TENDERLOIN HOUSING CLINIC, INC AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT June 30, 2010

/'

TABLE OF CONTENTS

INDEPENDENT FINANCIAL

AUDITORS'

REPORT

3

STATEMENTS STATEMENT STATEMENT STATEMENT STATEMENT OF FINANCIAL OF ACTIVITIES OF FUNCTIONAL OF CASH FLOWS FINANCIAL STATEMENTS EXPENSES POSITION 4 5

CONSOLIDATED CONSOLIDATED CONSOLIDATED CONSOLIDATED

6 7 8'

NOTES TO CONSOLIDATED SUPPLEMENTARY SCHEDULE

INFORMATION OF FEDERAL A WARDS AWARDS 19 20

OF EXPENDITURES

NOTE TO SCHEDULE

OF EXPENDITURES

OF FEDERAL

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-I33 SCHEDULE SUMMARY OF FINDINGS SCHEDULE AND QUESTIONED COSTS

21

23 25 27

OF PRIOR AUDIT FINDINGS

Ccrri ried Pubhc Account ar-ts .~ Advisors

INDEPENDENT AUDITORS' REPORT Board of Directors Tenderloin Housing Clinic, Inc. and Subsidiary We have audited the accompanying statement of financial position of Tenderloin Housing Clinic, Inc. (a nonprofit organization) and Subsidiary (the Organization) as of June 30, 2010, and the related consolidated statements of activities, functional expenses and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Organization. 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 the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In December 2007, the Organization received a donation of real property that has not been recorded in the financial statements. In our opinion, accounting principles generally accepted in the United States of America require that such donated property be recorded at its fair value. Management believes that the fair value ofthe property is not measureable until final zoning is approved (refer to note K). In our opinion, except for the effects of not recording real estate received by donation, as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of June 30, 2010, and the changes in its net assets and its 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, we have also issued our report dated February 28, 2011 on our consideration of the Organization's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements of the Organization taken as a whole. The accompanying schedule of expenditures of federal awards for the year ended June 30, 2010 is presented for the purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and NonProfit Organizations, and is not a required part of the basic consolidated financial statements. 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 financial statements taken as a whole. San Francisco, California February 28, 2011
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Tenderloin Housing Clinic, Inc. and Subsidiary CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2010
ASSETS ASSETS
Cash and cash equivalents Cash held for clients Cash- tenant security deposits Investment in mutual fund Prepaid expenses Contracts and grants receivable Attorney fee receivable Other receivables Total current assets Property and equipment - net of accumulated depreciation $ 1,085,206 405,185 30,024 10,531 99,856 1,504,095 63,729 48,960 3,247,586 6,886,007

OTHER ASSETS
Deposits Cash held for 495 Minna Street Total other assets 296,011 31,359 327,370 $ 10,460,963

TOTAL ASSETS LIABILITIES AND NET ASSETS CURRENT LIABILITIES
Accounts payable Accrued payroll Accrued vacation Tenant security deposits Client trust fund liability Other Total current liabilities

$

408,015 144,070 303,442 30,024 356,523 226,533 ·1,468,607

OTHER LIABILITIES
Funds field in trust for 495 Minna Street Loans payable 31,359 704,949 2,204,915

