Maryland | 6162 | 20-2891283 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
Proposed Maximum | Proposed Maximum | |||||||||||
Title of Each Class of | Amount to be | Offering Price | Aggregate | Amount of | ||||||||
Securities to be Registered | Registered(1) | per Share(2) | Offering Price(2) | Registration Fee(3) | ||||||||
Common Stock, $0.0001 par value per share | 7,900,000 | $9.75 | $77,025,000 | $9,065.84 | ||||||||
(1) | Includes the maximum number of shares of common stock of Registrant that may be issuable to holders of units of Vestin Fund I, LLC in the proposed merger of Vestin Fund I, LLC with and into the Registrant as described in the proxy statement/ prospectus that forms a part of this Registration Statement. |
(2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(2) under the Securities Act. |
(3) | Previously paid. |
The information in this proxy statement/ prospectus is not complete and may be changed. Vestin Realty Trust I, Inc. may not issue the common stock to be issued in connection with the transactions described in this proxy statement/ prospectus until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/ prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any state where the offer or sale is not permitted. |
• | Our management has no experience operating a mortgage REIT, and we cannot assure you that our management’s past experience will be sufficient to successfully manage our business as a mortgage REIT, including complying with complicated U.S. federal income tax rules and regulations. | |
• | If we fail to qualify as a REIT for U.S. federal income tax purposes, we will be taxed as a corporation and our liability for certain U.S. federal, state and local income taxes can be expected to increase significantly, which can be expected to result in a material decrease in cash available for distribution to our stockholders. | |
• | You will no longer have redemption rights after the REIT conversion. | |
• | If you sell the Vestin Realty Trust common stock you receive in the merger after the REIT conversion, the price you receive may be less than the amount you may be able to receive either through an exercise of your redemption rights or in connection with a liquidation of Fund I. |
Sincerely, | |
Michael V. Shustek | |
Chairman, President and Chief Executive Officer | |
Vestin Mortgage, Inc., the sole manager of | |
Vestin Fund I, LLC |
1. To consider and vote upon a proposal to adopt and approve the form of agreement and plan of merger by and between Fund I and Vestin Realty Trust I, Inc., a newly formed Maryland corporation, pursuant to which Fund I will be merged with and into Vestin Realty Trust. The merger agreement will implement the restructuring of the business operations of Fund I to allow Vestin Realty Trust, as the surviving entity in the merger, to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes. The form of merger agreement is included as Annex A to this proxy statement/ prospectus; and | |
2. To transact any other business that may properly come before the special meeting or any adjournment or postponement of the special meeting. |
By Order of the Board of Directors of | |
Vestin Mortgage, Inc., as the sole manager of | |
Vestin Fund I, LLC | |
Michael V. Shustek | |
Chairman, President and Chief Executive Officer |
• | general industry, economic and business conditions (which will, among other things, affect availability and cost of financing, interest rate fluctuations and operating expenses); | |
• | adverse changes in the real estate markets; | |
• | inflation and interest rate, market and monetary fluctuations; | |
• | higher defaults on our loan portfolio than we expect; | |
• | our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes; | |
• | the ability of certain of our wholly-owned subsidiaries to qualify as taxable REIT subsidiaries for U.S. federal income tax purposes; | |
• | our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by the U.S. federal income tax laws and regulations applicable to REITs; | |
• | changes in U.S. federal income tax laws and regulations applicable to REITs; | |
• | changes in the legal and regulatory environment in our industry; and | |
• | other risks inherent in the real estate business. |
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QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION AND MERGER | v | ||||
SUMMARY OF THE PROXY STATEMENT/ PROSPECTUS | 1 | ||||
The Companies | 1 | ||||
The REIT Conversion | 1 | ||||
Ownership Structure After the Merger | 2 | ||||
Conflicts of Interest | 3 | ||||
Date, Time, Place and Purpose of the Special Meeting | 4 | ||||
Unitholders Entitled to Vote | 4 | ||||
Recommendation of Manager | 4 | ||||
Vote Required | 4 | ||||
Interests of Directors and Executive Officers of Vestin Mortgage in the REIT Conversion | 5 | ||||
Units Owned by Directors and Executive Officers of Vestin Mortgage | 5 | ||||
Conditions to the Merger | 5 | ||||
Regulatory Approvals | 5 | ||||
Restrictions on the Ability to Sell Vestin Realty Trust Common Stock | 6 | ||||
Material United States Federal Income Tax Consequences | 6 | ||||
Qualification of Vestin Realty Trust as a REIT | 6 | ||||
RISK FACTORS | 7 | ||||
Risks and Effects of the Merger and the REIT Conversion | 7 | ||||
Risks Related to Our Business | 8 | ||||
United States Federal Income Tax Risks Relating to Our REIT Qualification | 16 | ||||
Risks of Ownership of Our Common Stock | 17 | ||||
VOTING AND PROXIES | 22 | ||||
Date, Time and Place of the Special Meeting | 22 | ||||
Purpose of the Special Meeting | 22 | ||||
Recommendation of the Manager | 22 | ||||
Record Date and Unit Information | 22 | ||||
Quorum; Vote Required | 22 | ||||
Units Owned by Directors and Executive Officers of Vestin Mortgage | 23 | ||||
Voting Procedures | 23 | ||||
Solicitation of Proxies and Expenses | 23 | ||||
Stockholder Proposals | 24 | ||||
MERGER PROPOSAL | 25 | ||||
Background of the REIT Conversion | 25 | ||||
Our Reasons for the REIT Conversion | 27 | ||||
Organizational Activities | 28 | ||||
TERMS OF THE MERGER | 30 | ||||
Structure and Completion of the Merger | 30 | ||||
Other Effects of the Merger | 30 | ||||
Conditions to the Merger | 31 | ||||
Termination of the Merger Agreement | 31 | ||||
Interests of Vestin Mortgage and its Directors and Executive Officers in the REIT Conversion | 32 |
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Regulatory Approvals | 32 | ||||
Absence of Dissenters’ Rights | 32 | ||||
Restrictions on Sales of Vestin Realty Trust Common Stock Issued in the Merger | 32 | ||||
Accounting Treatment of the Merger | 32 | ||||
OTHER RESTRUCTURING TRANSACTIONS; FORMATION OF TAXABLE REIT SUBSIDIARIES | 33 | ||||
MANAGEMENT AGREEMENT | 34 | ||||
General Duties | 34 | ||||
Obligations of Vestin Mortgage | 35 | ||||
Limitations on Vestin Mortgage’s Authority | 36 | ||||
Other Activities of Vestin Mortgage | 36 | ||||
Other Investment Advisory Activities of Vestin Mortgage | 36 | ||||
Compensation | 37 | ||||
Term; Termination | 38 | ||||
Termination For Cause | 39 | ||||
MARKET PRICE INFORMATION AND DISTRIBUTION POLICY | 40 | ||||
BUSINESS | 41 | ||||
General | 41 | ||||
Acquisition and Investment Policies | 41 | ||||
Real Estate Loans to Affiliates | 45 | ||||
Purchase of Loans from Vestin Mortgage and its Affiliates | 45 | ||||
Types of Loans We Invest In | 45 | ||||
Collateral | 46 | ||||
Prepayment Penalties and Exit Fees | 47 | ||||
Extensions to Term of Loan | 47 | ||||
Interest Reserves | 47 | ||||
Balloon Payment | 47 | ||||
Repayment of Loans on Sales of Properties | 48 | ||||
Variable Rate Loans | 48 | ||||
Borrowing | 48 | ||||
Competition | 49 | ||||
Regulation | 49 | ||||
Employees | 49 | ||||
Facilities | 50 | ||||
Legal Proceedings | 50 | ||||
HOW WE PROTECT OUR RIGHTS AS A LENDER | 52 | ||||
Overview of Mortgages | 52 | ||||
Foreclosure | 52 | ||||
Environmental Risks | 53 | ||||
Second Mortgage; Rights of Senior Mortgages | 53 | ||||
Statutory Rights of Redemption | 54 | ||||
Anti-Deficiency Legislation | 54 | ||||
