nihonmachi terrace limited partnership a california

FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR’S REPORT

NIHONMACHI TERRACE LIMITED PARTNERSHIP

A California Limited Partnership

HUD PROJECT NO.121-44284

December 31, 2015 and 2014

C O N T E N T S Page INDEPENDENT AUDITOR’S REPORT 3 FINANCIAL STATEMENTS BALANCE SHEETS 5 STATEMENTS OF OPERATIONS 6 STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT) 7 STATEMENTS OF CASH FLOWS 8 NOTES TO FINANCIAL STATEMENTS 10 SUPPLEMENTARY INFORMATION SUPPLEMENTARY INFORMATION 18

INDEPENDENT AUDITOR’S 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 23

INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE FOR EACH MAJOR HUD PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE CONSOLIDATED AUDIT GUIDE

FOR AUDITS OF HUD PROGRAMS 25 SCHEDULE OF FINDINGS, QUESTIONED COSTS, AND RECOMMENDATIONS 27 SCHEDULE OF THE STATUS OF PRIOR YEAR FINDINGS, QUESTIONED COSTS, AND RECOMMENDATIONS 28 CERTIFICATIONS OF PARTNERS AND MANAGEMENT AGENT 29

INDEPENDENT AUDITOR’S REPORT To the Partners Nihonmachi Terrace Limited Partnership A California Limited Partnership Report on the Financial Statements We have audited the accompanying financial statements of Nihonmachi Terrace Limited Partnership, a California Limited Partnership, HUD Project No. 121-44284 which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, changes in partners' equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nihonmachi Terrace Limited Partnership, a California Limited Partnership, as of December 31, 2015 and 2014, and the results of its operations, changes in partners' equity (deficit), and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

INDEPENDENT AUDITOR’S REPORT (Continued)

Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplementary information shown on pages 18 to 29 is presented for purposes of additional analysis, and is not a required part of the financial statements. The accompany supplementary information shown on pages 18 to 29 is the responsibility of management and was derived from and relates directly to the underlying accounting and other audit records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information shown on pages 18 to 29 is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated February 22, 2016 on our consideration of Nihonmachi Terrace Limited Partnership’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Nihonmachi Terrace Limited Partnership’s internal control over financial reporting and compliance.

Moraga, California February 22, 2016 Lead Auditor: Annette M. Spiteri, CPA Federal Tax Identification Number: 68-01990999

The accompanying notes are an integral part of these financial statements. 5

NIHONMACHI TERRACE LIMITED PARTNERSHIP BALANCE SHEETS


ASSETS

Property and equipment1420 Building and improvements $ 31,239,085 $ 31,239,085 1460 Furniture and equipment 1,206,170 1,140,350 1400T Total property and equipment 32,445,255 32,379,435 1495 Less accumulated depreciation (5,052,860) (4,119,870) 1400N Net property and equipment 27,392,395 28,259,565

Other assets1120 Cash - operating 1,826,111 1,855,750 1191 Cash - tenant security deposits 84,421 82,410 1130 Tenant rents receivable 265 1,175 1135 Tenant assistance receivable 5,444 2,341 1200 Prepaid expenses 97,313 105,710

Reserve funds1310 Escrow held impounds 254,836 401,782 1320 Reserve for replacement 996,037 893,3441330 Operating reserve 1,800,393 1,798,2501330 Excess rent reserve 116,806 98,382 1330 Bond reserve funds 180,982 179,1691520 Deferred costs, net 1,047,564 1,086,676

1000T Total assets $ 33,802,567 $ 34,764,554

2015 2014

LIABILITIES AND PARTNERS’ EQUITY

2320 Mortgage payable $ 20,275,000 $ 20,835,0002323 Deferred mortgages payable 5,910,884 5,910,884

Other liabilities2110 Accounts payable and accrued expenses 120,096 182,731 2191 Tenant security deposits 84,420 82,4102210 Prepaid rents 659 7,3842332 Accrued interest - deferred mortgages payable 1,469,970 1,223,5042390 Partnership administration fee payable 13,134 12,7512390 Ground lease payable, including accrued interest 1,897,469 1,577,809

