TENDERLOIN HOUSING CLINIC, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT June 30, 2011

TABLE OF CONTENTS

Page INDEPENDENT AUDITORS’ REPORT FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF ACTIVITIES CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 5 6 7 8 3

Tenderloin Housing Clinic, Inc. and Subsidiary . CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2011

ASSETS CURRENT ASSETS
Cash and cash equivalents Cash held for clients Cash - tenant security deposits Investment in mutual fund Prepaid expenses Contracts and grants receivable Contribution receivable Attorney fee receivable Other receivables Total current assets $ 2,115,406 573,978 28,996 10,829 119,870 513,042 124,241 3,516 109,363 3,599,241 6,555,671

PROPERTY AND EQUIPMENT - net of accumulated depreciation OTHER ASSETS
Deposits Cash held for 495 Minna Street Total other assets

304,608 29,472 334,080 $ 10,488,992

TOTAL ASSETS LIABILITIES AND NET ASSETS CURRENT LIABILITIES
Accounts payable Accrued payroll Accrued vacation Tenant security deposits Client trust fund liability Loans payable - current portion Interest rate swap liability Other Total current liabilities

$

307,253 150,859 333,541 28,917 576,996 19,700 8,460 32,064 1,457,790 29,472 930,391 2,417,653 -

OTHER LIABILITIES
Funds held in trust for 495 Minna Street Loans payable - long-term portion

TOTAL LIABILITIES COMMITMENTS NET ASSETS
Unrestricted

8,071,339 $ 10,488,992

TOTAL LIABILITIES AND NET ASSETS

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

Tenderloin Housing Clinic, Inc. and Subsidiary . CONSOLIDATED STATEMENT OF ACTIVITIES Year ended June 30, 2011
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 La Voz Latina - Glide Foundation and First 5 Community Challenge Grant Program - Mural Restorations 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 Management and general Total expenses Unrealized loss from interest rate swap agreement Change in net assets Unrestricted net assets at beginning of year - as previously reported Prior period adjustment Unrestricted net assets at beginning of year - as restated Unrestricted net assets at end of year Unrestricted $ 14,876,889 516,949 601,811 125,000 478,955 329,066 251,826 87,490 72,894 80,317 30,740 20,000 8,487,745 369,037 174,663 61,805 31,940 35,017 16,170 5,943 1,828 26,656,085 24,870,474 1,844,263 26,714,737
(3,737)

(62,389) 8,256,048 (122,320) 8,133,728 $ 8,071,339

The accompanying notes are an integral part of this statement. 5

Tenderloin Housing Clinic, Inc. and Subsidiary CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year ended June 30, 2011
   
Program Services Community Legal Organizing Assistance Outreach $ 514,954 $ 298,022 200 19,735 7,684 12,447 1,060 1,705 874 34,200 24,000 23,956 13,527 5,920 4,795 19 240 828 2,835 78,197 10,443 26 $ 667,918 35,820 $ 423,569 Total Program Services $ 11,475,988 7,362,122 1,819,903 1,776,984 854,333 497,475 194,757 176,814 213,215 75,172 152,392 53,282 78,197 65,279 46,094 6,821 2,191 19,132 323 $ 24,870,474 $

Salaries and related costs Hotel leases Subsidy payments Utilities Repair and maintenance Depreciation and amortization Rent Office Insurance Legal and accounting Bed bug related costs Staff development and other costs Litigation expenses Community events Subcontractors, contractors and outside services Minor capital expenditures Taxes Bank and finance charges Interest expense Total expenses

SRO Housing $ 9,579,954 7,361,469 1,099,683 1,638,964 790,757 368,343 90,800 114,653 172,111 73,172 147,744 41,538 47,225 10,000 10,156 $ 21,546,569

Housing Service $ 1,006,405 700,285 26,165 5,238 5,935 45,757 23,989 1,490 2,000 925 7,969 6,563 4,334 8,950 $ 1,846,005

Galvin Apartments $ 68,467 653 90,186 54,418 122,323 599 28,123 3,464 112 1,048 2,487 1,107 313 $ 373,300

