Independent Auditors' Report
To
the Members
GMH/GF II Student Housing Associates II, LLC
We
have audited the accompanying balance sheet of GMH/GF II Student Housing Associates II, LLC as of December 31, 2007, and the related statements of operations, member's
equity and cash flows from April 12, 2007 (date of inception) through December 31, 2007. These financial statements are the responsibility of management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. The company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GMH/GF II Student Housing Associates II, LLC as of
December 31, 2007, and the results of its operations, the changes in members' equity and its cash flows from April 12, 2007 (date of inception) through December 31, 2007, in
conformity with accounting principles generally accepted in the United States of America.
/s/
REZNICK GROUP, P.C.
Baltimore, Maryland
March 24, 2008
1
GMH/GF II STUDENT HOUSING ASSOCIATES II, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
Note 1 Organization and Nature of Operations
GMH/GF II Student Housing Associates II, LLC (the Company) was formed on April 12, 2007, as a Delaware Limited Liability Company, in accordance with
the terms and provisions of the operating agreement dated April 12, 2007 (the Operating Agreement). The Company was formed between College Park Investments, LLC (College Park) and
GFII/GMH II LLC (Fidelity), (collectively the Members). As of December 31, 2007, Fidelity and College Park maintain a 90% and 10% interest in the Company, respectively.
The
Company was formed for the purpose of owning and managing six student housing apartment buildings (collectively, the Properties) in multiple states. Five properties and one property
were acquired on April 13, 2007 and June 28, 2007, respectively, in transactions accounted for under the purchase method of accounting.
Note 2 Significant Accounting Policies
Basis of Accounting
The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United
States of America.
Real Estate Investments
We carry real estate investments at cost, net of accumulated depreciation. Cost of acquired assets includes the purchase price and related closing costs. We
allocate the cost of real estate investments to net tangible and identified intangible assets based on relative fair values in accordance with SFAS No. 141, "Business Combinations"
(SFAS 141). We estimate fair value based on information obtained from a number of sources, including our due diligence, marketing and leasing activities, independent appraisals that may be
obtained in connection with the acquisition or financing of the respective property, and other market data.
The
value of in-place leases is based on the difference between (i) the property valued with existing in-place leases and (ii) the property valued
as if vacant. As lease terms typically are 12 months or less, actual rates on in-place leases generally approximate market rental rates. Factors that we consider in the valuation of
in-place leases include an estimate of incremental carrying costs during the expected lease-up periods considering current market conditions and nature of the tenancy. Purchase
prices of student housing properties to be acquired are not expected to be allocated to tenant relationships considering the terms of the leases and the expected levels of renewals. We amortize the
value of in-place leases to expense over the remaining term of the respective leases, which is generally one year or less.
We
expense routine repair and maintenance expenditures that do not improve the value of an asset or extend its useful life, including turnover costs. We capitalize expenditures that
improve the value and extend the useful life of an asset. We compute depreciation using the straight-line method over the estimated useful lives of the assets, which is generally
40 years for buildings and three to five years for residential furniture and appliances.
In
accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets, such as real estate investments and
purchased intangibles subject to amortization, are
6
GMH/GF II STUDENT HOUSING ASSOCIATES II, LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2007
Note 2 Significant Accounting Policies (Continued)
reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. These circumstances may include, but are not limited to, operational
performance, market conditions and competition from other off-campus properties and on-campus housing, legal and environmental concerns, and results of appraisals or other
information obtained as part of a financing or disposition strategy. When required, we review recoverability of assets to be held and used through a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in an amount by which the carrying value of the asset exceeds the fair value of the asset determined using customary valuation techniques, such as the present value of expected future cash
flows. As of December 31, 2007, none of the Company's properties require an impairment charge.
Cash and Cash Equivalents
All highly-liquid investments with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents at
December 31, 2007 consist of operating cash of the Company.
Restricted Cash
Restricted cash consists of cash held as escrow for real estate taxes, capital expenditures and other amounts, as required by the terms of various loan
agreements.
Accounts Receivable and Bad Debts
Accounts receivable is charged to bad debt expense when they are determined to be uncollectible based upon a periodic review of the accounts by management.
Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debts; however, the effect of using the direct write-off
method is not materially different from the results that would have been obtained under the allowance method.
Deferred Costs
The Company has capitalized certain expenditures related to the leasing and financing of the Properties. Deferred leasing costs are amortized, on a
straight-line basis, over the terms of the related leases which are typically twelve month leases. Costs incurred in connection with obtaining financing are deferred and amortized on a
straight-line basis over the term of the related loans, which is not materially different than the effective interest method. Amortization of deferred financing costs is included in
interest expense. Accumulated amortization of deferred leasing and financing costs was $15,093 and $159,746 respectively as of December 31, 2007.
Revenue Recognition
Rental revenue is recognized when due over the lease terms, which are generally 12 months or less.
7
GMH/GF II STUDENT HOUSING ASSOCIATES II, LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2007
Note 2 Significant Accounting Policies (Continued)
Other
property income, including, but not limited to, lease processing fees, move-in fees, utility reimbursements and activity fees is recognized as earned throughout the
course of the year. The timing of these fees typically fluctuates in relation to the academic year leasing cycle.