2000T Total liabilities 29,771,632 29,832,473

3130 Partners' equity 4,030,935 4,932,081

2033T Total liabilities and partners' equity $ 33,802,567 $ 34,764,554


NIHONMACHI TERRACE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS

Years Ended December 31, 2015 and 2014

REVENUERental income

5120 Tenant rental income $ 1,271,147 $ 1,236,2265121 Tenant assistance payments 4,326,002 4,300,1505140 Commercial rents 9,000 9,000 5194 Excess rents retained 18,200 17,987 5100T Gross rent potential 5,624,349 5,563,363 5220 Less vacancy loss (66,441) (41,008) 5250 Less concessions (258) (1,392) 5152N Net rental income 5,557,650 5,520,963

Interest income5410 Operating accounts 3,666 2,8725440 Replacement reserve 303 411 5490 Operating reserve 2,143 7665400T Total interest income 6,112 4,049

Other income5910 Laundry and vending 15,207 15,932 5920 Tenant charges 3,321 4,4395945 Mortgage interest reduction payments 275,235 276,740 5990 Other income 11,348 1,4985900T Total other income 305,111 298,609 5000T Total revenue 5,868,873 5,823,621

EXPENSES6263T Administrative expenses 460,745 392,851 6400T Utilities 356,323 358,128 6500T Operating and maintenance 2,129,021 643,331 6700T Taxes and insurance 358,571 363,932 6800T Financial expenses 1,368,834 1,413,600 6990 Tenant service expenses 64,723 47,185 6000T Total expenses before depreciation and amortization 4,738,217 3,219,027 5060T Operating profit before depreciation and amortization 1,130,656 2,604,594 6600 Less : Depreciation 932,990 928,955 6610 Less : Amortization 39,112 39,112 5060N Operating profit 158,554 1,636,527

Entity expenses7142 Deferred mortgage interest expense - Seller note 236,666 227,826 7142 Deferred mortgage interest expense - AHP 9,800 9,800 7190 Ground lease rent 790,548 778,6097190 Partnership administration fee 13,134 12,751 7190 Investor services fee 9,552 9,274 7100T Total entity expenses 1,059,700 1,038,260 3250 Net income (loss) $ (901,146) $ 598,267

2015 2014


NIHONMACHI TERRACE LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS’ EQUITY (DEFICIT)


0.01% 99.99%

Partners' equity (deficit) - January 1, 2014 $ (393,588) $ 3,755,645 $ 3,362,057

Contributions 100 971,657 971,757

Net income 60 598,207 598,267

Partners' equity (deficit) - December 31, 2014 (393,428) 5,325,509 4,932,081

Net income (loss) (90) (901,056) (901,146)

Partners' equity (deficit) - December 31, 2015 $ (393,518) $ 4,424,453 $ 4,030,935

TotalPartnersLimitedPartner

General


NIHONMACHI TERRACE LIMITED PARTNERSHIP STATEMENTS CASH FLOWS


CASH FLOWS FROM OPERATING ACTIVITIESRevenue

Rental revenue $ 5,512,048 $ 5,497,562 Other income 305,111 298,609 Interest income 6,112 4,049

Total revenue 5,823,271 5,800,220 Expenses

Administrative expenses 281,210 221,105 Property management fees 161,700 155,820 Utilities 358,389 361,204 Operating and maintenance 2,081,333 614,818 Real estate taxes 1,971 1,432 Property insurance 216,736 230,865 Other taxes and insurance 130,734 132,550 Tenant security deposit 1 (325) Tenant service expenses 61,592 42,098 Mortgage interest expense 1,327,679 1,362,831 Bond administrative fees 48,312 77,794 Partnership administration fee 12,751 12,380 Investor services fee 9,552 9,274 Ground lease expense 470,888 1,272,715

Total expenses 5,162,848 4,494,561

Net cash provided by operating activities 660,423 1,305,659

CASH FLOWS FROM INVESTING ACTIVITIESAdditions to property and equipment (151,935) 64,251 Disbursements from (additions to):

Escrow held impounds, net 146,946 (125,405) Reserve for replacement, net (102,693) (120,297) Operating reserve, net (2,143) (972,412) Excess rents reserve, net (18,424) (16,820) Bond reserve funds, net (1,813) (1,812)

Net cash used by investing activities (130,062) (1,172,495)

CASH FLOWS FROM FINANCING ACTIVITIESMortgage principal payments (560,000) (535,000) Advances from (payments to) affiliate, net - (133,490) Capital contributions received - 971,757