Bankruptcy Laws | 55 | ||||
Enforceability of Certain Provisions | 55 |
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES | 58 | ||||
Distribution Policy | 58 | ||||
Investment Policies | 58 | ||||
Financing Policies | 59 | ||||
Interested Director and Officer Transactions | 59 | ||||
Policies With Respect to Other Activities | 59 | ||||
Reporting Policies | 60 | ||||
CONFLICTS OF INTEREST | 61 | ||||
MANAGEMENT | 64 | ||||
Directors and Executive Officers | 64 | ||||
Board Composition | 66 | ||||
Board Committees | 66 | ||||
Director Compensation | 67 | ||||
SELECTED FINANCIAL DATA | 68 | ||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | 69 | ||||
General | 69 | ||||
Critical Accounting Policies | 70 | ||||
Results of Operations | 73 | ||||
Investments in Real Estate Loans Secured by Real Estate Portfolio | 84 | ||||
Asset Quality and Loan Reserves | 88 | ||||
Investments in Real Estate Held for Sale | 89 | ||||
Investments in Real Estate Held for Sale — Seller Financed | 91 | ||||
Liquidity and Capital Resources | 92 | ||||
Off-Balance Sheet Arrangements | 94 | ||||
Related Party Transactions | 94 | ||||
Quantitative and Qualitative Disclosures About Market Risk | 95 | ||||
Recent Accounting Pronouncements | 96 | ||||
DESCRIPTION OF VESTIN REALTY TRUST STOCK | 98 | ||||
General | 98 | ||||
Common Stock | 98 | ||||
Preferred Stock | 99 | ||||
Stockholders’ Rights Plan | 99 | ||||
Power to Increase Authorized Stock and Issue Additional Shares of Our Common Stock | 100 | ||||
Restrictions on Transfer | 100 | ||||
Transfer Agent and Registrar | 103 | ||||
MATERIAL PROVISION OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS | 104 | ||||
Our Board of Directors | 104 | ||||
Removal of Directors | 104 | ||||
Business Combinations | 104 | ||||
Control Share Acquisitions | 105 | ||||
Subtitle 8 | 105 | ||||
Amendments to Our Charter and Bylaws | 106 | ||||
Transaction Outside the Ordinary Course of Business | 106 |
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Dissolution of Our Company | 106 | ||||
Advance Notice of Director Nominations and New Business | 106 | ||||
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws | 107 | ||||
Ownership Limit | 107 | ||||
Indemnification and Limitation on Directors’ and Officers’ Liability | 107 | ||||
COMPARISON OF RIGHTS OF UNITHOLDERS OF FUND I AND STOCKHOLDERS OF VESTIN REALTY TRUST | 109 | ||||
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES | 123 | ||||
Introduction | 123 | ||||
United States Federal Income Tax Consequences of the Merger | 124 | ||||
United States Federal Income Taxation of Vestin Realty Trust Following the Merger | 124 | ||||
United States Federal Income Taxation of Stockholders | 132 | ||||
Taxation of Tax-Exempt Stockholders | 134 | ||||
Information Reporting and Backup Withholding Tax Applicable to Stockholders | 134 | ||||
Taxation of Non-U.S. Stockholders | 135 | ||||
Possible Legislative of Other Actions Affecting Tax Considerations | 135 | ||||
Other Tax Consequences for Vestin Realty Trust and Its Stockholders | 135 | ||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS | 136 | ||||
LEGAL MATTERS | 137 | ||||
EXPERTS | 137 | ||||
WHERE YOU CAN FIND MORE INFORMATION | 137 | ||||
OTHER MATTERS | 137 | ||||
INDEX TO FINANCIAL STATEMENTS | F-1 |
Annex A | Form of Agreement and Plan of Merger | |
Annex B | Articles of Incorporation of Vestin Realty Trust I, Inc. | |
Annex C | Articles Supplementary of Vestin Realty Trust I, Inc. | |
Annex D | Bylaws of Vestin Realty Trust I, Inc. | |
Annex E | Form of Management Agreement | |
Annex F | Opinion of Cogent Valuation (formerly Houlihan Valuation Advisors) |
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Q: | What is proposed? | |
A: | The board of directors of Vestin Mortgage, Inc., as the sole manager of Vestin Fund I, LLC, or Fund I, has approved a plan to restructure our business operations to enable us to elect to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We refer to this plan, including the related restructuring transactions, as the REIT conversion. Following the REIT conversion, subject to compliance with applicable REIT rules and regulations, we intend to continue our real estate lending business consistent with past practices. We do not expect any material change in our business operations or operating policies as a result of the REIT conversion.The REIT conversion will not change our investment objectives.We currently do not plan to raise additional capital through equity financings, except through a distribution reinvestment plan we intend to adopt. | |
Q: | Why are we proposing the REIT conversion? | |
A: | We are proposing the REIT conversion primarily for the following reasons: |
• provide liquidity for unitholders as we have applied to list the shares of Vestin Realty Trust common stock on the Nasdaq National Market. Listing of the shares on Nasdaq or a national securities exchange acceptable to Fund I is a condition to consummation of the merger and REIT conversion; and | ||
• maximize the availability of assets for investments in real estate loans by eliminating the need to reserve capital to satisfy redemption requests. In the past, Fund I has accumulated a cash reserve equal to approximately 10% of its total capital by the end of a calendar year in order to meet redemption requests. For example, Fund I had approximately $20.2 million in cash at December 31, 2004 compared to approximately $6.6 million at June 30, 2004. At September 30, 2005, Fund I had not reserved any cash to satisfy redemption requests. | ||
Q: | What is a REIT? | |
A: | A REIT is a corporation that derives most of its income from real estate loans and real property and whose assets predominantly consist of such loans and property. The corporation must make a special election for U.S. federal income tax purposes to be treated as a REIT. Subject to a number of significant exceptions, a corporation that qualifies as a REIT generally is not subject to U.S. federal corporate income taxes on income and gain that it distributes to its stockholders, thereby reducing its corporate-level taxes. | |
Q: | What happens in the REIT conversion? | |
A: | The REIT conversion involves several restructuring transactions: |
The Merger | ||
The principal restructuring transaction is the merger of Fund I with and into Vestin Realty Trust I, Inc., a recently formed Maryland corporation. Vestin Realty Trust will be the surviving entity in the merger and will succeed to and continue the business of Fund I. As a consequence of the merger and the REIT conversion: | ||
• each outstanding unit of Fund I will be converted into one share of common stock of Vestin Realty Trust; | ||
• the shares of Vestin Realty Trust common stock will trade on Nasdaq or a national securities exchange acceptable to Fund I as listing of the shares is a condition to the consummation of the merger and REIT conversion; | ||
• Vestin Realty Trust will succeed to and continue to operate, directly or indirectly, all of the existing business of Fund I; | ||
• your rights as stockholders of Vestin Realty Trust will be governed by the articles of incorporation and articles supplementary of Vestin Realty Trust, which we sometimes refer to collectively in this proxy statement/ prospectus as the charter, and bylaws of Vestin Realty Trust; and | ||
• Vestin Mortgage will continue to manage our day-to-day business operations, subject to the oversight of the board of directors of Vestin Realty Trust, pursuant to the terms and conditions of a management agreement. |
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We have attached a copy of the form of merger agreement as Annex A to this proxy statement/ prospectus. We have also attached copies of the articles of incorporation, articles supplementary and bylaws of Vestin Realty Trust and the form of management agreement as Annex B, Annex C, Annex D and Annex E, respectively, to this proxy statement/ prospectus. If unitholders approve the form of merger agreement, which will implement the REIT conversion, we will not make any material changes to it unless further unitholder approval is obtained. We urge you to read each of these documents carefully. While our management structure will be substantially similar to that of Fund I, there are certain differences. See “Comparison of Rights of Unitholders of Fund I and Stockholders of Vestin Realty Trust.” | ||
