Kewalo Development LLC
Financial Statements
(Unaudited - See accompanying independent accountants’
compilation report)
Independent Accountants’ Compilation Report
The Members
Kewalo Development LLC:
Management is responsible for the accompanying financial statements of Kewalo Development LLC (the Company), which comprise the balance sheet as of December 31, 2016, and the related statements of income and changes in members’ equity, and cash flows for the year then ended, and the related notes to financial statements in accordance with accounting principles generally accepted in the United States of America. We have performed the compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants. We did not audit or review the 2016 financial statements, nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.
The financial statements as of and for the year ended December 31, 2015 were audited by us, and we expressed an unmodified opinion on them in our report dated February 26, 2016. We have not performed any auditing procedures on the financial statements since February 26, 2016.
The 2014 financial statements have not been audited, reviewed, or compiled and accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on it.
/s/ KKDLY LLC
Honolulu, Hawaii
February 27, 2017
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| KEWALO DEVELOPMENT LLC |
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| Balance Sheets |
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| December 31, 2016 and 2015 |
| (See accompanying independent accountants' compilation report) |
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| Asset | 2016 (Unaudited) | | 2015 (Audited) |
| Cash | | | | | | | $ 2,757,310 | | $ 2,573,165 |
| | | | | | | | | | | | |
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| Liability and Members' Equity | | | |
| Liability: | | | | | | | | |
| | Contingency reserve | | $ 2,388,851 | | $ 2,457,823 |
| | | | | | | | | | | | |
| Members' equity | | | 368,459 | | 115,342 |
| | | | | | Total liability and members' equity | | $ 2,757,310 | | $ 2,573,165 |
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| KEWALO DEVELOPMENT LLC |
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| Statements of Income and Changes in Members' Equity |
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| Years ended December 31, 2016, 2015, and 2014 |
| (See accompanying independent accountants' compilation report) |
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| | | | | | | | | 2016 (Unaudited) | | 2015 (Audited) | | 2014 (Unaudited) |
| Real estate sales, net | | $ 230,300 |
| | $ 242,952,850 |
| | $ 9,659,590 |
|
| Cost of sales | | | — |
| | 208,911,678 |
| | 8,268,443 |
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| | | | | | Gross profit | | 230,300 |
| | 34,041,172 |
| | 1,391,147 |
|
| | | | | | | | | | | | | |
| Operating expenses | | 80,130 |
| | 1,413 |
| | 178,842 |
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| | | | | | Operating income | | 150,170 |
| | 34,039,759 |
| | 1,212,305 |
|
| | | | | | | | | | | | | |
| Other income (expense): | | | | | | |
| | Rental and other income | | 102,947 |
| | 36,544 |
| | 80,992 |
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| | Other expense | | — |
| | (7,841) |
| | (8,994) |
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| | | | | | Net income | | 253,117 |
| | 34,068,462 |
| | 1,284,303 |
|
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| Members' equity at beginning of year | | 115,342 |
| | 65,950,613 |
| | 53,092,321 |
|
| Members' contributions | | — |
| | — |
| | 11,573,989 |
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| Distributions to members | | — |
| | (99,903,733) |
| | — |
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| Members' equity at end of year | | $ 368,459 |
| | $ 115,342 |
| | $ 65,950,613 |
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| KEWALO DEVELOPMENT LLC |
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| Statements of Cash Flows |
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| Years Ended December 31, 2016, 2015 and 2014 |
| (See accompanying independent accountants' compilation report) |
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| | | | | | | | | 2016 (Unaudited) | | 2015 (Audited) | | 2014 (Unaudited) |
| Cash flows from operating activities: | | | | | | |
| | Net income | | $ | 253,117 |
| | $ | 34,068,462 |
| | $ | 1,284,303 |
|
| | Adjustments to reconcile net income to net cash provided | | | | | | |
| | | by (used in) operating activities: | | | | | | |
| | | | Contingency reserve | | (68,972) |
| | 2,361,227 |
| | 96,596 |
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| | | | Real estate development costs | | — |
| | 192,649,651 |
| | (88,449,655) |
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| | | | Prepaid expenses | | — |
| | 8,901 |
| | 134 |
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| | | | Accounts payable and accrued expenses | | — |
| | (212,881) |
| | (8,962,494) |