Net cash provided (used) by financing activities (560,000) 303,267

Increase (decrease) in operating cash (29,639) 436,431

Operating cash - beginning of year 1,855,750 1,419,319

Operating cash - end of year $ 1,826,111 $ 1,855,750

2015 2014


NIHONMACHI TERRACE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Continued)


Reconciliation of net loss to net cash provided by operating activities

Net income (loss) $ (901,146) $ 598,267

Adjustments to reconcile net loss to netcash provided by operating activities:

Depreciation 932,990 928,955 Amortization 39,112 39,112 (Increase) decrease in:

Cash - tenant security deposits (2,011) (2,070) Tenant rents receivable 910 6,339 Tenant assistance receivable (3,103) (193) Prepaid expenses 8,397 (1,418)

Increase (decrease) in:Accounts payable and accrued expenses 23,480 (16,756) Tenant security deposits 2,010 2,395 Prepaid rents (6,725) 7,137 Accrued interest - deferred mortgages payable 246,466 237,626 Partnership administration fee payable 383 371 Ground lease payable, including accrued interest 319,660 (494,106)

Net cash provided by operating activities $ 660,423 $ 1,305,659

2015 2014

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NIHONMACHI TERRACE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS

December 31, 2015 and 2014 NOTE A - SUMMARY OF ACCOUNTING POLICIES AND ORGANIZATION

Nihonmachi Terrace Limited Partnership, a California Limited Partnership (Partnership), was organized in 2008 to acquire, rehabilitate and operate an apartment complex of 245 units for low-income persons in San Francisco, California (Project). This Project is regulated under terms of Regulatory Agreements with the California Tax Credit Allocation Committee, the Federal Home Loan Bank Affordable Housing Program (AHP), City and County of San Francisco Office of Community Investment and Infrastructure (CCSF), and the U.S. Department of Housing and Urban Development (HUD) as to rent charges, tenant income eligibility limits, operating methods and other matters. The Project has qualified for and been allocated low-income housing credits pursuant to the Internal Revenue Code Section 42 (Section 42), which regulates the use of the Project as to occupant eligibility and gross unit rent, among other requirements. The Project must meet the provisions of these requirements during each of the 15 consecutive years in order to remain qualified to receive the credits. In addition, the Partnership has executed a land use restriction agreement which requires the utilization of the Project pursuant to Section 42 for a minimum of 30 years, even if the Partnership disposes of the Project. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements is as follows:

1. Cash

Cash is defined as cash in demand deposits and cash on hand. Not included as cash for purposes of the statement of cash flows are funds restricted as to their use, regardless of liquidity, such as tenant security deposits, replacement reserve, operating reserve and other reserves.

2. Property and Equipment

Property and equipment is stated at cost of acquisition. Renewals and improvements are capitalized. The cost of maintenance and repairs is charged to operations when incurred. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method, 20 - 40 years for building and improvements and 9 years for furnishings and equipment.

The Partnership reviews its investment in real estate for impairment whenever events or changes in circumstances indicate that the carrying value of such property may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the real estate to the future net undiscounted cash flow expected to be generated by the rental property including the low income housing tax credits and any estimated proceeds from the eventual disposition of the real estate. If the real estate is considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the real estate exceeds the fair value of such property. There were no impairment losses recognized in 2015 and 2014.

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December 31, 2015 and 2014 NOTE A - SUMMARY OF ACCOUNTING POLICIES AND ORGANIZATION (Continued)

3. Tenant Receivables

The Partnership elects to record bad debt using the direct write-off method. Generally accepted accounting principles in the United States of America (GAAP) require that the allowance method be used to reflect bad debts. However, the effect of the use of the direct write-off method is not materially different from the results that would be obtained had the allowance method been followed.

4. Deferred Financing Costs, Other Deferred Costs and Amortization

Financing costs are amortized over the 30 year term of the mortgage loan using the straight-line method. GAAP requires that the effective yield method be used to amortize financing costs; however, the effect of using the straight-line method is not materially different from the results that would have been obtained under the effective yield method. Tax credit fees are amortized over fifteen years using the straight-line method. Transfer taxes related to the ground lease are amortized over 99 years using the straight line method.

5. Fair Value of Financial Instruments

The carrying amount of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relatively short term maturity of these instruments. The carrying value of long-term debt approximates fair value based on prevailing borrowing rates currently available for loans with similar terms and maturities.

