A note payable to Community Development, Inc. ("CDI"), an affiliate of TCB, bears no interest. All principal is due upon the earlier of: (a) the removal of Laurel-Clayton Associates as managing general partner; (b) the sale or transfer of the property; (c) the dissolution and liquidation of Laurel-Clayton Associates; or (d) November 28, 2003. During 2003 the entire principal balance of $405,895 was paid. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE D - NOTES PAYABLE (Continued) Other ----- A residual receipts note is payable to HUD, incurred for the purpose of completing a rehabilitation plan which provided for renovation to rental units, common areas and structures. The note is secured by the real estate of the Project. This note bears interest at an annual rate of 8%, a portion of which is payable out of surplus cash (see note G). Principal and unpaid interest are due in their entirety in a balloon payment when the mortgage expires. During 2003, $224,000 of interest was incurred. The Partnership paid $303,822 from available surplus cash during 2003. At December 31, 2003, the principal note balance was $2,800,000 and unpaid interest of $2,512,165 was included in accrued interest payable - other loans/notes. NOTE E - RELATED PARTY TRANSACTIONS The Project owes asset management fees of $169,997, including the current year expense of $46,641, to Century Pacific Realty Corporation, the supervising general partner. The fees are payable out of surplus cash available for distribution (see note G), or proceeds from the sale or refinancing of the property. During 2003, the Partnership paid $44,134 from available surplus cash. NOTE F - MANAGEMENT FEE The Project is managed by TCB. Management fees to TCB, based on 6% of gross collections, were $279,829. In addition, TCB charged the Partnership $964,286 for payroll and related costs. NOTE G - DISTRIBUTIONS The HUD regulatory agreement limits annual distributions of Project funds to 6% of the initial equity investment in the Project which is $242,600. Distributions may only be made from surplus cash, as defined by the HUD regulatory agreement. Distributions that are allowable, but limited by insufficient surplus cash, can be accumulated. At December 31, 2003, surplus cash amounted to $361,133 and accumulated undistributed return on investment totaled $5,372,065. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE G - DISTRIBUTIONS (Continued) An amendment to the HUD residual receipts note provides for the following uses of surplus cash: (a) The first $120,000 shall be retained in an operating account and used in the following 12-month period for resident services. (b) The next $40,000 shall be allocated for distributions permitted under the HUD regulatory agreement. (c) The next $50,000 shall be applied to interest on the HUD residual receipts note. (d) The next $30,000 shall be allocated for distributions permitted under the HUD regulatory agreement. (e) Any surplus cash beyond $240,000 shall be allocated equally to interest on the HUD residual receipts note and distributions permitted under the HUD regulatory agreement. NOTE H - RESIDENT SERVICES The Project provides many programs and other services to its residents at its Center for Education and Employment. Those programs include a computer learning center, adult education classes for GED and ESL, workforce readiness and employment assistance and various youth programs. These services are funded by up to $120,000 from the previous year's surplus cash and the remainder from the Project's operating budget. In 2003, resident service expenses totaled $216,355, which consists of salaries and related expenses, as well as supplies, equipment and administrative costs. NOTE I - CONCENTRATION OF CREDIT RISK The Partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 at each bank. As of December 31, 2003, the uninsured portion of the cash balances held at one of the banks was $399,873. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE I - CONCENTRATION OF CREDIT RISK (Continued) The restricted deposits described in note C are held by GMAC Mortgage Corporation, which potentially subjects the Partnership to risk. NOTE J - HOUSING ASSISTANCE PAYMENT CONTRACT AGREEMENT HUD has contracted with the Partnership, under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants. One agreement covering 256 units expires on September 30, 2004. A second agreement covering 86 units expires on September 30, 2004. In January 2001, HUD issued its "Guidebook for Section 8 Renewal Policy" (the "Guidebook"), which provides guidance for the renewal of expiring Section 8 project-based contracts. The Guidebook is a comprehensive resource for all renewals and is updated periodically to reflect program and legislative changes. The Guidebook sets forth six options for initial Section 8 contract renewals. They include requesting renewal under the mark-up-to-market procedures, renewing other contracts with rents at or below comparable market rents, referring projects to the