Other Important Restructuring Transactions | ||
Prior to the consummation of the REIT conversion, Fund I will transfer various properties to one or more wholly-owned subsidiaries of Vestin Realty Trust in order to avoid 100% U.S. federal penalty taxes on any income from the future sale of these properties. The transferred assets will consist primarily of real property foreclosed upon by Fund I to be sold to third parties. The composition and value of the assets to be transferred can only be determined at the time of the REIT conversion. As of September 30, 2005, we held two properties with a total carrying value of approximately $4.3 million, which were acquired through foreclosure and recorded as investments in real estate held for sale. As of September 30, 2005, we also held interests in two properties with a total carrying value of approximately $8.6 million, which were sold in transactions in which we or an affiliate provided the financing and which were recorded as seller financed real estate held for sale. GAAP requires us to include these properties in real estate held for sale until the borrower has met and maintained a certain percentage of equity ownership. The real estate held for sale and the seller financed real estate held for sale collectively constituted approximately 16.5% of our assets as of September 30, 2005. These wholly-owned subsidiaries will elect to be treated as “taxable REIT subsidiaries” effective upon the REIT conversion. Income from these wholly-owned taxable REIT subsidiaries will be either distributed to Vestin Realty Trust, where it will contribute to income available for distribution to stockholders or be reinvested into Vestin Realty Trust’s business, or be retained by the taxable REIT subsidiaries and used to fund their operations. | ||
A taxable REIT subsidiary is a corporation in which a REIT owns stock and which joins the REIT in filing a taxable REIT subsidiary election on Internal Revenue Service, or IRS, Form 8875. A taxable REIT subsidiary also includes any corporation in which a taxable REIT subsidiary owns securities representing more than 35% of the voting power or more than 35% of the value of the issuing corporation’s outstanding securities. A taxable REIT subsidiary generally can conduct activities that generate gross income that would not be qualifying income for purposes of the gross income tests applicable to REITs and generally can hold assets that would not be qualifying assets for purposes of the quarterly asset tests applicable to REITs. As the name implies, taxable REIT subsidiaries are subject to corporate income tax on the income they recognize and, unlike a REIT, they are not allowed a deduction for distributions they pay on their stock. |
Q: | What alternatives were considered to a REIT conversion? | |
A: | As alternatives to a REIT conversion, we considered maintaining the current operating structure as well as a liquidation of Fund I. As discussed above, we concluded that maintaining the current structure was not in the best interest of unitholders as it provides only limited liquidity and reduces the availability of funds for investment in real estate loans. |
We also evaluated liquidation as an alternative. We engaged an independent valuation firm, Cogent Valuation (formerly Houlihan Valuation Advisors), or Cogent, to prepare an analysis of the value of a Fund I unit in a liquidation scenario as of June 30, 2005. In the opinion of Cogent, the maximum value obtainable under a liquidation scenario would be $7.50 per unit and the actual value could be substantially lower. Our manager, based on its experience in commercial real estate lending, also believes that any liquidation of Fund I would result in a substantial loss of unit value. Therefore, we have decided not to pursue liquidation. | ||
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A copy of Cogent’s opinion is attached as Annex F to this proxy statement/ prospectus. The full text of the Cogent valuation report has been filed with the Securities and Exchange Commission as an exhibit to the registration statement of which this proxy statement/ prospectus is a part. | ||
Q: | Will our business operations change after the REIT conversion? | |
A: | Subject to compliance with applicable REIT rules and regulations, we plan to operate our business after the REIT conversion substantially as it is currently conducted. We do not expect any material change in our business operations or operating policies as a result of the REIT conversion. Our investment objectives will not change and may not be changed without the approval of a majority of our stockholders. In addition, subject to compliance with applicable REIT rules and regulations, we will continue to use our current loan underwriting guidelines and our existing investment policies. In that regard, although we will no longer be subject to the Mortgage Program Guidelines of the North American Securities Administrators Association, Inc., or NASAA, once we are listed on Nasdaq or another national securities exchange, we will continue to comply voluntarily with the NASAA Guidelines unless a majority of our unaffiliated directors determines that it is in our best interests to vary our lending practices from the NASAA Guidelines. We currently do not plan to raise additional capital through equity financings, except through a distribution reinvestment plan we intend to adopt. Vestin Mortgage will continue to serve as our manager after the REIT conversion. Unlike before, however, Vestin Mortgage will manage our business subject to the oversight of the board of directors of Vestin Realty Trust and pursuant to the terms and conditions of a management agreement, the form of which is attached as Annex E to this proxy statement/ prospectus. | |
Q: | What are the material terms of the management agreement with Vestin Mortgage? | |
A: | General. Vestin Mortgage will implement our business strategies on a day-to-day basis subject to the oversight of the board of directors of Vestin Realty Trust. There are no material differences between the terms and conditions of the management agreement, including the fees payable to Vestin Mortgage thereunder, and the management provisions currently set forth in the operating agreement for Fund I. |
Compensation. Vestin Mortgage will be compensated based on the various services it provides as our manager according to the schedules set forth in the management agreement and our bylaws. The compensation structure under the management agreement and our bylaws is the same as currently set forth in the operating agreement for Fund I. The fees payable by us to Vestin Mortgage may not be changed without the approval of a majority in interest of Vestin Realty Trust’s stockholders. Fund I paid Vestin Mortgage a total of approximately $69,000 for the three months ended September 30, 2005 and approximately $201,000 and $255,000 for the nine month transition period ended June 30, 2005 and the year ended September 30, 2004, respectively, for managing Fund I. In addition, Vestin Mortgage was paid a total of approximately $3.2 million, $13.9 million and $19.6 million in fees directly by borrowers for the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, respectively. The total amount paid to Vestin Mortgage from borrowers represents fees earned by Vestin Mortgage for loans originated for all of its managed funds, including Fund I, Fund II, Fund III and inVestin Nevada. | ||