TOTAL LIABILITIES COMMlTMENTS NET ASSETS
Unrestricted

8,256,048

TOTAL LIABILITIES AND NET ASSETS

$ 10,460,963

The accompanying notes are an integral part of this statement. 4

Tenderloin Housing Clinic, Inc. andSubsidiary CONSOLIDATED STATEMENT OF ACTIVITIES Year ended June 30, 2010
Unrestricted Revenues and support: Government contracts and grants SRO Housing Program - Human Services Agency (HSA) Family Housing Subsidy program - HSA Modified Payment Program - HSA Assistance for Ellis Act Evictions - HSA Homelessness Prevention and Rapid Rehousing Program - HSA Shelter Plus Care - SF Housing Authority Central City SRO Collaborative - Department of Public Health CDBG grant - Mayor's Office of Housing Code Enforcement and Outreach Program - Department of Building Inspection and First 5 - Corrunercial District Capital Grant La Voz Latina - Glide Foundation Rent Board Grant Hotel rental income Galvin Apartments rental income Attorney fees Reimbursed legal costs Other rental income Miscellaneous income 495 Minna rental income Donations Investment return Total revenues and support Expenses Program services SRO housing Housing services Legal assistance Tenants' organizing outreach Galvin Apartments Beyond Chron 495 Minna Street Total program services Management and general Total expenses Change in net assets Unrestricted Unrestricted net assets at beginning of year net assets at end of year $ 19,930,101 1,541,604 704,341 395,163 309,788 15,500 7,234 22,903,731 1,814,586 24,718,317 (43,840) 8,299,888 8,256,048

$ 13,327,108 678,510 422,898 124,171 245,003 325,205 235,550 86,110 75,470 89,340 20,000 18,806 8;162,012 359,366 336,635 86,793 34,790 22,073 11,802 . 11,196 1,639 24,674,477

Mayor's Office of Economic and Workforce Development

The accompanying notes are an integral part of this statement. S

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Tenderloin

Housing Clinic, Inc. and Subsidiary" STATEMENT OF CASH FLOWS

CONSOLIDATED

Year ended June 30, 2010 CASH FLOWS FROM (TO) OPERATING ACTIVITIES Change in net assets Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization Changes in operating assets and liabilities Contracts and grants receivable Cash held for clients Attorney fees receivable Other receivables Prepaid expenses Deposits Accounts payable Accrued payroll Accrued vacation Other current liabilities Net cash used in operating activities CASH FLOWS FROM (TO) INVESTING ACTIVITIES Purchases of equipment and improvements Net cash used in investing activities NET DECREASE IN CASH AND CASH EQUIVALENTS

$

(43,840)

494,960 (860,585) (48,662) (47,876) (18,917) (36,304) (3,000) (179,934) (6,969) 39,430 220,582 (491,115)

(234,218) (234,218) (725,333) 1,810,539

Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$ 1,085,206

The accompanying

notes are an integral part of this statement.

7

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2010 NOTE A - DESCRlPTION OF ORGANIZATION Tenderloin Housing Clinic, Inc. (the Organization) was incorporated on. June 3, 1980, as a California nonprofit corporation. The Organization's primary purposes are to preserve, expand and stabilize low-income housing in the Tenderloin and surrounding communities of San Francisco, California, assist tenants to assert their legal rights, provide culturally competent support services, and create employment and leadership opportunities for formerly homeless tenants. On January 1,2004, the Clinic merged with City Housing, Inc. (CHI), the exclusive agent that operated and managed all the hotels now master-leased by the Organization. The Organization assumed all the assets and liabilities of CHI and was the surviving corporation. The Organization formed Beyond Chron, LLC on April 3, 2004 to operate an online website, under BeyondChron.org. The Organization is the sole member of this LLC. All the Organization's properties are in San Francisco, California and its principal activities are as follows: Single Room Occupancy (SRO) Housing Program: This program has provided supportive housing to homeless tenants through master lease agreements with residential hotels in San Francisco, California since May 1, 1999. The Organization provides comprehensive property management services for fifteen master-leased hotels. The Organization's property management department manages tenants' leases and compliance with hotel leases and ensures the sanitation, safety, upkeep and code compliance of the hotels. The Organization offers voluntary comprehensive support services to tenants residing in these hotels. The support services offered by the Organization help residents maintain housing, enrich their selfrespect, confidence and awareness, improve quality of life, minimize and/or resolve issues that may jeopardize their housing, build a strong sense of community and access information about other helpful services. The hotels' operating expenses, including lease .payments, are funded by a combination of rent collections and service contracts with the Human Services Agency of the City and County of San Francisco (HSA) since July 1,2000. Legal Assistance Program: This program assists tenants to assert their legal rights. The majority of the funding for this program comes from settlements of lawsuits and courtawarded legal fees. HSA funds a portion of this program to provide legal representation to long-term senior and disabled San Francisco tenants facing eviction under the Ellis Act. A Community Development Block Grant ceDBG) also funds a portion of the program. The program has a mix of revenue and non-revenue generating litigation, as well as a substantial amount of non-litigation representation for low-income tenants where no fees of any kind are charged or collected. Most of the revenue generating cases is on a contingency fee basis.