Office of Multifamily Housing Assistance Restructuring ("OMHAR") for full restructuring or "OMHAR-lite" renewals because the contract has rents greater than market, renewing contracts for "exception" projects which are exempted from referral to OMHAR, renewing contracts for portfolio reengineering demonstration or preservation projects, and opting out of the Section 8 program. Owners are limited to selecting options based upon the type of project involved and current rent levels and must submit requests to HUD at least 120 days before contract expiration. Each option contains specific eligibility requirements, rules and procedures that must be followed to comply with the Guidebook. Approved multiple year contracts are funded for one year with the balance of years subject to annual appropriations. Subsequent renewals of contracts may be made under any option the contract is eligible for at the time of renewal. As of the date of the report, the Partnership intends to renew its contracts under the options provided by HUD housing notice 99-36. Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE K - MORTGAGOR ENTITY EXPENSES Mortgagor entity expenses included in the Statement of Operations do not represent operating expenses of the project and, accordingly, cannot be paid and are not paid out of project operations. Rather, they are entity expenses, which can only be paid out of surplus cash or mortgagor entity funds. Such expenses have been segregated from project operations in the Statement of Operations for that reason. Unpaid mortgagor entity expenses included in the Statement of Operations represent accruals only and are recorded only where required under accounting principles generally accepted in the United States of America. These accruals result only in increased liabilities in the Balance Sheet. The liability that results from any accrual is also subject to surplus cash restrictions and is payable only to the extent of surplus cash or mortgagor entity funds. The Statement of Cash Flows reflects those mortgagor entity expenses actually paid during the period. Below is a summary of mortgagor entity expenses expensed and paid:
Expensed Paid Beginning Ending Description Amount Amount Liability Liability -------------------- ------------ ------------ -------------- -------------- Interest on notes payable $ 751,578 $ 276,055 $ 5,459,773 $ 5,935,296 Asset management fees 46,641 44,134 167,490 169,997 ------------ ------------ -------------- -------------- Total $ 798,219 $ 320,189 $ 5,627,263 $ 6,105,293 ============ ============ ============== ==============
NOTE L - CONTINGENCY Interest on the residual receipts note from HUD described in note D had been accrued at 1% simple interest from the loan origination date until the date of the transfer of physical assets from the seller to the Partnership, at which time the interest rate increased to 8%. HUD contends that the rate change is retroactive to the loan origination, while management contends that the increase was effective as of the date of the transfer, and it has kept its books and records accordingly. The amount of interest which would have been capitalized as part of the purchase price due to the retroactive adjustment is approximately $179,331. This additional amount would be due with the balance of principal and interest at the expiration of Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2003 NOTE L - CONTINGENCY (Continued) the mortgage as described in note C. No accrual of this amount has been made in the accounting records as of December 31, 2003. NOTE M - FRONT FOOTAGE BENEFIT The Partnership entered into a contract exempting it from taxation of real and personal property and betterments and special assessments and from the payment of any tax, excise or assessment to or for the Commonwealth or any of its political subdivisions on account of the Project. The Partnership pays the excises with respect to the Project which a corporation would be bound to pay under the formulae and provisions set forth under the provisions of the contract. For the year ended December 31, 2003, the Partnership incurred $180,000 in taxes. SUPPLEMENTAL INFORMATION SUPPORTING DATA REQUIRED BY HUD Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION SUPPORTING DATA REQUIRED BY HUD BALANCE SHEET DATA December 31, 2003
ASSETS Account No. ---------- CURRENT ASSETS 1120 Cash - operations $ 483,213 1130 Tenant accounts receivable $ 17,578 1131 Allowance for doubtful accounts (13,000) ----------- 1130N Net tenants accounts receivable 4,578 1135 Accounts receivable - HUD 8,854 1140 Accounts and notes receivable - operations 5,624 1165 Interest reduction payment receivable 4,622 1190 Miscellaneous current assets 106,999 1200 Miscellaneous prepaid expenses 138,535 ------------ 1100T Total current assets 752,425 DEPOSITS HELD IN TRUST - FUNDED 1191 Tenant deposits 93,012 RESTRICTED DEPOSITS AND FUNDED RESERVES 1310 Escrow deposits 225,537 1320 Reserve for replacements 989,007 ----------- 1300T Total deposits 1,214,544 RENTAL PROPERTY 1410 Land 1,100,000 1420 Buildings 23,197,918 1465 Office furniture and equipment 1,342,476 1470 Maintenance equipment 22,139 1480 Motor vehicles 6,400 ----------- 1400T Total fixed assets 25,668,933 1495 Less accumulated depreciation (11,893,951) ----------- 1400N Net fixed assets 13,774,982 ------------ 1000T Total assets $ 15,834,963 ============
