1. Working Capital Roy Williams – FHA Deputy Chief Underwriter

2. 1 Working Capital Formula  Accounting Definition – Current Assets less Current Liabilities  HUD Definition - Includes conservative adjustments made to the above calculation – MAP Appendix 8C

3. Cash and Cash Equivalents  Operating Cash  Savings Accounts  Money Market Accounts  Restricted Cash – Monies earmarked for a specific purpose and therefore not available for immediate and general use by an organization  Tax and Insurance Escrows  Amounts Designated for Re-payment of Debt  Compensating Balances – Amounts required to be held on deposit in exchange for extension of credit 2

4. Marketable Securities  Publically Traded Stocks and Bonds – Determine the Current Value  Request recent brokerage statement  Refer to published pricing sources such as Bloomberg or Wall Street Journal  Privately Held Securities – Value is not published anywhere  Discount the value of the securities listed on the financial statement  Choose not to include the value of the securities in the working capital calculation 3

5. 4 Accounts Receivable  Trade Accounts Receivable  Review A/R Aging Schedule to determine amounts past due no more than 60 days  Allowance for Bad Debts (if applicable) should be deducted from the total balance  Exception – Funds from a local, State or Federal source past due beyond 60 days 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.

6. 5 Accounts Receivable - Other  Amounts due from officers or employees  Amounts advanced to subsidiary, affiliated or associated companies  Disputed amounts  All of the above are not allowable and should be excluded from the working capital calculation

7. 6 Syndication Proceeds/Notes Receivable  Amounts from other projects to be collected should only be recognized if assumed collectible during the normal business cycle or 1 year, whichever is less

8. 7 Inventory  Liquidation value of inventory can only be included if it has been subject to an accountant’s review  Inventory listed on an unaudited financial statement should not be included in working capital  Food For Thought – What is inventory in the case of a General Contractor?

9. 8 Prepaid Expenses  Prepaid expenses are not to be included in working capital unless they are associated with the subject project

10. 9 Other Items Excluded From Working Capital  Land Equity – Recognized on HUD 92264-A (Warranted Price of Land)  Cash Equity in additional Land or Properties intended for sale. Must establish that those properties are readily marketable and intended to be placed on the market  Anticipated profits from other business ventures  Equity in real estate with high LTV ratios  Unlisted securities  Goodwill and other intangible assets

11. 10 Current Liabilities  In general, all current liabilities listed on the balance sheet should be considered as deductions from working capital

12. 11 Accounts Payable  Accounts payable aging schedule – All payables should be deductions for working capital  Aging schedule is a valuable indicator in determining an entity’s history in meeting its obligations

13. 12 Other Current Liabilities – All Deductions From WC  Amounts due to officers, employees or affiliates unless it is established that the obligations have a definite long-term maturity  Amounts needed to satisfy a brokerage margin account  Current portion of long-term liabilities  Current year income taxes payable  NOTE: Outstanding debt on subject land is accounted for on Form HUD 92264-A and is not part of the working capital analysis

14. 13 Working Capital Calculation  Excess of Current Assets over Current Liabilities Additional Items To Consider:  Effects of contingent liabilities  Financial needs of additional projects in planning or under construction

15. 14 Example #1 – Personal Financial Statement Willie Robertson

16. 15 Example #2 – Developer Financial Statement Duck Commander Development, LLC

17. 16 Example #3 – General Contractor Bob the Builder – Can He Build It?

18. 17 Questions?