8

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2010 NOTE A - DESCRIPTION OF ORGANIZATION (continued) Housing Service Program: This program provides housing, rental and payment assistance where the Organization acts as a disbursing agent. Comprehensive case management is also offered to adult clients under the Shelter plus Care Program and families through the Family Housing Subsidy Program. These services target to low-income individuals, low-income families and homeless individuals who may be mentally ill, have chronic substance abuse problems, and/or be afflicted with disabling HN, AIDS or related disorders. This program is . funded by federal and local government agencies under various contracts, with the majority of funding from HSA. Community Organizing and Outreach: This program operates the Central City SRO Collaborative (Collaborative), Code Enforcement Outreach Program (CEOP), La Voz Latina de la Ciudad Central (La Voz), Commercial District Capital Grant and Residential Rent Stabilization & Arbitration Board Outreach (Rent Board). Funding for this program is from contract and grants from local government agencies. The following City and County of San Francisco agencies fund this program: Department of Public Health, Department of Building Inspection, First 5 via Glide Foundation acting as a subcontractor for this program, Mayor's Office of Economic and Workforce Development and the Rent Board. The Collaborative, CEOP and Rent Board programs provide community outreach, counseling and tenant organizing to SRO and low-income residents of San Francisco. The Collaborative operates a tenant representative program at various SRO hotels to enhance stability in the hotels and address residential community concerns. Tenant representatives, with the help of the Organization's community organizers, conduct regular meetings and respond to tenant concerns. The Commercial District Capital Grant is a onetime project to improve the facade of the Cadillac Hotel in the Tenderloin neighborhood of San Francisco. La Voz engages and educates Latino and immigrant families living in the Tenderloin community of San Francisco. Galvin Apartments: The Organization owns and manages a studio apartment building named in honor of Sister Bernie Galvin of Religious Witness with Homeless People: refer to Note 1. . Beyond Chron: This is a daily online news site that provides news and analysis about issues primarily related to San Francisco. 495 Minna Street: The Organization manages two artist live/work units and an art. gallery space located at 495 Minna Street, San Francisco, California.

9

Tenderloin Housing Clinic, Inc. and Subsidiary N0TES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2010 NOTE B - SUMlvlARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the Organization's significant accounting policies: Basis of accounting The Organization maintains its records using the accrual method of accounting. Basis of presentation The Organization reports information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted and permanently restricted. Unrestricted Net Assets The portion of net assets that is neither temporarily restricted nor permanently restricted by donor restriction. Temporarily Restricted Net Assets The portion of net assets for which use by the Organization is limited by donor-imposed stipulations that expire by passage of time or can be fulfilled and removed by actions of the Organization. The Organization currently has no temporarily restricted net assets. Permanently Restricted Net Assets The portion of net assets for which use by the Organization is lirnitedby donor-imposed stipulations that neither expire by passage of time nor can otherwise be removed by . actions of the Organization. The Organization currently has no permanently restricted net assets. Consolidation The accompanying financial statements include the accounts of Tenderloin Housing Clinic, Inc. and its wholly owned subsidiary Beyond Chron, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents For purposes of the statement of cash flows, the Organization considers all unrestricted, highly liquid investments with an initial maturity of three months or less to be cash equivalents. The Organization maintains its cash balances at two banks located in San Francisco, California. The FDIC temporarily increased deposit insurance for such accounts from $100,000 to $250,000 per depositor, through December 31, 2013. At year-end and various times during the year, the Organization had cash in excess of insured amounts. 10

