You have the privilege of serving on the board of directors for a local not-for-profit that works to prevent homelessness. As a board member, it is your fiduciary duty to ensure the sustainability of the organization; poor judgment on your part could spell misfortunate for the residents. The not-for-profit owns and manages seven locations throughout your city which are used to house those less fortunate. Each location is its own entity for accounting purposes?that is, it generates its own revenue (per 8 housing vouchers and resident rent payment) and records its own expenditures. Each entity also undergoes its own audit. There is a central accounting office, and consolidated financial statements are compiled annually after all seven "entity" and "parent" audits are completed.

At a recent board meeting, the executive director presented the board with an opportunity to expand the organization's reach. Essentially, to acquire a building already zoned and used for affordable housing. The building would increase the number of clients the not-for-profit accommodates (this is great news as the board's annual goal is to increase the number of residents).

In order for the board to make a decision, the executive director and controller compiled relevant financial data (presented on page two)to the best of their ability. The real trick to the decision is deciding which piece of financial data is relevant (if it's relevant at all) and also discerning when the data is/will be relevant. Because of the substantial purchase price, due diligence should be exercised to a fault. The board chair has decided to establish a special committee to take a deep dive into the financial data, and give a recommendation to the entire board at their next meeting. As an accounting professional, you've been volunteered to take part in the committee.

As a committee member, it will be your duty to peruse the above data and convert it to useable information (to the best ofyourability). Remember, not everyone on the board, and that will read your memo, is accounting-savvy. And, don't necessarily worry about every piece of data?that is,keep your eyes on the forest, not the trees.

Part I

Your deliverable for the next board meeting is a memo outlining your committee's findings. In particular (and anything else you believe is necessary):

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Here is the report that has been given to the board and your committee. Summary data Purchase price Reserve account balance, transferable to new owner Total property management payments for the previous year; $xxx or x% is avoidable if this purchase is made The past five years' income statement, with a total column at far right 2017 $500,000.00 $849,368.66 ($103,186.17) Revenue 2014 $811,891 2015 $833,659 2016 $790,103 2018 $851,639 $824,001 $4,111,383 Expense $525,599 $584,627 $575,827 $558,188 $585,217 $2,829,458 Op Income $286,382 $249,032 $214,276 $293,457 $238,784 $1,281,931 PMF $131,812 $76,474 $92,561 $65,855 $79,956 $446,658 Debt $114,830 $107,425 $121,422 $106,439 $111,512 $561,628 service Capital $13,339 $6,270 $28,825 $49,969 $24,643 $123,046 expenditure Net income $26.401 $59.863 ($28.532) $50.649 $22.673 $159.586 *PMF = property management fee; would be paid to NFP is property was purchased. Current debt structure Loan 1 Loan 2, due 2060 $1,898,412 $75,000 Loan 3, due 2060 $100,000 Loan 4, due 2060 $40,103 Loan 5, due 2050 Loan 6, due 2062 $200,000 $2,499,962 Loan 7, due 2062 $315,000 Loan 8 $1,413,924 Loans 17 are in deferment. Loan 8 is active and payments are being made monthly (though specific information was not provided). Financing possibilities **If we borrow $500,000 Our bank can extend $500,000 to the not-for-profit. Loan details would roughly be: 8.25% interest for 45 years, $3,524.66 monthly payment. Loan origination fee of 10% may be waived **If we pay $500,000 cash Another transaction on the table is to sell a property (a whole other issue) that would yield $2,000,000 cash. The board has not yet approved this sale, so the $2,000,000 is not yet available. It's probable this transaction will come to fruition within the year. Here is the report that has been given to the board and your committee. Summary data Purchase price Reserve account balance, transferable to new owner Total property management payments for the previous year; $xxx or x% is avoidable if this purchase is made The past five years' income statement, with a total column at far right 2017 $500,000.00 $849,368.66 ($103,186.17) Revenue 2014 $811,891 2015 $833,659 2016 $790,103 2018 $851,639 $824,001 $4,111,383 Expense $525,599 $584,627 $575,827 $558,188 $585,217 $2,829,458 Op Income $286,382 $249,032 $214,276 $293,457 $238,784 $1,281,931 PMF $131,812 $76,474 $92,561 $65,855 $79,956 $446,658 Debt $114,830 $107,425 $121,422 $106,439 $111,512 $561,628 service Capital $13,339 $6,270 $28,825 $49,969 $24,643 $123,046 expenditure Net income $26.401 $59.863 ($28.532) $50.649 $22.673 $159.586 *PMF = property management fee; would be paid to NFP is property was purchased. Current debt structure Loan 1 Loan 2, due 2060 $1,898,412 $75,000 Loan 3, due 2060 $100,000 Loan 4, due 2060 $40,103 Loan 5, due 2050 Loan 6, due 2062 $200,000 $2,499,962 Loan 7, due 2062 $315,000 Loan 8 $1,413,924 Loans 17 are in deferment. Loan 8 is active and payments are being made monthly (though specific information was not provided). Financing possibilities **If we borrow $500,000 Our bank can extend $500,000 to the not-for-profit. Loan details would roughly be: 8.25% interest for 45 years, $3,524.66 monthly payment. Loan origination fee of 10% may be waived **If we pay $500,000 cash Another transaction on the table is to sell a property (a whole other issue) that would yield $2,000,000 cash. The board has not yet approved this sale, so the $2,000,000 is not yet available. It's probable this transaction will come to fruition within the year.

Answer rating: 100% (QA)

Here is a memo outlining my committees findings regarding the proposed property purchase To Board of Directors From Special Committee on Property Purc... View the full answer