6. Tenant Rental Income

Rental income is recognized as rent becomes due. Rental payments received in advance are deferred until earned. All leases between the Partnership and tenants of the Project are operating leases. Lease terms are usually one year or less.

7. Advertising Costs

Advertising costs are charged to operations when incurred.

8. Risks and Uncertainties

The Partnership is subject to various risks and uncertainties in the ordinary course of business that could have adverse impacts on its operating results and financial condition. Future operations could be affected by changes in the economy or other conditions in the geographic area where the Project is located or by changes in federal, state and/or local low-income housing subsidies or the demand for such housing.

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NOTE A - SUMMARY OF ORGANIZATION AND ACCOUNTING POLICIES (Continued) 9. Management's Estimates

Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported revenues and expenses. Actual results could differ from those estimates.

10. Income Taxes

Net earnings (loss) are reportable, on the accrual basis, by the partners on their individual tax returns, and, accordingly, no provision for income taxes has been made in the financial statements. The Partnership believes that it does not have any uncertain tax positions that are material to the financial statements. The federal and state tax returns for the years ending December 31 2014, 2013, 2012, and 2011 are subject to examination by regulatory agencies, generally for three years and four years after they were filed for the federal and state returns, respectively.

11. Subsequent Events

Subsequent events were evaluated through February 22, 2016, which is the date the financial statements were available to be issued.

NOTE B - DEFERRED COSTS

Deferred costs at December 31 consist of the following:

Financing fees and costs 30 years $ 923,780 $ 923,780Ground lease transfer tax 99 years 267,000 267,000Tax credit fees 15 years 101,630 101,630

Total deferred costs 1,292,410 1,292,410 Less accumulated amortization (244,846) (205,734)

Net deferred costs $ 1,047,564 $ 1,086,676

2015 2014

The estimated aggregate amortization expense for each of the next five years ending December 31 is as follows:

2016 - 39,112$ 2019 - 39,112$ 2017 - 39,112$ 2020 - 39,112$ 2018 - 39,112$ Thereafter - 852,004$

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December 31, 2015 and 2014 NOTE C – MORTGAGE PAYABLE 2015 2014 The mortgage is payable to US Bank, serviced by Berkadia Commercial

Mortgage, in variable monthly payments including interest at 6.45% per annum. The mortgage is secured by a first deed of trust on the Project and is due in two tranches. Outstanding balances and maturities are as follows:

NOI loan portion is due in full in the year 2041. $ 20,195,000 $ 20,495,000 IRP loan portion is due in full in the year 2016. 80,000 340,000 Total mortgage payable $ 20,275,000 $ 20,835,000 Principal payments due for each of the next five years ending December 31 are estimated as follows:

2016 - 405,000$ 2019 - 395,000$ 2017 - 345,000$ 2020 - 420,000$ 2018 - 365,000$ Thereafter - 18,345,000$

NOTE D - DEFERRED MORTGAGES PAYABLE 2015 2014 . Mortgage payable to Citibank (AHP loan), is secured by a subordinated

deed on leasehold interest and bears simple interest of 1% per annum. No current payments are required with total unpaid principal and accrued interest due in the year 2042. As of December 31, 2015 and 2014, accrued interest payable is $64,546 and $54,746, respectively. $ 980,000 $ 980,000

Mortgage payable to Japanese American Religious Federation Housing,

Inc., a California nonprofit corporation (Managing General Partner), the Seller and Managing General Partner, (Seller Note) is secured by a subordinated deed on leasehold interest and bears interest at 3.88% compounded annually. Payments can only be made from surplus cash. Any unpaid principal and accrued interest is due in the year 2042. As of December 31, 2015 and 2014, accrued interest payable is $1,405,424 and $1,168,758, respectively. 4,930,884 4,930,884

Total deferred mortgages payable $ 5,910,884 $ 5,910,884

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NOTE E - PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS

All profits and losses are allocated 0.0075% to the Managing General Partner, 0.0025% to JSCo NT LLC, a California limited liability company (Administrative General Partner), and 99.99% to Enterprise Green Communities West, LP, a Maryland limited partnership (Limited Partner). Distributable cash flow, as defined by the Partnership Agreement, is distributable 0.0075% to the Managing General Partner, 0.0025% to the Administrative General Partner and 99.99% to the Limited Partner.

