A.8.2 How to Analyze Financial Statements

A. Please follow the instruction below to correctly analyze financial statement(s) when determining the financial capability of the Borrower, Sponsor, General Contractor, and or Manager.

1. Current assets are cash and other assets convertible into cash during the normal operating cycle of business operations or 1 year, whichever is less.

   • When reviewing cash, take into consideration compensating balances, which would limit the amount of cash actually available.

• Determine the current value of readily marketable stocks and bonds.

• Evaluate the accounts receivable and classify the following as noncurrent.

• 1. Amounts due from officers and employees.
• 2. Amounts advanced to subsidiary, affiliated or associated companies.
• 3. Disputed accounts receivable.
• 4. Accounts receivable past due for more than 60 days. Funds from a local, State or Federal source past due beyond this period may be considered if evidence is provided that source is historically late, and it can be expected that these funds will be received before initial closing.

  • a) Using a Schedule of Accounts Receivable by Age determine if the amount allowed for doubtful accounts, if any, is adequate.

  • b) Recognize only syndication proceeds from other projects and notes receivable to be collected during the normal operating cycle or 1 year, whichever is less.

  • c) If the statement is audited, evaluate inventory and establish its liquidation value, relying on the accountant's review. Do not consider inventory, if statement is unaudited.

  • d) Recognize only prepaid expenses for the project.

  • e) Do not include:

  • f) Equity in the proposed site, since consideration is given on form HUD-92264-A, Part A.

  • g) Cash equity in land and/or properties unless they are readily marketable and intended for the sale market.

  • h) Anticipated profits from business ventures.

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• i) Equity in real estate encumbered by high ratios of loan to value mortgages, unlisted stocks, goodwill, and other intangible assets.

2. Current liabilities are payables due during the normal operating period or 1 year, whichever is less.

   • Include as current liabilities, regardless of term, those relating to marketable land and completed properties that were treated as current assets.

NOTE: If the balance sheet does not reflect the amounts required to complete construction in progress, the Sponsor/General Contractor must submit a supplementary statement of such amounts, which contains the truth and accuracy certification. For a cross reference, see Chapter 8, Section 8.5.1.3.D-E.

• Consider amounts due to officers, employees, affiliates or stockholders as current liabilities unless the obligations have a definite long-term maturity.

• Consider amounts needed to satisfy broker's margin account (brokerage account allowing customers to buy securities with money borrowed from the broker).

• Consider current portion of long-term liabilities.

• Current year income tax payable. Normally, deferred income taxes are not considered current as long as the economic outlook of company does not appear to be in an adverse trend.

  • Do not include the amount outstanding on the project land, since this obligation is considered on form HUD-92264-A, Part A.

3. Working capital is the excess of current assets over current liabilities. If current liabilities exceed current assets, precede the difference with a minus sign to show a deficit. The Underwriter must adjust the net working capital to consider the following:

   • Effects of contingent liabilities.

Financial needs of other projects in the planning stage or under construction.

4. When a Sponsor's financial interests are represented by a number of corporations, the Underwriter must do the following :

   • Require a certification from the Board of Directors, which evidences their willingness to make the required funds available.

Establish the availability of funds from such corporations. Consider whether:

• 1. Individual corporations have any operating capital to spare.
• 2. Laws under which they are incorporated and/or their banks permit:

  • a) Withdrawals, loans or advances to owners or Sponsors.

  • b) Stock investment in affiliated corporations.

  • c) Guarantee of debts of associated corporations.

• 3. In analyzing financial statement:
  • a) Do not consider interlocking debts, receivables and investments between all affiliated corporations.

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• b) Consider only those assets readily available for investment by the Borrower.

• c) Do not consider the operating capital and/or net worth of rental project holding corporations as assets available for closing.

5. If funds are being provided by a parent company or affiliate of the Sponsor, the Underwriter must do the following :

   • Require a certification from the Board of Directors or authorized agent which specifies the funds the parent company/affiliate is willing to commit.

Establish the availability of funds from parent company/affiliate.

• Require the parent company/affiliate to submit a certification indicating that the lending institution will not make any claim against the mortgaged property, mortgage proceeds, any reserve or deposit required by HUD, or against the rents or other income from the mortgaged property for payment of the loan. This certification must contain the criminal warning reflected in Appendix 8, Section A.8.1.