Beyond Chron $ 3,110 90 274 1,084 $ 4,558

495 Minna Street $ 5,076 1,538 1,155 776 10 $ 8,555

Management & General $ 1,332,284 25,506 19,962 15,582 79,817 73,723 30,158 125,643 42,461 12 750 18,746 49,171 23,761 6,687 1,844,263

Total $ 12,808,272 7,362,122 1,819,903 1,802,490 874,295 513,057 274,574 250,537 243,373 200,815 152,392 95,743 78,209 66,029 64,840 55,992 25,952 25,819 323 $ 26,714,737

 

The accompanying notes are an integral part of this statement. 6

Tenderloin Housing Clinic, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS Year ended June 30, 2011

Cash flows provided by (used in) operating activities Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Unrealized loss from interest rate swap agreement Changes in operating assets and liabilities Contracts and grants receivable Cash held for clients Attorney fees receivable Contribution receivable Other receivables Prepaid expenses Deposits Accounts payable Accrued payroll Accrued vacation Other current liabilities Net cash provided by operating activities Cash flow provided by (used in) investing activities Purchases of equipment and improvements Net cash used in investing activities Cash flow provided by (used in) financing activities Proceeds from refinance of 126 Hyde Street mortgage loan Principal payment of 126 Hyde Street mortgage loan Expense related to the issuance of the interest rate swap Net cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$

(62,389)

513,057 3,737 991,053 51,680 60,213 (124,241) (60,403) (20,014) (8,597) (100,762) 6,789 30,099 (194,846) 1,085,376

(182,721) (182,721)

250,000 (127,178) 4,723 127,545 1,030,200 1,085,206 $ 2,115,406

The accompanying notes are an integral part of this statement. 7

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2011

NOTE A - DESCRIPTION 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 sixteen 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 (CDBG) 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, 2011
 

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 HIV, 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), Community Challenge 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 Building Inspection, First 5 via Glide Foundation acting as a subcontractor for this program, Community Challenge Grant Program 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. La Voz engages and educates Latino and immigrant families living in the Tenderloin community of San Francisco. The Community Challenge Grant is a onetime project for the restoration and creation of five murals at two sites in the Tenderloin neighborhood 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 K. 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.

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Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE B - SUMMARY 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 limited by 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 consolidated financial statements include the accounts of Tenderloin Housing Clinic, Inc. and its wholly owned subsidiary Beyond Chron, LLC. All significant inter-company accounts and transactions have been eliminated in consolidation. Cash and cash equivalents For purposes of the consolidated 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. Certain balances are insured by the FDIC up to $250,000. 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, 2011
 

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. Derivative financial instruments The Organization enters into interest swap agreements to hedge its exposure to fluctuations in future cash flows resulting from interest rate payments on its variable-rate term debt. The level of effectiveness of the hedge is measured by changes in the fair value of the hedged term debt resulting from fluctuations in interest rates. As a matter of policy, the Organization does not enter into derivative transactions for trading or speculative purposes. The fair values of interest rate swap and cap agreements are obtained from dealer quotes. These values represent the estimated amount the Organization would pay to terminate the agreements taking into consideration current interest rates. Changes in fair values on interest rate swaps are recorded as an asset or liability with corresponding reporting as an element of unrestricted net assets. 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. Management and general 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.

11

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 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. 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, 2007 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. 12

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Subsequent events The Organization has evaluated subsequent events through February 27, 2012, which represents the date the financial statements are available to be issued. NOTE C – PRIOR PERIOD ADJUSTMENT The Organization has a 50% ownership interest in the building located at 126 Hyde Street. A mortgage note associated with the property was not previously recorded as a liability. This error was discovered upon the refinance of the mortgage note in 2011. The adjustment records 50% of the mortgage note associated with the building as of June 30, 2011. Accordingly, an adjustment of $122,320 was made in the current year to decrease unrestricted net assets with a corresponding entry to record the mortgage note payable (refer to Note I). The effect of the restatement on net assets for prior years was not determined.

NOTE D - 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 segregated and held separate from the Organization's funds. The Organization bears all expenses incurred to maintain any agency bank accounts. At June 30, 2011, the balance in these accounts was $319,848. 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, 2011 was $254,130.