Term; Termination. The management agreement will continue in force for the duration of the existence of Vestin Realty Trust. The management agreement will automatically terminate upon the affirmative vote of a majority in interest of stockholders entitled to vote on the matter. This provision is identical to the current operating agreement for Fund I which permits a majority of Fund I members to terminate Vestin Mortgage as a managing member. In addition, the board of directors of Vestin Realty Trust may terminate the management agreement for cause at any time upon 90 days’ written notice of termination. The management agreement does not contain any termination penalty or payment provisions. |
Q: | Will the REIT conversion result in additional benefits to our manager? | |
A: | Yes. If the REIT conversion is consummated, Fund I’s total capital will not continue to be reduced to satisfy redemption requests or be returned in its entirety to members in the event of liquidation. Instead, the capital may be used to invest in new loans from which Vestin Mortgage can continue to earn fees. |
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Vestin Mortgage will continue to face the same conflicts of interest in managing the affairs of Vestin Realty Trust as currently exist in connection with its management of Fund I, including those related to the receipt of fees. See “Conflicts of Interest.” |
Q: | Will I continue to have redemption rights after the REIT conversion? | |
A: | No. Under the operating agreement for Fund I, you currently have the right to withdraw as a member and require Fund I to redeem your units upon withdrawal, subject to certain conditions and limitations, including a maximum limit on the total amount that may be redeemed by all members during any calendar year equal to 10% of the amount of the capital accounts of all members. The redemption demands have exceeded this limit, resulting in fully-subscribed redemption requests through 2018. Consequently, many unitholders who would like to attain liquidity for their units have been unable to do so within the timeframe they desire. As of September 30, 2005, approximately 700 unitholders, representing approximately 58.2% of all unitholders, had requested redemption and requests to redeem units totaling approximately $57.1 million, representing approximately 77.3% of Fund I’s total capital, were outstanding. | |
You will not have any redemption rights as a stockholder of Vestin Realty Trust after the REIT conversion. Upon completion of the REIT conversion, unitholders in effect will surrender any outstanding redemption requests. However, the shares of Vestin Realty Trust common stock to be issued in the merger will trade on Nasdaq or a national securities exchange acceptable to Fund I as listing of the shares is a condition to consummation of the merger and REIT conversion. Since Vestin Realty Trust will be a publicly traded entity, it is not practical to provide redemption rights. |
Q: | How will my rights as an equity holder change after the REIT conversion? | |
A: | Your current rights as a unitholder of Fund I are governed primarily by the operating agreement for Fund I. If the merger proposal is approved by unitholders of Fund I and the merger is consummated, you will become a stockholder of Vestin Realty Trust and your rights as a stockholder of Vestin Realty Trust will be governed by the Maryland General Corporation Law, or the MGCL, and the charter and bylaws of Vestin Realty Trust. |
The REIT conversion has been structured to preserve in all material respects your rights in Fund I by replicating them in Vestin Realty Trust. In that regard, your rights to vote on certain matters as a stockholder of Vestin Realty Trust will be substantially similar to your voting rights as a member of Fund I. However, some important differences exist between your rights as a unitholder of Fund I and your rights as a stockholder of Vestin Realty Trust. | ||
The major difference is that you will not have redemption rights after the REIT conversion. Also, distributions after completion of the REIT conversion will be made on a quarterly basis rather than on a monthly basis as currently required by the operating agreement for Fund I. Another significant difference is that the charter of Vestin Realty Trust prohibits ownership, directly or by the attribution provisions of the U.S. federal tax laws, by any person of more than a specified percentage (by value or by number of shares, whichever is more restrictive) of the outstanding shares of Vestin Realty Trust’s stock. This ownership limitation is being implemented primarily to satisfy certain requirements under the Internal Revenue Code of 1986, or the Code, that are applicable to REITs in general and to otherwise address concerns relating to stock ownership. A chart comparing your rights as a stockholder of Vestin Realty Trust and a unitholder of Fund I is set forth under “Comparison of Rights of Unitholders of Fund I and Stockholders of Vestin Realty Trust.” | ||
Copies of the articles of incorporation, articles supplementary and bylaws of Vestin Realty Trust are attached as Annex B, Annex C and Annex D, respectively, to this proxy statement/ prospectus. |
Q: | What will I receive in connection with the merger? | |
A: | At the time of the completion of the merger, you will receive one share of Vestin Realty Trust common stock for each unit of Fund I you hold. We have applied to list the shares of Vestin Realty Trust common stock on the Nasdaq National Market under the symbol “VRTA.” Listing of the shares on Nasdaq or a |
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national securities exchange acceptable to Fund I is a condition to consummation of the merger and REIT conversion. | ||
Q: | Will Vestin Realty Trust make distributions in the future? | |
A: | We currently intend to distribute substantially all REIT taxable income and net capital gain on a quarterly basis to the extent practicable, consistent with Fund I’s current policy to distribute all of its net income available for distribution. Although we generally do not plan to make distributions in excess of our REIT taxable income and any net capital gain, we may do so from time to time. As a mortgage REIT, Vestin Realty Trust generally will have to distribute annually at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain). REIT taxable income generally is the net income of a REIT determined for U.S. federal income tax purposes subject to specified adjustments, including a deduction for dividends paid and excluding net capital gain. A distribution of REIT taxable income or net capital gain generally will be a taxable distribution to you and will not represent a return of capital for U.S. federal income tax purposes. If we make distributions in excess of our REIT taxable income and any net capital gain, the excess portion of these distributions generally would represent a non-taxable return of capital for such purposes up to your tax basis in your Vestin Realty Trust stock and then generally capital gain. The portion of any distribution treated as a return of capital for U.S. federal income tax purposes would reduce your tax basis in your Vestin Realty Trust stock by a corresponding amount. If the REIT conversion is completed, we plan to continue to make distributions. However, we intend to make regular quarterly distributions after the REIT conversion rather than the current monthly distributions. The actual amount and timing of the distributions will be as authorized by the board of directors of, and declared by, Vestin Realty Trust and will depend on, among other factors, our financial condition and earnings. In order to maintain our status as a REIT, we may be required to make distributions in excess of available cash. In this situation, we expect we will borrow funds or raise capital by selling assets to meet our distribution requirements. |
If you dispose of your shares of Vestin Realty Trust common stock before the record date for a distribution payment, you will not receive that distribution payment. |
Q: | Are there risks I should consider in deciding whether to vote for the merger proposal? | |
A: | Yes, in evaluating the merger proposal, you should consider carefully the following factors. |