Deferred Revenue
Deferred revenue represents revenue received from tenants prior to their due dates.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect various amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Income Taxes
No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the
members individually.
Note 3 Related Party Transactions
College Park Management TRS, Inc., a subsidiary of College Park Management, LLC is under common ownership and control with College Park and provides
management services to the Properties and in return receives a management fee equal to 4% of gross receipts. For the period from April 13, 2007 through December 31, 2007 the Company paid
$445,010 for these services.
In
addition, other payroll and administrative costs, at actual amounts incurred, are allocated from entities related to College Park through common ownership and control to the Company.
For the period from April 12, 2007 through December 31, 2007, the Company incurred $783 for these services.
8
GMH/GF II STUDENT HOUSING ASSOCIATES II, LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2007
Note 4 Mortgage Notes Payable
The Company obtained separate mortgage notes payable to finance the properties. The mortgage notes all require interest-only payments through their
maturity dates. All unpaid principal is due upon maturity. The following table summarizes the mortgage notes for each of the properties:
Property
|
|
Lender
|
|
Maturity Date
|
|
Principal
|
|
Fixed Interest Rate
|
|
University Heights
|
|
Wells Fargo
|
|
5/1/2012
|
|
$
|
18,160,000
|
|
5.54
|
%
|
Uptown
|
|
Wells Fargo
|
|
5/1/2012
|
|
|
20,160,000
|
|
5.51
|
%
|
University Walk
|
|
Wells Fargo
|
|
5/1/2012
|
|
|
14,760,000
|
|
5.51
|
%
|
The Ridge
|
|
Wells Fargo
|
|
5/1/2012
|
|
|
23,120,000
|
|
5.53
|
%
|
The Edge I
|
|
Wells Fargo
|
|
5/1/2012
|
|
|
11,845,000
|
|
5.50
|
%
|
The Edge II
|
|
Wells Fargo
|
|
7/1/2010
|
|
|
4,456,000
|
|
4.54
|
%
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Notes Payable
|
|
|
|
|
|
$
|
92,501,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of mortgage notes payable approximates its
carrying value.
The
future scheduled maturities of long-term debt are as follows:
2008
|
|
$
|
|
2009
|
|
|
|
2010
|
|
|
4,456,000
|
2011
|
|
|
|
2012
|
|
|
88,045,000
|
|
|
|
|
|
$
|
92,501,000
|
|
|
|
The
mortgage notes payable contain various financial and nonfinancial covenants customarily found in mortgage notes payable of these types. As of December 31, 2007, the Properties
are in compliance with such covenants.
Note 5 Members' Equity
Allocation of Net Income
Net income is allocated to the Members in accordance with the provisions of the Operating Agreement, which is generally in the same percentage as ownership.
Distributions of Cash Flows from Operations
Distributions of cash flows from Operations, as defined, is to be made monthly to the Members in accordance with their percentage interests.
9
GMH/GF II STUDENT HOUSING ASSOCIATES II, LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2007
Note 5 Members' Equity (Continued)
Distributions of Cash Flow from Capital Transactions
Distributions of net proceeds from a capital transaction shall be made on the date of the capital transaction in the following order of priority:
-
(a)
-
First,
to the Members in proportion to the percentage interest, until each Member has received distributions equal to the aggregate amount of deposits forfeited to the Company and
which were paid to the Company by a Member or any affiliate of a Member in connection with the proposed purchase of Company assets;
-
(b)
-
Next,
to the Members in proportion to the percentage interest, until each member has received cumulative distributions of net cash flow from operations and cumulative distributions of
net proceeds from capital transactions equal to a 10% cumulative return on its capital contribution;
-
(c)
-
Next,
75% to Fidelity and 25% to College Park until the distributions from (b) and (c) to Fidelity have equaled the capital contributions made by Fidelity to provide
Fidelity with a 16% cumulative return on its capital contribution; and
-
(d)
-
Thereafter,
60% to Fidelity and 40% to College Park.
Note 6 Concentration of Credit Risk
The Company maintains its cash balances in several accounts in one bank. The cash balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At times these balances may exceed the federal insurance limits; however, the Company has not experienced any losses with respect to its bank balances in excess of government provided
insurance. Management believes that no significant concentration of credit risk exists with respect to these cash balances at December 31, 2007.
10
-
(b)
-
Exhibits
Required by Item 601 of Regulation S-K.
Exhibit
|
|
Description of Document
|
23.1
|
|
Consent of Reznick Group, P.C. relating to financial statements for GMH/GF II Student Housing Associates II, LLC (Filed herewith).
|
31.1
|
|
Certifications of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. (furnished herewith)
|
31.2
|
|
Certifications of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. (furnished herewith)
|
32.1
|
|
Certifications of Principal Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
|
32.2
|
|
Certifications of Principal Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
|
-
(c)
-
Financial
Statement Schedules.
The
financial statement schedules of GMH/GF II Student Housing Associates II, LLC are included under subsection (a) of this Item 15.
11