MCKINLEY III, INC.

Finding Type - Improper replacement reserve deposits is a significant deficiency Title and CFDA Number of Federal Program - - U.S. Department of Housing and Urban Development - Supportive Housing for Persons with Disabilities - 14.181 Finding Resolution Status - In Process Information on Universe and Population Size - Deposits to the replacement reserve account during the year ended June 30, 2020. Sample Size Information - All deposits to the replacement reserve account during the year ended June 30, 2020. Criteria - The Project should have made 12 monthly deposits of $41,400 into the reserve for replacements account as required by the regulatory agreement. Statement of Condition - The Project failed to make the required reserve for replacements deposits in the current fiscal year. Cause - The Project failed to monitor the cash requirements of the reserve for replacement account as specified by the regulatory agreement. Effect or Potential Effect - The replacement reserve account was underfunded in the current fiscal year by $24,150. Auditor Noncompliance Code - N - Reserve for replacements deposits Reporting Views of Responsible Officials - Effective controls do exist to ensure that the proper deposits made to the replacement reserve account are being properly made. Context - The Project is required to adhere to the stated deposits amount established in the regulatory agreement. Recommendation - All required deposits should be made in accordance with the regulatory agreement. Auditor's Summary of the Auditee's Comments on the Findings and Recommendations - Management should make the required reserve for replacements deposits in the current fiscal year. Response Indicator - Agree Completion Date - June 30, 2021 Response - Management acknowledges noncompliance in the current fiscal year and has taken measures to improve internal controls over compliance. Management funded the replacement reserve account by $24,150 during the year ended June 30, 2021.

Finding Type - Significant deficiency in internal control over compliance Title - U.S. Department of Housing and Urban Development - Supportive Housing for Persons with Disabilities - 14.181 Finding Resolution Status - In-Process Information on Universe and Population Size - Withdrawals from replacement reserve during the year ended June 30, 2020. Sample Size Information - All withdrawals from the replacement reserve during the year ended June 30, 2020. Criteria - The Project should have HUD authorization for all withdrawals from the replacement reserve account as required by the regulatory agreement. Identification of Repeat Finding and Finding Reference Number ? 2019-001 Criteria ? The Project should have HUD authorization for all withdrawals from the replacement reserve account as required by the regulatory agreement. Statement of Condition - Withdrawals totaling $31,653 were made from the replacement reserve without HUD authorization. Cause - The Project withdrew $31,653 from the replacement reserve account without obtaining prior approval from HUD. Effect or Potential Effect - The unauthorized withdrawals caused the replacement reserve account to be underfunded at year end by $31,653. Auditor Noncompliance Code - A - Unauthorized withdrawals from replacement reserve account Reporting Views of Responsible Officials - Effective controls exist to ensure that the proper authorization from HUD is obtained prior to withdrawing amounts from reserve accounts. Context - The Project is required to obtain authorization from HUD prior to withdrawing funds from the replacement reserve account. Recommendation - The Project needs to implement internal controls to ensure authorization from HUD is received prior to withdrawing funds from the replacement reserve account. Auditor's Summary of the Auditee's Comments on the Findings and Recommendations - Management should obtain approval from HUD prior to withdrawing funds from the replacement reserve. Response Indicator - Agree Completion Date - June 30, 2021 Response - Management acknowledges noncompliance in the current fiscal year and has taken measures to improve internal controls over compliance. Management will obtain HUD approval for the withdrawals or will deposit the underfunded amount of $31,653 to the replacement reserve account during the fiscal year ending June 30, 2021.

Finding Type Significant deficiency in internal control over compliance Title and CFDA Number of Federal Program U.S. Department of Housing and Urban Development Supportive Housing for Persons with Disabilities 14.181 Finding Resolution Status In progress Information on Universe and Population Size Withdrawals from replacement reserve during the year ended June 30, 2019 Sample Size Information All withdrawals from the replacement reserve during the year ended June 30, 2019 Criteria The Project should have HUD authorization for all withdrawals from the replacement reserve account, as required by the Regulatory Agreement. Statement of Condition Withdrawals totaling $38,813 were made from the replacement reserve without HUD authorization. Cause The Project withdrew $38,813 from the replacement reserve account without obtaining prior approval from HUD. Effect or Potential Effect The unauthorized withdrawals caused the replacement reserve account to be underfunded at year end by $38,813. Auditor Noncompliance Code A Unauthorized withdrawals from replacement reserve account Reporting Views of Responsible Officials Effective controls exist to ensure that the proper authorization from HUD is obtained prior to withdrawing amounts from reserve accounts. Context The Project is required to obtain authorization from HUD prior to withdrawing funds from the replacement reserve account. Recommendation The Project needs to implement internal controls to ensure authorization from HUD is received prior to withdrawing funds from the replacement reserve account. Auditor's Summary of the Auditee's Comments on the Findings and Recommendations Management should obtain approval from HUD prior to withdrawing funds from the replacement reserve. Response Indicator ? Agree Completion Date June 30, 2020 Response Management acknowledges noncompliance in the current fiscal year and has taken measures to improve internal controls over compliance. Management will deposit the underfunded amount of $38,813 to the replacement reserve account during the fiscal year ending June 30, 2020.

Finding Type Significant deficiency in internal control over compliance Title and CFDA Number of Federal Program U.S. Department of Housing and Urban Development Supportive Housing for Persons with Disabilities 14.181 Finding Resolution Status In progress Information on Universe and Population Size Surplus cash was deposited into the residual receipts account during the year ended June 30, 2019. Sample Size Information Deposits of surplus cash were made to the residual receipts account for the year ended June 30, 2019. Criteria The Project should deposit surplus cash within 90 days of the property's fiscal year end, as specified in the Summary of Financial Reporting and Auditing Guidance for HUD (the "FRAG Guide"). Statement of Condition The Project deposited prior year surplus cash on October 15, 2018, 17 days after the deadline of September 28, 2018, as defined in the Real Estate Assessment Center's FRAG Guide under Section 2.8. Cause The Project failed to monitor the cash requirements of the residual receipts account, as specified by the FRAG Guide. Effect or Potential Effect The residual receipts account was not funded in accordance with the FRAG Guide. Auditor Noncompliance Code B Failure to make required residual receipt deposits Reporting Views of Responsible Officials Effective controls exist to ensure required deposits are made into the residual receipts account. Context Surplus cash as calculated by the 2018 audited financial statements is required to be deposited into the residual receipts account by the Project within 90 days of the end of the fiscal year. Recommendation Surplus cash deposit amounts should be deposited within 90 days of the fiscal year end, as required by the FRAG Guide. Auditor's Summary of the Auditee's Comments on the Findings and Recommendations Management should deposit surplus cash within the time frame required by the FRAG Guide. Response Indicator ? Agree Completion Date October 15, 2018 Response Management acknowledges noncompliance in the current fiscal year and has taken measures to improve internal controls over compliance. Management deposited the surplus cash amount of $17,285 into the residual receipts account on October 15, 2018.

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