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| | | | Retention payable | | — |
| | (14,743,123) |
| | 8,072,229 |
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| | | | Deposits | | — |
| | (36,072,303) |
| | (1,407,864) |
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| | | | | | Net cash provided by (used in) operating activities | 184,145 |
| | 178,059,934 |
| | (89,366,751) |
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| Cash flows from financing activities: | | | | | | |
| | Distributions to members | | — |
| | (99,903,733) |
| | — |
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| | Principal payments on debt | | — |
| | (76,068,549) |
| | (7,878,179) |
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| | Proceeds from issuance of debt | | — |
| | — |
| | 83,946,728 |
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| | Contributions from members | | — |
| | — |
| | 11,573,989 |
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| | | | | | Net cash provided by (used in) financing activities | | — |
| | (175,972,282) |
| | 87,642,538 |
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| | | | | | Net increase (decrease) in cash | | 184,145 |
| | 2,087,652 |
| | (1,724,213) |
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| Cash at beginning of year | | 2,573,165 |
| | 485,513 |
| | 2,209,726 |
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| Cash at end of year | | $ | 2,757,310 |
| | $ | 2,573,165 |
| | $ | 485,513 |
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| Supplemental cash flow information: | | | | | | |
| | Interest paid | | $ | — |
| | $ | 203,663 |
| | $ | 953,825 |
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| Supplemental noncash operating information: | | | | | | |
| | Deferred financing cost amortized to real estate | | | | | | |
| | | development costs | | $ | — |
| | $ | — |
| | $ | 882,826 |
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KEWALO DEVELOPMENT LLC
Notes to Financial Statements
December 31, 2016 (Unaudited) and 2015
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| (1) | Organization and Description of Business |
Kewalo Development LLC (the Company) is a Hawaii limited liability company formed on June 3, 2010, by Waimanu Development LLC, a Hawaii limited liability company (Waimanu). A&B Properties, Inc., a Hawaii corporation is Waimanu’s parent company and is the Manager of the Company. On September 5, 2012, the Company amended and restated its operating agreement (the Operating Agreement) and admitted N1189 LLC, a Hawaii limited liability company, BSC Waihonua LLC, a Hawaii limited liability company, and Armstrong Homes, Ltd., a Hawaii corporation as members (the Additional Members). The Company was formed primarily for the purpose of developing and selling real property commonly referred to as “Waihonua at Kewalo”, comprised of a condominium high rise project with 341 fee simple units, in Honolulu, Hawaii (the Project) and a senior citizen housing building in Honolulu, Hawaii, consisting of approximately 70 rental units.
In conjunction with a planned development permit (the Permit) issued by the Hawaii Community Development Authority (HCDA), the Company effectively satisfied the reserve housing obligations under the Permit to receive approval for issuance of the certificate of occupancy for the Waihonua at Kewalo condominium project. The Company deposited deeds and other consideration in conjunction with a development agreement by and between the Company and an unrelated third party developer, SCD Piikoi, LLC. The certificate of occupancy for the Project was issued in October 2014.
The Company commenced construction of the Project in November 2012. As of June 2015, all 341 units were sold.
The Operating Agreement provides for distributions to the Members first to the Additional Members proportionately until their respective unpaid preferred amount, as defined, equals zero. Further distributions are then to be paid to Waimanu until its unpaid preferred amount, as defined equals zero and then allocated 90 percent to Waimanu and 10 percent to the Additional Members in proportion to their respective economic interest.
Pursuant to the Operating Agreement, net profits from operations are first allocated to reduce any negative capital accounts, as defined, to zero, then to the Additional Members’ respective adjusted capital account up to their unpaid preferred amount, as defined. Additional net profits are then allocated to Waimanu’s capital account up to its unpaid preferred amount, as defined, and then allocated 90% to Waimanu and 10% to the Additional Members in proportion to their respective economic interest. Losses are first allocated to any member with a capital account greater than its unpaid preferred amount and then to Waimanu’s capital account until it equals zero. Additional losses are proportionately allocated to the Additional Members’ with capital accounts equal to zero and then to all members in proportion to their respective economic interest.