NOTE F - RELATED PARTY TRANSACTIONS Property Management Fee

The Partnership entered into a Property Management Agreement approved by HUD with the John Stewart Company. The John Stewart Company is entitled to a fee equal to 5.00% of residential income collected through December 31, 2017. The property management fee paid during the years ended December 31, 2015 and 2014 was $176,400 and $155,820, respectively. Additionally, the John Stewart Company was paid accounting fees during the years ended December 31, 2015 and 2014 amounting to $27,930 and $27,930, respectively. As of December 31, 2015 and 2014, included in accounts payable are amounts due The John Stewart Company for reimbursement of operating expenses totaling $59,123 and $48,036, respectively.

Partnership Administration Fee

The Managing and Administrative General Partners shall be paid an annual partnership administration fee of $11,000 increasing at the rate of three percent (3%) per year. This fee shall be paid in arrears from available surplus cash, as defined in the Partnership Agreement, and unpaid fees shall accrue. As of December 31, 2015 and 2014, partnership administration fee payable is $13,134 and $12,751, respectively.

Investor Services Fee

The Limited Partner shall be paid an annual investor services fee of $8,000 increasing at the rate of three percent (3%) per year. This fee shall be paid in arrears from available surplus cash, as defined in the Partnership Agreement, and unpaid fees shall accrue. For the years ended December 31, 2015 and 2014, investor services fee expense amounted to $9,552 and $9,274, respectively.

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NOTE F - RELATED PARTY TRANSACTIONS (Continued) Ground Lease

The Partnership leases the land on which the Project was built from the Managing General Partner under a ninety-nine year lease agreement. The annual lease payments consist of basic annual rent of $747,600 paid in arrears and prorated on the basis of 1/360th of the basic annual rent per day for any partial year. Rent shall only be payable from residual receipts, as defined in the Ground Lease Agreement, on December 31 of each year commencing on December 31, 2009. Unpaid rent shall accrue interest at a rate of 3.88% per annum until paid in full. Any accrued and unpaid rent shall be due and payable upon expiration of the lease. As of December 31, 2015 and 2014, accrued ground lease payable is $1,854,521 and $1,546,800, respectively. As of December 31, 2015 and 2014, accrued interest on outstanding lease payments totaled $42,948 and $31,009, respectively.

General Partner Obligations

The Partnership Agreement provides for various obligations of the General Partners, including their obligation to provide funds for any operating or tax credit deficiencies. The General Partners have not been required to provide any funds for any operating or tax credit deficiencies during the current year.

NOTE G - HOUSING ASSISTANCE PAYMENT CONTRACT AGREEMENTS

The Partnership has entered into Housing Assistance Payments (HAP) Contracts with HUD on behalf of qualified tenants. The contracts cover 120 of the 245 units and expire on September 1, 2029. HUD has established various guidelines for the renewal of these contracts. For the years ended December 31, 2015 and 2014, receipts under the HAP Contracts totaled $3,058,736 and $3,047,905, respectively. The Partnership has also entered into a project based Housing Assistance Payments Contract with the San Francisco Housing Authority (SFHA). The contracts cover 123 of the 245 units and expire on October 1, 2025. For the years ended December 31, 2015 and 2014, receipts from the SFHA totaled $1,267,266 and $1,252,245, respectively.

NOTE H – MORTGAGE INTEREST REDUCTION PAYMENTS

The Partnership has entered into an Agreement for Mortgage Interest Reduction Payments with the HUD under Section 236 of the National Housing Act expiring in the year 2016. For the years ended December 31, 2015 and 2014, the Partnership has received $275,235 and $276,740, respectively.

NOTE I - RIGHT OF FIRST REFUSAL AND PURCHASE OPTION AGREEMENT The Managing General Partner has entered into a right of first refusal and option agreement to purchase the Project. The option period commences at the end of the compliance period for a period of ninety (90) days. The purchase price shall be equal to the sum of the principal amount of all outstanding indebtedness secured by the Project, all other loans from the General Partner or its Affiliates, any accrued interest on any of such debts and all federal, state, and local taxes attributable to such sale.

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NOTE J - CONTINGENCY

The Project’s low-income housing credits are contingent on its ability to maintain compliance with applicable sections of Section 42. Failure to maintain compliance with occupant eligibility, and/or unit gross rent, or to correct noncompliance within a specified time period, could result in recapture of previously taken tax credits plus interest.