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2010 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment in mutual fund The investment in mutual fund is recorded at fair value, which is its quoted market price. Property and equipment Equipment purchase costs in excess of $1,000, with estimated useful lives in excess of one year, are capitalized at cost. Donated assets are capitalized at the fair market value on the date of receipt. Depreciation is computed on the straight-line method using estimated useful lives varying between five and forty years. Leasehold improvements, in excess of $1,000, are recorded at cost and are amortized using the straight-line method over the estimated useful lives of the respective assets, ranging from three to seven years, but not more than the remaining term of the respective lease. Maintenance, repairs and renewals, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Functional allocation of expenses Expenses are charged to programs and management and general services on the basis of periodic time and expense studies in addition to estimates made by management. General and administrative expenses include those expenses that are not directly identifiable with any other specific function but which provide for the overall support and direction of the Organization. Estimates The preparation of fmancial 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 disclosures of contingent assets and liabilities (if any) at the date of the financial statements and the reported amounts of revenue and expenditures during the reporting period. Actual results could differ from those estimates. The most significant estimates are the allocation of expenses among the Organization's functions and the rates of depreciation for property and equipment. Litigation expenses Litigation expenses such as court costs, filing fees and courier charges are expensed when incurred because those expenses may not be recoverable.

11

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2010 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income taxes The Organization is exempt from paying federal and state income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701d. Accordingly, no provision has been made for such taxes in the accompanying financial statements. Each year, management considers whether any material tax position the Organization has taken is more likely than not to be sustained upon examination by the applicable taxing authority. Management believes that any positions the Organization has taken are supported by substantial authority and, hence, do not need to be measured or disclosed in the attached financial statements. Tax returns for years subsequent to June 30, 2006 are subject to examination by federal and state tax authorities. Revenue recognition Attorney fees are recognized as revenue during the period in which a case is settled. Hotel rental income is reported net of any vacancy loss. Contributions and grants are recognized when the donor/grantor makes an unconditional promise to give to the Organization. Amounts that are restricted by the donor/grantor are reported as increases in temporarily restricted net assets or permanently restricted net assets depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets. Management reviews the collectability of contributions and pledges receivable and establishes reserves for uncollectible amounts when needed. Subsequent events The Organization has evaluated subsequent events through February 28, 2011, which represents the date the financial statements are available to be issued.

NOTE C - CASH HELD FOR CLIENTS The Organization acts as an agent for its clients in receiving checks and disbursing money for rent and other expenditures on their behalf. It does this as part of the cash management services provided by the Housing Services Program. All client funds are_~~d and held separate from the Organization's funds. The Organization bears all expenses incurred to maintain any agency bank accounts. At June 30, 2010, the balance in these accounts was $231,955.

12

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCLAL STATEMENTS (continued) June 30, 2010 NOTE C - CASH HELD FOR CLIENTS (continued) Under the Legal Assistance Program, the Organization maintains client trust bank accounts .. During legal proceedings, clients often remit rents, which are deposited into the client trust bank account. The Organization pays rents to owners or returns them to clients when the respective lawsuits are settled. The trust account balance at June 30,2010 was $173,230, including funds held on behalf of a minor in a non-tenant related settlement. NOTE D - CONTRACTS AND GRANTS RECEIVABLE Contracts and grants receivable at June 30, 2010 consisted of the following: Human Services Agency Department of Building Inspection Department of Public Health Mayor's Office of Housing Office of Economic and Workforce Development San Francisco Rent Board Glide Foundation $ 1,373,338 38,451 21,951 21,154 20,000 18,806 10,395
$ 1,504,095

NOTE E - PROPERTY AND EQUIPMENT Property and equipment consists of the following: Land Buildings Automobiles Office furniture and equipment Leasehold improvements Building improvements $ 906,225 4,707,275 37,114 701,943 878,944 1,784,440

Less accumulated depreciation

9,015,941 (2,129,934) $ 6,886,007

The Organization has a 50% ownership interest in an office building located at 126 Hyde Street, San Francisco. The Organization occupies most of this building for its office; refer to Note F.