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD BALANCE SHEET DATA - CONTINUED December 31, 2003
LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Account No. ----------------- CURRENT LIABILITIES 2110 Accounts payable - operations $ 88,739 2150 Accrued property taxes payable 180,000 2170 Mortgage payable - first mortgage, current maturities 463,660 2190 Miscellaneous current liabilities 43,875 ------------ 2122T Total current liabilities 776,274 DEPOSITS LIABILITY 2191 Tenant deposits held in trust (contra) 91,332 LONG-TERM LIABILITIES 2133 Accrued interest payable - other loans/notes (surplus cash) $ 8,447,461 2311 Notes payable - surplus cash 2,800,000 2320 Mortgage payable - first mortgage, net of current maturities 5,297,532 2324 Other loans/notes payable, net of current maturities 3,517,966 2390 Miscellaneous long-term liabilities 169,997 ----------- 2300T Total long-term liabilities 20,232,956 3130 PARTNERS' EQUITY (DEFICIT) (5,265,599) ------------ 2033T Total liabilities and partners' equity (deficit) $ 15,834,963 ============
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF OPERATIONS DATA Year ended December 31, 2003
Account No. ----------------- RENTAL REVENUE 5120 Rent revenue - gross potential $ 2,025,690 5121 Tenant assistance payments 2,597,584 5140 Rent revenue - stores and commercial 24,776 5190 Miscellaneous rent revenue 33,002 ----------- 5100T Total rental revenue $ 4,681,052 VACANCIES 5220 Apartments (20,015) 5250 Rental concessions (2,008) ----------- 5200T Total vacancies (22,023) ----------- 5152N Net rental revenue 4,659,029 FINANCIAL REVENUE 5410 Financial revenue - project operations 19,923 5440 Revenue from investments - replacement reserve 9,181 ----------- 5400T Total financial revenue 29,104 OTHER REVENUE 5910 Laundry and vending 9,237 5920 Tenant charges 15,233 5945 Interest reduction payments revenue 130,859 5990 Miscellaneous revenue 11,188 ----------- 5900T Total other revenue 166,517 ----------- 5000T Total revenue 4,854,650 -----------
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF OPERATIONS DATA - CONTINUED Year ended December 31, 2003
Account No. ----------------- ADMINISTRATIVE EXPENSES 6210 Advertising and marketing 890 6250 Other renting expenses 184,645 6310 Office salaries 228,245 6311 Office expenses 39,240 6320 Management fee 279,829 6331 Administrative rent free unit 6,276 6340 Legal expense - project 20,502 6350 Auditing expense 9,800 6370 Bad debts 5,947 6390 Miscellaneous administrative expenses 41,315 ----------- 6263T Total administrative expenses 816,689 UTILITIES EXPENSE 6450 Electricity 298,807 6451 Water 223,966 6452 Gas 382,425 ----------- 6400T Total utilities expense 905,198 OPERATING AND MAINTENANCE EXPENSES 6510 Payroll 371,638 6515 Supplies 75,134 6520 Contracts 291,848 6525 Garbage and trash removal 49,093 6548 Snow removal 2,811 6570 Vehicle and maintenance equipment operation and repairs 8,195 ----------- 6500T Total operating and maintenance expenses 798,719
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF OPERATIONS DATA - CONTINUED Year ended December 31, 2003
Account No. TAXES AND INSURANCE 6710 Real estate taxes 180,000 6711 Payroll taxes 54,010 6720 Property and liability insurance 173,955 6722 Workmen's compensation 14,164 6723 Health insurance and other employee benefits 156,343 6790 Miscellaneous taxes, licenses, permits and insurance 86 -------- 6700T Total taxes and insurance 578,558 FINANCIAL EXPENSES 6830 Interest on notes payable - long-term 224,000 6850 Mortgage insurance premium/service charge 29,775 6890 Miscellaneous financial expenses 10,059 -------- 6800T Total financial expenses 263,834 ---------- 6000T Total cost of operations before depreciation and amortization 3,362,998 ---------- 5060T Income (loss) before depreciation and amortization 1,491,652 ---------- DEPRECIATION AND AMORTIZATION 6600 Depreciation expense 848,101 -------- Total depreciation and amortization 848,101 ---------- 5060N Operating income (loss) 643,551 ---------- CORPORATE OR MORTGAGOR ENTITY REVENUE AND EXPENSES 7141 Interest on notes payable 751,578 7190 Other expenses 46,641 -------- 7100T Net entity expenses 798,219 ---------- Total expenses 5,009,318 ---------- 3250 Net income (loss) $ (154,668) ==========
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF OPERATIONS DATA - CONTINUED Year ended December 31, 2003