• You will lose your redemption rights in connection with the REIT conversion. Because of the limit on the total amount that may be redeemed during any calendar year, Fund I currently has fully-subscribed redemption obligations through 2018. As of September 30, 2005, approximately 700 unitholders, representing approximately 58.2% of all unitholders, had requested redemption and requests to redeem approximately $57.1 million, representing approximately 77.3% of Fund I’s total capital, were outstanding. There may be significant initial downward pressure on the market price of Vestin Realty Trust’s common stock after the REIT conversion because of these redemption requests and, as a result, you may receive less upon a sale of the Vestin Realty Trust common stock than what you may be able to receive either by exercising your redemption rights or in connection with a liquidation of Fund I. | ||
• Based upon its intended qualification as a non-publicly traded partnership, the U.S. federal income tax rules governing Fund I are less complex compared to such rules governing REITs. Because we have never operated as a REIT and our management has no experience managing a REIT and complying with the complicated REIT qualification requirements, we may not be able to successfully manage our business as a REIT. Moreover, assuming Fund I is not treated as a publicly traded partnership, it is not subject to U.S. federal income taxes. In contrast, Vestin Realty Trust will be subject to U.S. federal income taxation if it fails to qualify as a REIT and, even if it qualifies as a REIT, a portion of its income may be subject to U.S. federal income taxation. | ||
• Our manager will continue to face the same conflicts of interest in managing the affairs of Vestin Realty Trust as currently exist in connection with its management of Fund I. For example, Vestin Mortgage will face conflicts of interest arising from our fee structure as its compensation will be based on the volume and size of loans selected for us. Vestin Mortgage will also face conflicts of interest concerning |
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the allocation of its time between our activities and its other activities, including managing other funds with objectives similar to ours. See “Conflicts of Interest.” | ||
• Our company will be dissolved on December 31, 2019 unless the holders of a majority of our common stock determine otherwise. As we move closer to the dissolution date, we expect to stop making new loans and we expect that our stock price will approach our book value per share. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. | ||
• We will incur increased costs as a result of being a listed company. | ||
• You should also consider the specific factors discussed in the “Risk Factors” section beginning on page 7. |
Q: | What do I need to do now? | |
A: | You should carefully read and consider the information contained in this proxy statement/ prospectus, including its annexes. You should then complete and sign the proxy card and return it in the enclosed postage-paid envelope as soon as possible so that your units can be voted at the special meeting. If you do not include instructions on how to vote your properly signed proxy, your units will be voted “FOR” the adoption and approval of the merger agreement. | |
Q: | May I vote in person? | |
A: | Yes. You may attend the special meeting and vote your units in person whether or not you sign and return the proxy card. | |
Q: | May I change my vote after I have mailed my signed proxy card? | |
A: | Yes. You may change your vote at any time before your proxy card is voted at the special meeting. You can do this in one of three ways. First, you can send a written notice to our manager, Vestin Mortgage, stating that you would like to revoke your proxy. Second, you can complete and return a new proxy card. Third, you can attend the special meeting and vote in person. Your attendance alone at the special meeting will not revoke your proxy. | |
Q: | What vote is required to approve the merger proposal? | |
A: | The adoption and approval of the merger agreement requires the affirmative vote of the holders of at least a majority of the outstanding units of our company on the record date. If you do not vote, it will have the same effect as voting against the merger proposal. As of the record date, the affirmative vote of units will be required. | |
Q: | When do we expect to complete the merger? | |
A: | We are working toward completing the merger as quickly as possible. We currently expect to complete the merger as soon as practicable after the requisite approval is obtained at the special meeting and the closing conditions are satisfied or waived. |
However, we reserve the right to cancel or defer the merger even if unitholders vote to approve the merger proposal and the other conditions to the consummation of the merger are satisfied or waived if the board of directors of Vestin Mortgage, as the sole manager of our company, determines that the merger is no longer in the best interests of our company unitholders. There is no time limit for us to cancel or defer the merger. |
Q: | Am I entitled to dissenters’ rights? | |
A: | Under Nevada law, you are not entitled to any dissenters’ or appraisal rights in connection with the merger and REIT conversion. | |
Q: | Where will my new Vestin Realty Trust common stock be traded? | |
A: | Vestin Realty Trust has applied to have its shares of common stock listed on the Nasdaq National Market under the symbol “VRTA.” If the shares of Vestin Realty Trust common stock are not approved for listing on Nasdaq or a national securities exchange acceptable to Fund I, we will not complete the merger. |
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Q: | Who is paying for the expenses incurred in connection with the REIT conversion? | |
A: | Vestin Mortgage, our manager, will pay for all expenses incurred in connection with the REIT conversion. | |
Q: | Who can help answer my questions? | |
A: | If you have any questions about the merger or the REIT conversion, or if you need additional copies of this proxy statement/ prospectus, you should contact our information agent: |
MacKenzie Partners, Inc. |
You may also contact: | ||
Vestin Fund I, LLC |
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• | Vestin Mortgage will receive substantial fees from borrowers for obtaining, processing, making and brokering, managing and selling real estate loans, as well as for other services. Many of these fees are paid on an up-front basis. Vestin Mortgage’s compensation is based on the volume and size of the real estate loans selected for us, regardless of their performance, which could create an incentive to make or extend riskier loans. Our interests may diverge from those of Vestin Mortgage and Michael V. Shustek, who indirectly owns 100% of Vestin Mortgage, in deciding whether we should invest in a particular loan. Vestin Mortgage will receive an immediate benefit through the payment of up-front fees from borrowers irrespective of the risk we may bear in connection with our ability to collect on such loans. |
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• | Vestin Mortgage will be receiving fees from borrowers that would otherwise increase our returns. Because Vestin Mortgage receives all of these fees, our interests will diverge from those of Vestin Mortgage and Mr. Shustek when Vestin Mortgage determines whether we should charge higher interest rates or Vestin Mortgage should receive higher fees from borrowers. | |
• | Vestin Mortgage must allocate its time between our activities and its other activities. These other activities include its current activities as a licensed mortgage broker and acting as the manager of Vestin Fund II, LLC, or Fund II, Vestin Fund III, LLC, or Fund III, and inVestin Nevada, Inc., funds with objectives similar to ours. Additional such funds may be formed or managed by Vestin Mortgage in the future. There are no restrictions or guidelines on how Vestin Mortgage will determine which loans are appropriate for us and which are appropriate for another company that it manages. Moreover, Vestin Mortgage has no obligation to provide us with any particular opportunities or even a pro rata share of opportunities afforded to other companies it manages. |