13

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATE1\1ENTS (continued)' June 30, 2010 NOTE F - COMMITMENTS The Organization owns half of the Hyde street building occupied by its administrative office. The Organization occupies the entire space and, in consequence, has a space lease agreement with the other owner (tenant-in-common). The agreement is for five years beginning October 2000 with automatic annual renewals. The starting monthly rent was $7,500, which increases by 5% for each successive year. The rent compensates the tenant-in-common for use of the space and covers substantially all normal operating costs of ownership. Rent expense for the year ended June 30, 2010 was $112,800. As part of the arrangement, the Organization also leases garage space for $500 per month and subleases a portion of this space. Net rental income during the reporting period from subleasing garage spaces amounted to $4,655, net of rent expense of $6,000. The Organization has a lease for a storefront office on Turk Street, which is renewable on an annual basis up to 2019. The starting monthly rent was $1,250 with a 5% annual increase. Rent expense for the year ended June 30, 2010 was $19,161. In March 2006, the Organization entered into a five-year lease for an office space on Turk Street, with a five-year renewal option. The initial monthly rent was $2,775, increasing each year based on schedules in the lease agreement. Rent expense for the year ended June 30, 2010 was $36,660. The Organization leased an office on Eddy Street in May 2007. The lease is for five years and has ten five-year renewal options. The initial monthly rent was $2,625, increasing by 3% each year. Rent expense for the year ended June 30, 2010 was $33,420. In July 2009, the Organization entered into a five-year lease for office space on Turk Street. The initial monthly rent was $2,000 increasing each year based on schedules in the lease agreement. There is also a renewal option for another five years upon expiration of the original lease term. Rent expense for the year ended June 30, 2010 was $19,161. The Organization leases additional office space and a parking space for its two trucks, both on a month-to-month basis. Office rent and parking expenses for these leases were $7,488 and $6,300, respectively, for the year ended June 30,2010. At June 30, 2010, minimum lease payments under non-cancelable leases are as follows: Year ending June 30, 2011 2012 2013 2014 $ 87,320 54,520 25,469 25,978 19J,287

$

14

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSqLIDATED FINANCIAL STATEMENTS (continued) June 30, 2010 NOTE F - COMMITMENTS (continued) Residential Hotels The Organization master leases residential hotels from outside parties to provide housing to low-income and homeless people. These leases have an .initial one-year term and consecutive one-year renewal terms at the Organization's option. The leases have different termination dates, depending upon the inception and length of the agreement. As of June 30, 20 I 0, the master leases are as follows: Name of Hotel Seneca Hotel Mission Hotel Jefferson Hotel Vincent Hotel Hartland Hotel Looper Residence Royan Hotel Caldrake Hotel Graystone Hotel Allstar Hotel Pierre Hotel Union Hotel Raman Hotel Boyd Hotel Elk Hotel Commencement Date May 1, 1999 October 1, 1999 October 1, 1999 ~ May 15,2000 September 1, 2000 August 9, 2002 May 20,2003 October 1, 2003 May 1,2004 August 1, 2004 September 16,2004 December 15, 2004 September 9,2005 February 13,2006 August 1,2006 Number of Units
204 248 111 103 138 44 69 51 74 86 87 60 85 82 89

Term with Options 20 years 20 years 20 years
20 years 20 years 20 years 20 years 20 years 10 years 20 years 20 years 10 years 20 years 20 years 20 years

Minimum future rental payments under the non-cancellable portion of these leases, usually one year for each hotel, totaled $2,811,891 as of June 30, 2010. NOTE G - CONCENTRA TrONS OF RlSK The Organization receives a substantial amount of its support from' federal and local government agencies. One of the agencies provides 60% of total revenue. A significant reduction in the level of this support could have a material adverse affect on the Organization's programs and activities. Management does not believe this is likely because the Organization's contract with the Agency continues through 2015.