Account No. ----------- S1000-010 Total mortgage principal payments required during the audit year (12 monthly payments). Applies to all direct loans and HUD-held and fully-insured mortgages. Any HUD-approved second mortgages are included. $ 426,006 ========= S1000-020 Total of 12 monthly deposits in the audit year made to the replacement reserve account, as required by the regulatory agreement, even if payments are temporarily suspended or reduced. $ 579,732 ========= S1000-030 Replacement reserve and residual receipts reserve releases which are included as expense items on the statement of operations. $ - ========= S1000-040 Project improvement reserve releases under the flexible subsidy program which are included as expense items on the statement of operations. $ - ========= S3100-120 Mortgage payable note detail (Section 236 only) Interest reduction payments from subsidy. $ 640,428 =========
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF PARTNERS' EQUITY (DEFICIT) DATA Year ended December 31, 2003
Account No. General partners Limited partners Total ----------- ---------------- ---------------- ------------ S1100-010 Partners' equity (deficit) December 31, 2002 $ (3,549,909) $ (1,561,022) $ (5,110,931) 3250 Net income (loss) (1,547) (153,121) (154,668) ------------ ------------ ------------ 3130 Partners' equity (deficit) December 31, 2003 $ (3,551,456) $ (1,714,143) $ (5,265,599) ============ ============ ============
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF CASH FLOWS DATA Year ended December 31, 2003
Account No. ----------- Cash flows from operating activities S1200-010 Rental receipts $ 4,636,348 S1200-020 Interest receipts 29,104 S1200-030 Other operating receipts 166,517 ----------- S1200-040 Total receipts 4,831,969 ----------- S1200-050 Administrative expenses paid (320,835) S1200-070 Management fees paid (279,829) S1200-090 Utilities paid (875,598) S1200-100 Salaries and wages paid (599,883) S1200-110 Operating and maintenance paid (410,824) S1200-120 Real estate taxes paid (180,000) S1200-140 Property insurance paid (157,080) S1200-150 Miscellaneous taxes and insurance paid (86) S1200-160 Net tenant security deposits received (paid) 106 S1200-170 Other operating expenses paid (194,823) S1200-190 Interest paid on notes (303,822) S1200-210 Mortgage insurance premium paid (28,141) S1200-220 Miscellaneous financial expenses paid (10,059) S1200-225 Entity/construction expenses paid S1200-226 Interest paid $ (276,055) S1200-226 Asset management fee (44,134) ---------- (320,189) ----------- S1200-230 Total disbursements (3,681,063) ----------- S1200-240 Net cash provided by (used in) operating activities 1,150,906 ----------- Cash flows from investing activities S1200-245 Net deposits to mortgage escrows (13,256) S1200-250 Net deposits to reserve for replacements (130,973) S1200-330 Net purchases of fixed assets (525,989) ----------- S1200-350 Net cash provided by (used in) investing activities (670,218) ----------- Cash flows from financing activities S1200-360 Mortgage principal payments - first mortgage (426,006) S1200-370 Principal payments on notes and loans payable (405,895) ----------- S1200-460 Net cash provided by (used in) financing activities (831,901) ----------- S1200-470 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (351,213) S1200-480 Cash and cash equivalents, beginning 834,426 ----------- S1200T Cash and cash equivalents, end $ 483,213 ===========
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD STATEMENT OF CASH FLOWS DATA - CONTINUED Year ended December 31, 2003
Account No. ----------- Reconciliation of net income (loss) to net cash provided by (used in) operating activities 3250 Net income (loss) $ (154,668) ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities 6600 Depreciation 848,101 Changes in asset and liability accounts (Increase) decrease in assets S1200-490 Tenant accounts receivable 5,576 S1200-500 Accounts receivable - other (6,591) S1200-520 Miscellaneous prepaid expenses 18,509 S1200-530 Tenant security deposits funded 21,146 Increase (decrease) in liabilities S1200-540 Accounts payable 21,532 S1200-570 Accrued interest payable (50,128) S1200-580 Tenant security deposits held in trust (21,040) S1200-590 Prepaid revenue (9,561) S1200-605 Entity/construction liability accounts (include detail) S1200-606 Accrued interest - entity $ 475,523 S1200-606 Accrued asset management fee 2,507 ---------- 478,030 ----------- Total adjustments 1,305,574 ----------- S1200-610 Net cash provided by (used in) operating activities $ 1,150,906 ===========
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD Year ended December 31, 2003 RESERVE FOR REPLACEMENTS Balance at December 31, 2002 $ 858,034 Total monthly deposits 579,732 Interest income 9,181 Approved withdrawals (457,940) --------- Balance at December 31, 2003 $ 989,007 ========= Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD Year ended December 31, 2003
COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS AND RESIDUAL RECEIPTS Part A - Compute Surplus Cash ----------------------------- Cash (Accounts 1120, 1170 and 1191) $ 576,225 Accounts receivable - HUD 8,854 --------- Total cash 585,079 --------- Accrued mortgage interest payable - Delinquent mortgage principal payments - Delinquent deposits to reserve for replacements - Accounts payable (due within 30 days) 88,739 Loans and notes payable (due within 30 days) - Deficient tax, insurance or MIP escrow deposits - Accrued expenses (not escrowed) - Prepaid revenue (Account 2210) - Tenant security deposits liability (Account 2191) 91,332 Other current obligations (describe in detail) Miscellaneous current liabilities $ 43,875 43,875 --------- Less total current obligations 223,946 --------- Surplus cash (deficiency) $ 361,133 ========= Part B - Compute Distributions to Owners and Required Deposit to Residual Receipts ---------------------------------------------------------------------------------- Surplus cash $ 361,133 --------- Limited Dividend Projects ------------------------- Annual distribution earned during fiscal period covered by the statements 242,600 Distribution accrued and unpaid as of the end of the prior fiscal period 5,449,654 Distributions and entity expenses paid during fiscal period covered by the statements 320,189 --------- Amount remaining as distribution earned but unpaid 5,372,065 --------- Amount available for distribution during next fiscal period $ 361,133 ========= Deposit due residual receipts reserve NONE
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD Year ended December 31, 2003
CHANGES IN FIXED ASSET ACCOUNTS Assets ------------------------------------------------------------------------------------ Balance 12/31/02 Additions Deletions Balance 12/31/03 ------------------ ------------------- ------------------- ------------------- Land $ 1,100,000 $ - $ - $ 1,100,000 Buildings 22,696,043 501,875 - 23,197,918 Office furniture and equipment 1,320,764 21,712 - 1,342,476 Maintenance equipment 19,737 2,402 - 22,139 Motor vehicles 6,400 - - 6,400 ------------------ ------------------- ------------------- ------------------- $ 25,142,944 $ 525,989 $ - $ 25,668,933 ================== =================== =================== =================== Accumulated depreciation $ 11,045,850 $ 848,101 $ - $ 11,893,951 ================== =================== =================== =================== Total net book value $ 13,774,982 ===================
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD Year ended December 31, 2003
CHANGES IN FIXED ASSET ACCOUNTS (Continued) Fixed Assets Detail ------------------- Additions to Buildings Account ------------------------------ Item and quantity Amount ------------------------------------------------------------- --------- Parking lot $ 8,760 Decorating 142,231 Electrical 7,821 Exterior repairs 5,047 Floor/carpet 19,653 Lock and key 2,857 Plumbing 78,911 Safety systems 5,296 Security 6,153 Windows/screens/doors 136,830 Other repair 45,813 HVAC 17,727 Appliances 24,776 --------- $ 501,875 ========= Additions to Office Furniture and Equipment Account --------------------------------------------------- Item and quantity Amount ------------------------------------------------------------- --------- Computers $ 21,712 ========= Additions to Maintenance Equipment Account ------------------------------------------ Item and quantity Amount ------------------------------------------------------------- --------- Bobcat bucket $ 520 Other maintenance equipment 1,882 --------- $ 2,402 =========
Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD Year ended December 31, 2003 DETAIL OF ACCOUNTS - BALANCE SHEET ACCOUNTS AND NOTES RECEIVABLE - OPERATIONS (ACCOUNT NO. 1140) Accounts receivable - commerical $ 2,478 Accounts receivable - other 3,146 -------- $ 5,624 ======== MISCELLANEOUS CURRENT ASSETS (ACCOUNT NO. 1190) Payroll deposit $106,999 ======== MISCELLANEOUS CURRENT LIABILITIES (ACCOUNT NO. 2190) Accrued audit fees $ 9,800 Accrued expenses 34,075 -------- $ 43,875 ======== MISCELLANEOUS LONG-TERM LIABILITIES (ACCOUNT NO. 2390) Asset management fees $169,997 ======== Laurel-Clayton Limited Partnership HUD Project No.: 023-44012-LDC SUPPLEMENTAL INFORMATION - CONTINUED SUPPORTING DATA REQUIRED BY HUD Year ended December 31, 2003
OTHER INFORMATION Schedule of notes payable: Lien placed on project assets? Creditor (Yes,No) Amount due ----------------------------------------------------------- --------------- ----------- The Community Builders, Inc. No $ 3,517,966 HUD Yes 2,800,000 ----------- $ 6,317,966 =========== Related party transactions detail: Entity name Amount paid ----------------------------------------------------------- ----------- The Community Builders, Inc. - Payroll and related costs $ 964,286 The Community Builders, Inc. - Management fee 279,829 The Community Builders, Inc. - Accrued interest on note 276,055 Century Pacific Realty Corporation - Asset management fee 44,134 ----------- $ 1,564,304 ===========