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• | The merger agreement must be approved by the holders of a majority of the outstanding Fund I units. | |
• | Vestin Realty Trust’s registration statement registering the shares of its common stock to be issued in the merger, of which this proxy statement/ prospectus forms a part, must be effective, no stop order suspending its effectiveness may be in effect, and no proceeding for suspending its effectiveness may be pending or threatened by the Securities and Exchange Commission, or the SEC. | |
• | The Vestin Realty Trust common stock shall have been approved for listing on Nasdaq or a national securities exchange acceptable to Fund I. | |
• | Fund I must receive from its special tax counsel a legal opinion generally to the effect that (a) the merger qualifies as a transaction described in Section 351 of the Code and (b) Vestin Realty Trust’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for the taxable year 2005 and thereafter. Neither Fund I nor Vestin Realty Trust may waive this closing condition. | |
• | Vestin Mortgage, acting on behalf of Fund I, shall have determined, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of substantially impairing the ability of Vestin Realty Trust to qualify as a REIT. | |
• | All necessary state and local governmental and third-party consents must have been received. Vestin Mortgage, acting on behalf of Fund I, may waive this closing condition. |
• | compliance with applicable U.S. federal and state securities laws; and | |
• | the filing and acceptance of articles of merger as required by the MGCL and the Nevada Revised Statutes. |
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Our management has no experience operating a mortgage REIT, and we cannot assure you that our management’s past experience will be sufficient to successfully manage our business as a mortgage REIT. If we fail to comply with REIT requirements, we would incur U.S. federal income taxes at the corporate level, which would reduce our distributions to you. |
You will lose your redemption rights in connection with the REIT conversion. |
Sales of our common stock after the REIT conversion could have an adverse effect on our stock price. |
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We cannot assure you that we will have access to funds to meet our distribution and tax obligations. |
We will incur increased costs as a result of being a listed company. |
We will rely on our manager to manage our day-to-day operations and select our loans for investment. |
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Our manager’s lack of experience with certain real estate markets could impact its ability to make prudent investments on our behalf. |
Our success depends on key personnel of our manager, the loss of whom could adversely affect our operating results, and on our manager’s ability to attract and retain qualified personnel. |
Any borrowing by us will increase your risk and may reduce the amount we have available to distribute to stockholders. |
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Defaults on our real estate loans will decrease our revenues and your distributions. |
Our underwriting standards and procedures are more lenient than conventional lenders, which may result in a higher level of non-performing assets and less amounts available for distribution to you. |
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We depend upon our real estate security to secure our real estate loans, and we may suffer a loss if the value of the underlying property declines. |
We typically make “balloon payment” loans, which are riskier than loans with payments of principal over an extended period of time. |
Our loans are not guaranteed by any governmental agency. |
Our real estate loans will not be marketable, and we expect no secondary market to develop. |
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We may have difficulty protecting our rights as a secured lender. |
• | Judicial foreclosure is subject to the delays of protracted litigation. Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it; | |
• | The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property; | |
• | Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights; | |
• | The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral; | |
• | We may not be able to pursue deficiency judgments after we foreclose on collateral; and | |
• | State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings. |
By becoming the owner of property, we may incur additional obligations, which may reduce the amount of funds available for distribution. |
We have identified material weaknesses in internal control over our financial reporting, primarily related to the lack of technical accounting and reporting expertise. Our inability to provide such expertise may result in inadequate or deficient financial reporting. |
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A prolonged economic slowdown, lengthy or severe recession or significant increase in interest rates could harm our business. |
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• | There is no assurance that this permitted rate increase will be adequate if interest rates have increased beyond the range contemplated by our loan documents. If interest rates rise, borrowers under loans with monthly or quarterly principal payments may be compelled to extend their loans to decrease the principal paid with each payment because the interest component has increased. If this happens, we are likely to be at a greater risk of the borrower defaulting on the extended loan, and the increase in the interest rate on our loan may not be adequate compensation for the increased risk. Additionally, any fees paid to extend the loan are paid to our manager, not to us . Our revenues and distributions will decline if we are unable to reinvest at higher rates or if an increasing number of borrowers default on their loans; and | |
• | If, at a time of relatively low interest rates, a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in mortgage loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. This is a risk if the loans we invest in do not have prepayment penalties or exit fees. |
We face competition for real estate loans that may reduce available yields and fees available. |
Vestin Mortgage serves as our manager pursuant to a long-term management agreement that may be difficult to terminate and may not reflect arm’s length negotiations. |
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Our manager will face conflicts of interest concerning the allocation of its personnel’s time. |
Our manager will face conflicts of interest arising from our fee structure. |
Our manager will face conflicts of interest relating to other investments in real estate loans. |
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Our failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce amounts available for distribution our to stockholders. |
Changes in the tax laws could make investments in REITs less attractive and could reduce the tax benefits of our REIT conversion. |
Distributions from a REIT are currently taxed at a higher rate than corporate distributions. |
A portion of our business is potentially subject to prohibited transactions tax. |
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Taxable REIT subsidiaries are subject to corporate-level tax, which may devalue Vestin Realty Trust’s common stock relative to other companies. |
Our use of taxable REIT subsidiaries may have adverse U.S. federal income tax consequences. |
We may endanger our REIT status if the distributions we receive from our taxable REIT subsidiaries exceed applicable REIT gross income tests. |