15

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2010 NOTEH-LOANSPAYABLE Hartland Hotel CDBG Loan The Organization entered into a loan agreement for $317,100 with the City and County of San Francisco to fund rehabilitation of Hartland Hotel. This loan is interest-free and the principal is due twenty years from the date of the agreement, January 3, 2002. It requires Hartland Hotel to comply with specified affordability and leasing restrictions until August 31, 2020. All principal and accrued interest will be forgiven at maturity, provided the Organization remains in compliance with specified terms of the agreement. If, with the City's prior written consent at any time while the affordability restrictions are still in effect: (i) the Organization consents to the lessor's sale of the property; or (ii) the Organization or its assignee fails to exercise the purchase option (as defined in the lease) for the property, then the lessor may terminate the affordability restrictions by payment of a release fee in an amount equal to the then remaining balance of the loan which is calculated on the basis of a 5% reduction of the original principal balance on each anniversary of the loan closing date. Mission Hotel CDBG Loan The Organization entered into a loan agreement for $387,849 with the Mayor's Office of Housing to fund part of the rehabilitation of Mission Hotel. This loan is interest-free and the principal is due fifteen years from the date of the deed, December 2, 2005. However, all principal and interest will be forgiven at maturity, provided the Organization remains in compliance with specified terms of the agreement. The agreement requires Mission Hotel to comply with stated affordability and leasing restrictions. If, with the City's prior written consent at any time while the affordability restrictions are still in effect: (i) the Organization consents to the lessor's sale of the property; or (ii) the Organization or its assignee fails to exercise the purchase option (as defined in the lease) for the property, then the lessor may terminate the affordability restrictions by payment of a release fee in an amount equal to the then remaining balance of the loan which is calculated on the basis of a 5% reduction of the original principal balance on each anniversary of the loan closing date. NOTE I - 495 MINNA STREET The Organization renovated the ground-floor commercial space of a residential hotel at the comer of Sixth and Minna Streets with funding from the San Francisco Redevelopment Agency. The renovation created a lobby/sitting room for the hotel's tenants and created two separate housing units for use as artist live-work spaces. The Organization has a lease for a term of 10 years with two 5-year renewal options for this space. The Organization manages the space and holds a surplus from prior years as a reserve for contingencies and repairs.

16

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 20'10 NOTE I - 495 MINNA STREET (continued) The reserve balance Was $31,359 at June 30, 2010. NOTE J - GALVIN APARTMENTS The Organization manages a 56-unit studio apartment building located at 785 Brannan Street (the Galvin Apartments). It rents the studio apartments to very low-income tenants who have previously lived in an SRO hotel. "Rental revenue from the building pays for the expenses associated with managing and operating the property. The Organization received the Galvin Apartments in September 2007 without paying consideration. NOTE K - 900 INNES The Organization received title to a 3.16 acre vacant lot located in the Bayview/Hunters Point neighborhood of San Francisco (900 Innes) in December 2007. The Organization pays the property taxes and insurance costs for this lot, totaling $27,345 for the year ended June 30, 2010. Upon receipt of title to the land, the Organization executed a space lease agreement with the current tenant, the donor. The lease expires upon the earlier of five years or commencement of construction on the property. The donor had created certain rights, title and interest in plans, permits and site improvements. He gave them to the Organization .as consideration under the terms of the lease, in lieu of cash payments valued at $400,000. The donor obtained an appraisal of the property at $20,000,000 as of the date of transfer but the Organization has not recorded any value associated with this land or site improvements. Management is awaiting the outcome of a rezoning process affecting the property, which began in 2807, before determining the best use of the property. Given the uncertainty of the final zoning, management believes it has no measurable basis to determine fair value of the parcel. Such lack of measurable value, and consequent omission in the financial statements of the Organization, constitutes a departure from US generally accepted accounting principles (GAAP). This GAAP departure does not impact overall operations of the Organization in serving its mission. NOTE L - CONTINGENCIES The Organization receives monies from several grant/contract programs that are operated by various government agencies. Those programs are subject to financial and compliance audits by the grantors/agencies or their representatives, to ensure compliance with conditions and restrictions of the agreements. In the opinion of management, any liability for reimbursement that may arise as the result of future audits is unlikely to be material.