Reznick Group, P.C. 7700 Old Georgetown Road * Suite 400 * Bethesda, MD 20814-6224 (301) 652-9100 * Fax (301) 652-1848 INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL To the Partners Laurel-Clayton Limited Partnership We have audited the financial statements of Laurel-Clayton Limited Partnership, as of and for the year ended December 31, 2003, and have issued our report thereon dated January 28, 2004. We have also audited Laurel-Clayton Limited Partnership's compliance with requirements applicable to major HUD-assisted programs and have issued our report thereon dated January 28, 2004. We conducted our audits in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the "Consolidated Audit Guide for Audits of HUD Programs" (the "Guide"), issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General. Those standards and the Guide require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether Laurel-Clayton Limited Partnership complied with laws and regulations, noncompliance with which would be material to a major HUD-assisted program. The management of the Partnership is responsible for establishing and maintaining effective internal control. In planning and performing our audit of the financial statements, we considered the Partnership's internal control over financial reporting and its internal control over compliance with requirements that would have a direct and material effect on a major HUD-assisted program in order to determine our audit procedures for the purpose of expressing our opinions on the financial statements and on compliance and not to provide assurance on the internal control over financial reporting and the internal control over compliance. Our consideration of internal control would not necessarily disclose all matters in internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements that would be material in relation to the financial statements or that noncompliance with applicable requirements of laws and regulations that would be material in relation to a HUD-assisted program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving internal control and its operation that we consider to be material weaknesses as defined above. ATLANTA o BALTIMORE o BETHESDA o CHARLOTTE o SACRAMENTO This report is intended solely for the information and use of management and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. Bethesda, Maryland January 28, 2004 Reznick Group, P.C. 7700 Old Georgetown Road * Suite 400 * Bethesda, MD 20814-6224 (301) 652-9100 * Fax (301) 652-1848 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO MAJOR HUD PROGRAMS To the Partners Laurel-Clayton Limited Partnership We have audited Laurel-Clayton Limited Partnership's compliance with the specific program requirements governing federal financial reports; mortgage status; replacement reserve; residual receipts; distributions to owners; tenant application, eligibility and recertification; management functions; unauthorized change of ownership/acquisition of liabilities; unauthorized loans of project funds; unauthorized transfer of beneficial interest; electronic submission verification; and excess income that are applicable to each of its major HUD-assisted programs for the year ended December 31, 2003. Compliance with those requirements is the responsibility of the Partnership's management. Our responsibility is to express an opinion on the Partnership's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the "Consolidated Audit Guide for Audits of HUD Programs" (the "Guide"), issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above that could have a direct and material effect on a major HUD-assisted program occurred. An audit includes examining, on a test basis, evidence about Laurel-Clayton Limited Partnership's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the Partnership's compliance with those requirements. In our opinion, Laurel-Clayton Limited Partnership complied, in all material respects, with the requirements described above that are applicable to its major HUD-assisted program for the year ended December 31, 2003. This report is intended solely for the information and use of management and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. Bethesda, Maryland January 28, 2004 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO FAIR HOUSING AND NON-DISCRIMINATION To the Partners Laurel-Clayton Limited Partnership We have applied procedures to test Laurel-Clayton Limited Partnership's compliance with the Fair Housing and Non-Discrimination requirements applicable to its HUD-assisted programs for the year ended December 31, 2003. Our procedures were limited to the applicable compliance requirement described by the "Consolidated Audit Guide for Audits of HUD Programs" (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General. Our procedures were substantially less in scope than an audit, the objective of which is the expression of an opinion on Laurel-Clayton Limited Partnership's compliance with the Fair Housing and Non-Discrimination requirements. Accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported herein under the Guide. This report is intended solely for the information and use of management and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. Bethesda, Maryland January 28, 2004