SUPPLEMENTARY INFORMATION

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NIHONMACHI TERRACE LIMITED PARTNERSHIP SUPPLEMENTARY INFORMATION

December 31, 2015 SCHEDULES OF OPERATING EXPENSES

Administrative expenses6250 Other renting expense $ 956 $ 780 6310 Office salaries 77,792 74,442 6311 Office supplies 16,830 13,678 6320 Property management fees 176,400 155,820 6330 Manager's salary 62,732 55,800 6331 Manager's rent free unit 15,132 15,132 6340 Legal expense 28,460 31 6350 Audit expense 13,300 12,800 6351 Bookkeeping fees/accounting services 27,930 27,930 6311 Payroll processing fee 7,433 7,415 6311 Telephone and answering service 18,711 17,175 6370 Collection loss 2,698 7576390 Physical needs assessment - 2,600 6390 Computer charges 7,260 4,573 6390 Miscellaneous administrative 5,111 3,918

6263T Total administrative expenses $ 460,745 $ 392,851

Utilities6450 Electricity $ 35,845 $ 20,638 6451 Water 100,519 93,727 6452 Gas 66,117 89,684 6453 Sewer 153,842 154,079

6400T Total utilities $ 356,323 $ 358,128

Operating and maintenance6510 Repairs payroll $ 137,967 $ 123,100 6510 Janitor payroll 31,526 29,264 6515 Janitor and cleaning supplies 5,432 6,910 6520 Janitor and cleaning contract 12,462 1,335 6515 Exterminating supplies 6,910 5,357 6521 Operating rent free unit 21,552 21,552 6525 Trash removal 97,088 99,825 6515 Security supplies 28,926 27,149 6520 Grounds contracts 31,586 28,812 6515 Repairs materials 172,955 77,2826520 Repairs contracts 1,554,155 201,6316515 Decorating supplies and contracts 7,770 4,255 6590 Miscellaneous operating and maintenance 20,692 16,859

6500T Total operating and maintenance $ 2,129,021 $ 643,331

20142015

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December 31, 2015 SCHEDULES OF OPERATING EXPENSES (continued)

Taxes and insurance6710 Real estate taxes $ 1,971 $ 1,432 6711 Payroll taxes 33,525 33,525 6720 Property and liability insurance 225,133 229,4476721 Fidelity bond 927 960 6722 Workmen's compensation 23,078 26,224 6723 Health insurance and other employee benefits 63,956 63,2126790 Miscellaneous taxes and licenses 9,981 9,132

6700T Total taxes and insurance $ 358,571 $ 363,932

Financial expenses6820 Bond interest expense $ 1,327,679 $ 1,362,831 6890 Bond administrative fees 41,155 50,769

6800T Total financial expenses $ 1,368,834 $ 1,413,600

20142015

STATEMENT OF ACTIVITIES, PART II

Total principal payments required under the mortgage, even of payments under aWorkout Agreement are more or less than those required under the mortgage $ 560,000

Replacement reserve deposits required, even if payments may be temporarilysuspended or waived $ 102,390

Replacement reserve releases which are included as expense items on theStatements of Activities $ -

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December 31, 2015

RESERVE FOR REPLACEMENTS

In accordance with the provisions of the Partnership Agreement and the Replacement Reserve Agreement with U.S. Bank, a reserve for replacements has been established to be used for the replacement of property. US Bank requires annual funding of $350 per unit, totaling $85,750. The Partnership Agreement requires annual funding of $350 per unit increasing at 3% per year. The required funding for the year ended December 31, 2015 is $102,390. Releases from the reserve in excess of $5,000 require approval from the Limited Partner. Accordingly, restricted cash is held as follows for the years ending December 31:

Balance - January 1 $ 893,344 $ 773,047Prior year deposits - 23,078 Monthly deposits 102,390 99,408 Release - (2,600) Interest earned 303 411

Balance - December 31 $ 996,037 $ 893,344

20142015

OPERATING RESERVE

In accordance with the provisions of the Partnership Agreement, an operating reserve has been established to be used for operating deficits with the initial funding of $1,796,800. Annual funding is required from available cash flow, as defined in the Partnership Agreement, to maintain a balance of $1,796,800. All releases from the reserve require approval from the Limited Partner. Accordingly, restricted cash is held as follows for the years ending December 31:

Balance - January 1 $ 1,798,250 $ 825,838 Deposits - 971,657 Interest earned 2,143 766 Bank charges - (11)

Balance - December 31 $ 1,800,393 $ 1,798,250

20142015

EXCESS INCOME RESERVE

Management has obtained HUD approval to retain excess income. In accordance with HUD instructions, restricted cash is held to be used with the prior approval of HUD for Project purposes as defined in the approval to retain excess income as follows:

Balance - January 1 $ 98,382 $ 81,562Deposits 18,200 16,599 Interest earned 224 221

Balance - December 31 $ 116,806 $ 98,382

2015 2014

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December 31, 2015

CHANGES IN PROPERTY

Building and improvements $ 31,239,085 $ - $ - $ 31,239,085 Furnishings and equipment 1,140,350 65,820 - 1,206,170

Total property $ 32,379,435 $ 65,820 $ - $ 32,445,255

Accumulated depreciation $ 4,119,870 $ 932,990 $ - $ 5,052,860

Net book value $ 27,392,395

Additions RemovalsBalance

Dec. 31, 2015

CostBalance

Jan. 1, 2015

COMPUTATION OF CASH FLOW AND DISTRIBUTIONS

Cash on hand and in banks:Cash - operating $ 1,826,111 Cash - tenant security deposits 84,421 $ 1,910,532 Tenant assistance receivable 5,444

Total cash 1,915,976

Less - current obligations:Accounts payable and accrued expenses $ 120,096 Prepaid tenant rents 659 Tenant security deposits 84,420

Total current obligations (205,175)

Surplus cash $ 1,710,801

Amount available for distribution $ 1,710,801

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December 31, 2015 COMPUTATION OF CASH FLOW AND DISTRIBUTIONS (Continued)

In accordance with the Partnership Agreement, surplus flow is distributed as follow:

first: to the Limited Partner, an amount equal to the Credit Deficiency $ - second: to the Limited Partner, an amount sufficient to pay federal income

tax on taxable income allocated to the Limited Partner - third: to pay the Investor Services Fee ** - fourth: to fund the Operating Reserve up the Operating Reserve Amount - fifth: to pay the Deferred Developer Fee - sixth: to pay the Partnership Administrative Fee 13,134 seventh: to the General Partner to repay any Operating Deficit Contribution - eighth: to pay rent on the Ground Lease 1,697,667 ninth: to pay debt service on the Seller Loan - tenth: .01% to the General Partners and 99.99% to the Limited Partner -

Total distribution $ 1,710,801

**For the year ended December 31, 2015, the investor service fee has been paid and the payment is accounted for in the cash balance used in determining surplus cash.

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SPITERI, NARASKY & DALEY, LLP Certified Public Accountants 1024 Country Club Drive, Moraga, California 94556 (925) 376-2195

INDEPENDENT AUDITOR’S 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 To the Partners Nihonmachi Terrace Limited Partnership A California Limited Partnership We have audited, 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, the financial statements of Nihonmachi Terrace Limited Partnership, a California Limited Partnership, which comprise the balance sheet as of December 31, 2015, and the related statements of operations, changes in partners' equity (deficit), and cash flows for the year then ended, and the related notes to the financial statements and have issued our report thereon dated February 22, 2016. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Nihonmachi Terrace Limited Partnership’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Nihonmachi Terrace Limited Partnership’s internal control. Accordingly, we do not express an opinion on the effectiveness of Nihonmachi Terrace Limited Partnership’s internal control. 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 and correct 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 Nihonmachi Terrace Limited Partnership’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Nihonmachi Terrace Limited Partnership’s financial statements are free from 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. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards.