13

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE E - CONTRACTS AND GRANTS RECEIVABLE Contracts and grants receivable at June 30, 2011 consisted of the following:
Human Services Agency Department of Building Inspection Department of Public Health Glide Foundation San Francisco Rent Board Mayor's Office of Housing $ 353,853 58,336 44,859 24,306 20,000 11,688 513,042

$

NOTE F - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
Land Buildings Automobiles Office furniture and equipment Leasehold improvements Building improvements Less: accumulated depreciation $ 906,225 4,707,275 37,114 736,189 878,943 1,932,916 9,198,662 (2,642,991) $ 6,555,671

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 G).

NOTE G - 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, 2011 was $112,800. As part of the arrangement, the Organization also 14

Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE G - COMMITMENTS 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 $3,280, 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 $1,200 with a 2% annual increase. Rent expense for the year ended June 30, 2011 was $14,761. 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, 2011 was $37,760. 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 $2,775, increasing by 3% each year. Rent expense for the year ended June 30, 2011 was $34,428. 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, 2011 was $24,000. 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 $6,975, respectively, for the year ended June 30, 2011. At June 30, 2011, minimum lease payments under non-cancelable leases are as follows:

Year ending June 30, 2012 2013 2014 2015 2016

$

93,457 64,509 66,201 46,713 30,776 301,656

$

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Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE G - 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, 2011, 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 Mayfair 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 July 1, 2010

Number of Units 204 248 111 103 138 44 69 51 74 86 87 60 85 82 88 76

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 20 years

Minimum future rental payments under the non-cancellable portion of these leases, usually one year for each hotel, totaled $2,873,416 as of June 30, 2011.

NOTE H - CONCENTRATIONS OF RISK The Organization receives a substantial amount of its support from federal and local government agencies. One of the agencies provides 64% of total revenue. A significant reduction in the level of this support could have a material adverse effect 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.

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Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE I - LOANS PAYABLE 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.

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Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE I - LOANS PAYABLE (continued) 126 Hyde Street Mortgage Note The 126 Hyde Street Mortgage was refinanced during the year. The loan provides for an initial monthly principal payment of $3,239, of which the Organization is responsible for 50% or $1,620 per month. The loan requires escalating principal payments each year. The variable interest rate is calculated using a 1-month LIBOR plus 2.6%. As of June 30, 2011 the variable rate was 2.79%. As of June 30, 2011, the balance of the loan amounted to $490,284 of which the Organization is responsible for $245,142 (50% of the balance).

Annual maturities of the mortgage note (50%) are as follows: Year ending June 30, 2012 2013 2014 2015 2016 Thereafter

$

19,700 20,778 21,920 23,120 16,040 143,584 245,142

$

In connection with the refinance of the mortgage note, the Organization entered into an interest rate swap agreement, with its lender for the 126 Hyde street mortgage note, to hedge its exposure to fluctuations in future cash flows resulting from interest payments on its variable-rate term debt. The interest rate swap agreement with the bank lender which (i) provides for net swap settlement payments based on a fixed rate of 6.38%; (ii) matures in February 2016; and (iii) is also secured by the deed of trust on the building at 126 Hyde Street. The swap agreement provides for early termination (as defined) in the event of default. At June 30, 2011, the fair value of the interest rate swap agreement is reported as an interest swap liability of $8,460. The change in the fair value (unrealized loss) of the swap agreement amounted to $3,737 and was recorded through the statement of activities.

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Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE J - 495 MINNA STREET The Organization renovated the ground-floor commercial space of a residential hotel at the corner 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 had a lease for a term of 10 years with two 5-year renewal options for this space. The Organization managed the space and held a surplus from prior years as a reserve for contingencies and repairs. The arrangement with 495 Minna Street ended in May 2011 and the remaining reserve balance of $29,472 at June 30, 2011 is for continued repairs. The amount will be distributed based on the direction of the San Francisco Redevelopment Agency.

NOTE K - 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 L - 900 INNES The Organization received title to a 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 $21,186 for the year ended June 30, 2011. 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.

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Tenderloin Housing Clinic, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 2011
 

NOTE L - 900 INNES (continued) Management is awaiting the outcome of a rezoning process affecting the property, which began in 2007, 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 U.S. generally accepted accounting principles (GAAP). This GAAP departure does not impact overall operations of the Organization in serving its mission.

NOTE M - 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.

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