17

SUPPLEMENTARY INFORMATION

Tenderloin SCHEDULE

Housing

Clinic, Inc. and Subsidiary OF FEDERAL

OF EXPENDITURES

A WARDS

For the year ended JW1e 30, 2010 Federal CFDA Number

Year ended June 30, 2010

MAJOR FEDERAL PROGRAMS
Human Services Agency - HSA (pass-through City and County of San Francisco) State Administrative Program ARRA - Homeless Prevention and Rapid Rehousing Department of Housing and Urban Development (Pass-through from the City and County of San Francisco) Community Community Community Development Block Grant 14.218 14.218 14.218 86,110 317,100 387,849 791,059 ·724,804 from the

Matching Grants for Food Stamp 10.561 14.257

$

2,798,693 245,003

Development Block Grant (loan) Development Block Grant (loan)

Shelter

+ Care Funding

14.238

Total Major Federal Programs

$

4,559,559

NON-MAJOR FEDERAL PROGRAMS
Department of Public Health (Pass-through from the City and County of San Francisco) Pedestrian and Traffic Safety Total Non-Major Federal Programs 20.205 3,623

$

3,623

19

Tenderloin Housing Clinic, Inc. and Subsidiary NOTE TO SCHEDULE OF EXPENDITURES OF FEDERAL A WARDS Year ended June 30, 2010

NOTE - BASIS OF ACCOUNTING The accompanying supplementary Schedule of Expenditures of Federal Awards has been prepared on the accrual basis of accounting. The resources and related expenditures are classified for accounting and reporting purposes into funds established according to their nature and purpose. Under the accrual basis, revenue is recorded when realized and expenditures are recorded when incurred, without regard to the time of cash receipt or payment. The focus of the accrual basis of accounting is on the matching of revenue realized with costs incurred. Revenues for the Federal programs are received as reimbursement for specific purposes or projects and are recognized based upon eligible recorded expenditures. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic consolidated financial statements.

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INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL

REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN
AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Tenderloin Housing Clinic, Inc. and Subsidiary

We have audited the financial statements of Tenderloin Housing Clinic, Inc. and Subsidiary (a California non-profit corporation) as of and for the year ended June 30, 2010, and have issued our report thereon dated February 28, 2011. 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. Internal Control Over Financial Reporting In planning and performing our audit, we considered the Organization's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow . management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Organization's financial statements will not be prevented or detected and corrected on a timely basis. Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control ovz_fin~l rw~that we consider to be significant deficiencies or material weaknesses, as defined qbovJ?:. ... Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization's fmancial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements,' noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion.

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INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS (CONTINUED)

The results of our tests disclosed no instances of nODcompliance or otbeL.IDatters that are required to be rs:ported under Government Auditing Standards. " This report is intended solely for the information and use of the board of directors, audit committee, management, others within the Organization, and the U.S. Department of Housing and Urban Development, is not intended to be, and should not be used by anyone other than these specified parties.

San Francisco, California February 28, 2011

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INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133

Board of Directors Tenderloin Housing Clinic, Inc. and Subsidiary Compliance We have audited Tenderloin Housing Clinic, Inc. and Subsidiary'S compliance with the types of compliance requirements described in the OMB Circular A-I33 Compliance Supplement that could have a direct and material effect on each of the Organization's major federal . programs for the year ended June 30, 2010. The Organization's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of . findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of Tenderloin Housing Clinic, Inc. and Subsidiary'S management. Our responsibility is to express an opinion on Tenderloin Housing Clinic, Inc. and Subsidiary'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 OMB Circular A-133. Those standards and OMB Circular A-I33 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization'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 Tenderloin Housing Clinic, Inc. and Subsidiary's compliance with those requirements. In our opinion, Tenderloin Housing Clinic, Inc. and Subsidiary complied, in all material respects, with the requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30,2010. Internal Control Over Compliance Management of Tenderloin Housing Clinic, Inc. and Subsidiary is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs.

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INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-I33 (CONTINUED)

In planning and performing our audit, we considered Tenderloin Housing Clinic, Inc. and Subsidiary's internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-I33, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Tenderloin Housing Clinic, Inc. and Subsidiary's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be significant deficiencies or material weaknesses, as defined above. This report is intended solely for the information and use of the board of directors, audit committee, management, others within the Organization and the U.S. Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties.