24

INDEPENDENT AUDITOR’S 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) Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of Nihonmachi Terrace Limited Partnership’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Nihonmachi Terrace Limited Partnership’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Moraga, California February 22, 2016

25

SPITERI, NARASKY & DALEY, LLP Certified Public Accountants

1024 Country Club Drive, Moraga, California 94556 (925) 376-2195 INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE FOR EACH MAJOR HUD PROGRAM AND

ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE CONSOLIDATED AUDIT GUIDE FOR AUDITS OF HUD PROGRAMS

To the Partners Nihonmachi Terrace Limited Partnership A California Limited Partnership Report on Compliance for Each Major HUD Program We have audited Nihonmachi Terrace Limited Partnership’s compliance with the compliance requirements described in the Consolidated Audit Guide for Audits of HUD Programs (the Guide), that could have a direct and material effect on each of Nihonmachi Terrace Limited Partnership’s major U.S. Department of Housing and Urban Development (HUD) programs for the year ended December 31, 2015. Nihonmachi Terrace Limited Partnership’s major HUD program is Section 8 Housing Assistance Payments Program. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its HUD programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of Nihonmachi Terrace Limited Partnership’s major HUD programs based on our audit of the compliance requirements referred to above. 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 the Guide. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a direct and material effect on a major HUD program occurred. An audit includes examining, on a test basis, evidence about the Nihonmachi Terrace Limited Partnership’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 on compliance for each major HUD program. However, our audit does not provide a legal determination of Nihonmachi Terrace Limited Partnership’s compliance. Opinion on Each Major HUD Program In our opinion, Nihonmachi Terrace Limited Partnership complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major HUD programs for the year ended December 31, 2015.

26

INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE FOR EACH MAJOR HUD PROGRAM AND

ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE CONSOLIDATED AUDIT GUIDE FOR AUDITS OF HUD PROGRAMS (Continued)

Report on Internal Control Over Compliance Management of Nihonmachi Terrace Limited Partnership is responsible for establishing and maintaining effective internal control over compliance with the specific compliance requirements referred to above. In planning and performing our audit of compliance, we considered Nihonmachi Terrace Limited Partnership’s internal control over compliance with the requirements that could have a direct and material effect on each major HUD program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinion on compliance for each major HUD program and to test and report on internal control over compliance in accordance with the Guide, 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 Nihonmachi Terrace Limited Partnership’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 compliance requirement of a HUD 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 compliance requirement of a HUD program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance with compliance requirement of a HUD program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance 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 compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of our testing based on the requirements of the Guide. Accordingly, this report is not suitable for any other purpose.

Moraga, California February 22, 2016

27

NIHONMACHI TERRACE LIMITED PARTNERSHIP SCHEDULE OF FINDINGS, QUESTIONED COSTS,

AND RECOMMENDATIONS December 31, 2015

Our audit disclosed no findings that are required to be reported herein under the Consolidated Audit Guide for Audits of HUD Programs.

28

NIHONMACHI TERRACE LIMITED PARTNERSHIP SCHEDULE OF THE STATUS OF PRIOR AUDIT FINDINGS,

QUESTIONED COSTS, AND RECOMMENDATIONS December 31, 2015

1. Findings from audit report dated February 12, 2015, for the period ended December 31, 2014, issued by Spiteri, Narasky & Daley, LLP.

There were no prior audit reports issued.

2. Findings from audit, attestation, or other studies performed by HUD, another Federal Agency, or a contract administrator during the year ended December 31, 2015.

There were no reports issued by HUD OIG or other Federal agencies or contract administrators during the year ended December 31, 2015.

3. Deficiencies listed in letters or reports issued by HUD management as a result of reviews of the entity’s activities that relate to the audit objectives during the year ended December 31, 2015.

There were no letters or reports issued by HUD management during the year ended December 31, 2015.

29

NIHONMACHI TERRACE LIMITED PARTNERSHIP CERTIFICATIONS OF PARTNERS AND MANAGEMENT AGENT

December 31, 2015

CERTIFICATION OF PARTNERS

We, as partners of Nihonmachi Terrace Limited Partnership, hereby certify that we have examined the accompanying financial statements and supplementary data of Nihonmachi Terrace Limited Partnership and to the best of our knowledge and belief, these financial statements and supplementary data are complete and accurate. February 22, 2016 Will Tsukamoto President - MGP Date February 22, 2016 Jack Gardner President, CEO - AGP Date NIHONMACHI TERRACE LIMITED PARTNERSHIP Employer ID No. 26-3751791

CERTIFICATION OF MANAGEMENT AGENT

We hereby certify that we have examined the accompanying financial statements and supplementary data of Nihonmachi Terrace Limited Partnership and, to the best of our knowledge and belief, these financial statements and supplementary data are complete and accurate.

Name Title Date JOHN STEWART COMPANY Employer ID No. 94-2477073

nihonmachi terrace limited partnership a california

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