We may lose our REIT status if we issue shares under our stockholders’ rights plan. |
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A public market for Vestin Realty Trust’s common stock may not develop or be maintained. |
The market price and trading volume of our common stock may be volatile following the REIT conversion. |
• | increases in loans defaulting or becoming non-performing or being written off; | |
• | actual or anticipated variations in our quarterly operating results or distributions; | |
• | publication of research reports about us or the real estate industry; | |
• | changes in market valuations of similar companies; | |
• | changes in tax laws affecting REITs; | |
• | adverse market reaction to any increased indebtedness we incur in the future; and | |
• | general market and economic conditions. |
Market interest rates could have an adverse effect on our stock price. |
We were the subject of a pending SEC investigation which may depress the price of our stock. |
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The informal meetings we held with members, and the tape recorded presentation, regarding the proposed REIT conversion may be deemed to have been a violation of federal securities laws. |
Our charter documents and Maryland law contain provisions that may delay, defer or prevent a change of control transaction. |
• | Ownership Limit. Our articles of incorporation, subject to certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than a specified percentage of the number or value, whichever is more restrictive, of the outstanding shares of our stock. In particular, no person may acquire more than 15% of our stock without exception. The ownership limit may have the effect of precluding a change in control of us by a third party, even if such change in control would be in the interest of the our stockholders (and even if such change in control would not reasonably jeopardize our REIT status). | |
• | Staggered Board. Our board of directors will be divided into three classes, with each class serving staggered three-year terms. This classification of our board of directors may have the effect of delaying or preventing changes in our control or management. | |
• | Removal of Directors. Directors may be removed only for cause and only by the affirmative vote of stockholders holding at least a majority of the shares then outstanding and entitled to be cast for the election of directors. |
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• | Stockholders’ Rights Plan. We have a stockholders’ rights plan that enables the board of directors of Vestin Realty Trust to deter coercive or unfair takeover tactics and to prevent a person or a group from gaining control of Vestin Realty Trust without offering a fair price to all stockholders. Unless our board of directors approves the person’s or group’s purchase, after that person gains control of Vestin Realty Trust, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person or group. Our board of directors, however, can prevent the stockholders’ rights plan from operating in this manner. This gives our board of directors significant discretion to approve or disapprove a person’s or group’s efforts to acquire a large interest in us. | |
• | Duties of directors with respect to unsolicited takeovers. Under Maryland law, a director is required to perform his or her duties (a) in good faith, (b) in a manner he or she believes to be in the best interests of the corporation and (c) with the care that an ordinarily prudent person in a like position would use under similar circumstances. Maryland law provides protection for Maryland corporations against unsolicited takeovers by, among other things, retaining the same standard of care in the performance of the duties of directors in unsolicited takeover situations. The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under Maryland Business Combination Act or Maryland Control Share Acquisition Act or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition. Moreover, under Maryland law the act of the directors of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law. | |
• | Maryland General Corporation Law. Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including: |
• | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and | |
• | “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
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• | Advance notice of director nominations and stockholder proposals. Our bylaws impose certain advance notice requirements that must be met for nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders. |
Our rights and the rights of our stockholders to take action against our directors and officers are limited. |
• | actual receipt of an improper benefit or profit in money, property or services; or | |
• | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated. |
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• | To adopt and approve the form of agreement and plan of merger, between Fund I and Vestin Realty Trust pursuant to which the REIT conversion will be effected; and | |
• | To transact any other business that is properly brought before the special meeting or at any adjournments or postponements of the special meeting. |
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• | giving written notice to our manager at Vestin Mortgage, Inc., 8379 West Sunset Road, Las Vegas, Nevada 89113 that you revoke your proxy; | |
• | submitting another proxy with a later date; or | |
• | attending the special meeting and voting in person, although attendance at the special meeting will not by itself revoke a proxy. |
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• | provide liquidity for our unitholders as we have applied to list the shares of Vestin Realty Trust common stock on the Nasdaq National Market. Listing of the shares on Nasdaq or a national securities exchange acceptable to Fund I is a condition to the consummation of the merger and REIT conversion; and | |
• | maximize the availability of assets for investments in real estate loans by eliminating the need to reserve capital to satisfy redemption requests. In the past, Fund I has accumulated a cash reserve equal to approximately 10% of its total capital by the end of a calendar year in order to meet redemption requests. For example, Fund I had approximately $20.2 million in cash at December 31, 2004 compared to approximately $6.6 million at June 30, 2004. At September 30, 2005, Fund I had not reserved any cash to satisfy redemption requests. | |
• | that we will need to comply with the highly complicated REIT qualification provisions under the Code; | |
• | that the backlog of redemption requests could likely result in a near-term decline in our stock price; |
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• | that the REIT conversion would have a more adverse impact on unitholders whose redemption requests are to be satisfied in the near term compared to those whose redemptions requests are to be satisfied in later years; and | |
• | the potential risks discussed in “Risk Factors — Risks and Effects of the Merger and the REIT Conversion” beginning on page 7. |
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• | Charter Documents and Governing Law. Vestin Realty Trust and its stockholders will be governed by Maryland corporate law and the articles of incorporation, articles supplementary and bylaws of Vestin Realty Trust, copies of which are attached to this proxy statement/ prospectus as Annexes B, C and D, respectively. | |
• | Other Restructuring Transactions. Properties acquired through foreclosure prior to completion of the merger will be transferred to one or more wholly-owned taxable REIT subsidiaries in order to comply with certain REIT qualification restrictions and to avoid penalty taxes on any income from the future sale of these properties. As of September 30, 2005, we held two properties with a total carrying value of approximately $4.3 million, which were acquired through foreclosure and recorded as investments in real estate held for sale. As of September 30, 2005, we also held interests in two properties with a total carrying value of approximately $8.6 million, which were sold in transactions in which we or an affiliate provided the financing and which were recorded as seller financed real estate held for sale. GAAP requires us to include these properties in real estate held for sale until the borrower has met and maintained a certain percentage of equity ownership. The real estate held for sale and the seller | |