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| (2) | Summary of Significant Accounting Principles |
Use of Estimates
The preparation of financial statements in accordance 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
The Company maintains cash accounts in a Hawaii bank, which as of December 31, 2016 and 2015 and at various times throughout the years then ended, exceeded federally insured limits.
Revenue Recognition
Profit on sales of real estate is recognized when title has passed, minimum down payment criterion are met, the terms of any note received are such as to satisfy continuing investment requirements and collectability of the note is reasonably assured, the risks and rewards of ownership have been transferred to the buyer, and there is no substantial continuing involvement with the property. If any of the aforementioned criteria are not met, profit is deferred and recognized under the cost recovery, deposit, or percentage of completion method.
Income Taxes
As a limited liability company, the Company is not a tax-paying entity for purposes of federal and state income taxes. Income or losses of the Company are reported on the Members’ income tax returns. Therefore, no provision or liability for income taxes has been included in the financial statements.
The Company follows the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 740, Income Taxes. ASC Topic 740 clarifies the accounting for uncertain tax positions in an enterprise’s financial statements by prescribing a recognition and measurement of a tax position taken or expected to be taken in a tax return. Management has determined that the Company does not have an uncertain tax position and associated unrecognized benefits that materially impact the financial statements or related disclosures.
As tax matters are subject to some degree of uncertainty, there can be no assurance that the Company’s tax returns will not be challenged by the taxing authorities and that the Company or its members will not be subject to additional tax, penalties, and interest as a result of such challenge. The Company is no longer subject to U.S. federal examinations by tax authorities for the years ended December 31, 2012 and prior (unaudited).
On November 30, 2012, the Company entered into a $120 million loan agreement with four unrelated financial institutions to finance the construction of the condominium project.
As of December 31, 2015, the Company had repaid in full all outstanding borrowings under the loan agreement and accrued interest thereon.
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| (4) | Related-Party Transactions |
The Company recorded real estate sales at market prices to directors, officers and employees of the Manager and the Manager’s parent company of approximately $3,800,000 and $2,400,000 in 2015 and 2014 (unaudited), respectively. In 2015, the Company also recorded approximately $2,000,000 in real estate sales to an Additional Member.
Developer Fee
In accordance with the Operating Agreement, the Manager has sole responsibility for the day-to-day oversight and administration of the Company’s business activities and internal affairs, including the management of cash and personnel. In consideration for such duties, the Operating Agreement provided for a developer fee (Developer Fee) to be paid to the Manager equal to 4% of the total cost of constructing the condominium units. The Developer Fee amounted to approximately $2,025,200 for the year ended December 31, 2015, and $1,640,300 for the year ended December 31, 2014 (unaudited), excluding the consulting fees described below.
Consulting Agreement
The Company has a consulting agreement with an affiliate of BSC Waihonua LLC, to market the Project, assist in meeting the affordable housing requirements and to advise on certain development and construction issues. The consulting fee is calculated as 24% of the Developer Fee and was paid under the same terms as the Developer Fee. For the years ended December 31, 2015 and 2014 (unaudited), the Company capitalized approximately $492,700 and $518,000, respectively, to real estate development costs under the consulting agreement.
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| (5) | Commitments and Contingencies |
In conjunction with provisions of the Company’s Operating Agreement, the Manager has recorded a reserve liability for possible claims against or obligations of the Company arising out of the normal course of business. The liability approximates 1% of unit sales proceeds on the Project and was included in cost of sales of the Project for the years ended December 31, 2015 and 2014 (unaudited). The contingency reserve amounted to $2,388,851 and $2,457,823 at December 31, 2016 and 2015, respectively.
The Company has evaluated subsequent events from the balance sheet date through February 27, 2017, the date at which the financial statements were available to be issued and determined there were no other items to disclose.