San Francisco, California February 28,2011

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Tenderloin

Housing Clinic, Inc. and Subsidiary

SCHEDULE OF FINDINGS AND QUESTIONED COSTS
Year ended June 30, 2010 Section I - Summary of Auditors' Results Financial Statements Type of auditors' report issued: Internal control over fmancial reporting: Material weakness( es) identified? Significant deficiency(s) identified that are not considered to be material weakness(es) Noncompliance material to financial statements noted Federal Awards Internal control over major programs: Material weakness( es) identified? Significant deficiency(s) identified that are not considered to be material weakness(es) Type of auditors' report issued on compliance for major problems: Any audit findings disclosed that are to be reported in accordance with section 51O(a) of Circular A-133? yes x no yes x no Qualified

yes yes

x
x

none reported no

yes

x

none reported

Unqualified

yes

x

no

Identification of major programs: eFDA Numbers(s) 10.561
14.218 14.238 14.257

Name of Program or Cluster State Administrative Matching Grants for Food Stamp Program Community Development Block Grant Program Shelter and Care Funding Homeless Prevention and Rapid Rehousing Pedestrian and Traffic Safety

20.205 Dollar threshold used to distinguish between Type A . and Type B programs:
Auditee qualified as low-risk auditee? (*)

$300,000 yes x no

(*) Does not qualify only because

of prior year audit findings,
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cleared in the current year.

Tenderloin Housing Clinic, Inc. and Subsidiary SCHEDULE OF FINDINGS AND QUESTIONED COSTS (continued) Year ended June 30, 2010 Section II - Financial Statement Findings None

Section III - Federal Award Findings and Questioned Costs None

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Tenderloin Housing Clinic, Inc. and Subsidiary SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Year ended June 30, 2010 FINDING NO. 2009-1 Modified Payment Program ("MPP") Bank Reconciliation

Statement of Condition: The Organization's MPP database records all monetary transactions for MPP clients using the Organization's representative payee and rental payment services. The MPP database also serves as the sub-ledger for the MPP bank account. Limitations of the MPP database do not provide the necessary information to perform a complete bank reconciliation of the MPP bank account. Specifically, the MPP database is not currently able to generate a detailed list of funds within individual client accounts that make up the balances in the MPP bank and corresponding MPP liability accounts. Criteria: Bank reconciliations and detailed subsidiary ledgers of account balances are important features of internal control. Effect of Condition: The Organization is not able to prepare a complete and accurate bank reconciliation for its MPP bank account. While the information for each client is in the MPP database, the database is unable to efficiently generate the required information. Cause of Condition: Management designed the MPP database program to manage its client transactions. The program was not designed to serve as a subsidiary ledger or to assist in the preparation of bank reconciliations. Recommendation: The Organization should prioritize obtaining proper MPP account reconciliations and detailed listing of balances by client as a component of its ongoing software upgrade program. Status: This findin was cleared with the im e new MPP software upgrade and correspon ing reconciliation and funding of individual client balances. '

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Tenderloin Housing Clinic, Inc. and Subsidiary SUMMARY SCHEDULE OF PRlOR AUDIT FINDINGS (continued) Year ended June 30,2010 FINDING NO. 2009-2 Rent Rolls and Property Management Statement of Condition: The Organization does not prepare current "rent rolls", as the term is defined by industry, for any of its master leased hotel properties or the Galvin Apartments. A rent roll is a tool for property management to maximize collection of rents, track past due amounts, bad debts, and to readily identify vacant units. Criteria: Rent rolls by location enhance controls over cash receipts by providing a mechanism to ensure accuracy and completeness in the rental collection process. Effect of Condition: Without a rent roll, the Organization is unable to readily determine its tenant rents receivable at specific intervals, to tie bad debts to specific units or to easily track vacant units. Cause of Condition: The unique services offered by the MPP required the creation of the MPP database that serves both as a money management and property management tool. It was not designed with the ability to record the tenants' expected rent amounts or other charges that need to be paid. The lack of this functionality does not allow a traditional rent roll to be generated. Recommendation: The Organization should pursue the possibility of customizing the MPP database to provide the required information in a format typically used by property management compames. Alternatively, a rental property software package could be obtained. Status: This rmding has been cleared with the implementation of the new MPP software 2~ade and the corresponding rent rolls for each property managed by the Orgailization;. ..

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