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financed real estate held for sale collectively constituted approximately 16.5% of our assets as of September 30, 2005. The composition and value of the properties to be transferred to taxable REIT subsidiaries can only be determined at the time of the REIT conversion. | ||
• | Directors and Officers. The directors and officers of Vestin Realty Trust immediately before the merger will continue to be the directors and officers, respectively, of Vestin Realty Trust immediately after the merger. | |
• | Management Agreement. Vestin Mortgage will serve as manager of Vestin Realty Trust, subject to the oversight of the board of directors of Vestin Realty Trust, pursuant to the terms and conditions of the form of management agreement attached as Annex E to this proxy statement/ prospectus. | |
• | Listing of Vestin Realty Trust Common Stock. We expect that the new Vestin Realty Trust common stock will trade on the Nasdaq National Market under the symbol “VRTA” following completion of the merger. If the shares of Vestin Realty Trust common stock are not approved for listing on Nasdaq or a national securities exchange acceptable to Fund I, we will not close the merger. |
• | Vestin Realty Trust Registration Statement. Vestin Realty Trust’s registration statement, of which this proxy statement/ prospectus is a part, must be effective, no stop order suspending its effectiveness may be in effect and no proceedings for suspending its effectiveness may be pending or threatened by the SEC. | |
• | Unitholder Approval. The holders of at least a majority of the outstanding Fund I units shall have approved the merger agreement. | |
• | Exchange Listing. The Vestin Realty Trust common stock shall have been approved for listing on the Nasdaq or a national securities exchange acceptable to Fund I. | |
• | Tax Opinions. Fund I shall have received from its special tax counsel a legal opinion generally to the effect that (a) the merger qualifies as a transaction described in Section 351 of the Code and (b) Vestin Realty Trust’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for the taxable year 2005 and thereafter. Neither Fund I nor Vestin Realty Trust may waive this closing condition. | |
• | Governmental and Third-Party Consents. Any necessary state and local governmental and third-party consents must have been received. Vestin Mortgage, acting on behalf of Fund I, may waive this closing condition. | |
• | No Adverse Tax Legislation. Vestin Mortgage, acting on behalf of Fund I, shall have determined, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of impairing the ability of Vestin Realty Trust to qualify as a REIT. |
• | a governmental authority has issued a final, non-appealable order, decree or ruling, or taken any other action, that would permanently prohibit the merger; | |
• | the unitholders of Fund I fail to approve the merger agreement; or | |
• | any closing condition is not satisfied or waived. |
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• | compliance with applicable U.S. federal and state securities laws; and | |
• | the filing and acceptance of articles of merger as required by the MGCL and the Nevada Revised Statutes. |
• | made in conformity with the requirements of Rule 145(d) under the Securities Act; | |
• | made pursuant to an effective registration statement under the Securities Act; or | |
• | otherwise exempt from registration under the Securities Act. |
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• | serving as our consultant with respect to formulation of investment criteria, interest rate risk management and preparation of policy guidelines by our board of directors; | |
• | advising us in developing criteria for mortgage asset purchase commitments that are tailored to our long-term investment objectives, and making available to us its knowledge and experience with respect to mortgage assets; | |
• | evaluating, selecting, purchasing and committing to purchase mortgage assets meeting our investment criteria and the maintenance and administration of our portfolio of mortgage assets; | |
• | advising and negotiating with respect to our agreements with third-party lenders to provide borrowings to us, encumbering our assets as security for such borrowings, and entering into such third-party agreements on our behalf; | |
• | furnishing reports and statistical and economic analysis to our company regarding our activities and the services performed for us by Vestin Mortgage; | |
• | investing or reinvesting any money of our company in accordance with policies and procedures established from time to time by our board of directors, including without limitation maintaining and investing working capital reserves in cash or short-term investments; | |
• | providing the executive and administrative personnel, office space and services required in rendering services to our company; | |
• | administering the day-to-day operations of our company and performing and supervising the performance of such other administrative functions necessary in the management of our company, which includes authority to contract on behalf of our company with third parties to provide various services, including facilities and costs associated therewith, technology, management information systems and other similar operations or administrative services; | |
• | overseeing the day-to-day operations of our company and performing and supervising the performance of such other administrative functions necessary in the management of our company as may be agreed upon by Vestin Mortgage and our board of directors, including the collection of revenues and payment of our debts and obligations; | |
• | counseling our company in connection with policy decisions made by our board of directors; | |
• | communicating on behalf of our company with the holders of the equity and debt securities of our company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; |
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• | evaluating, advising and selecting what agreements our company will enter into and whether we should enter into joint ventures with other companies to invest in mortgage assets, and entering into such agreements and joint ventures on behalf of our company; | |
• | advising, negotiating, managing and overseeing the origination, extension, modification, re-financing, evaluation, selection, acquisition, processing, brokerage and servicing of mortgage assets; | |
• | foreclosing upon real property on behalf of us or any of our subsidiaries and advising, developing, managing and either holding for investment on behalf of our company or any of our subsidiaries, or disposing of real property acquired by our company or our subsidiaries through foreclosure of any secured assets, either directly or through general partnerships, joint ventures or otherwise; | |
• | counseling our company regarding the maintenance of our exemption from the Investment Company Act of 1940 and monitoring compliance with the requirements for maintaining exemption from that Act; | |
• | counseling our company regarding the maintenance of our status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set forth in the Code and the income tax regulations promulgated thereunder; | |
• | qualifying and causing our company to qualify to do business in all applicable jurisdictions; | |
• | causing our company to retain qualified accountants and tax experts to assist in developing appropriate accounting procedures and testing systems and to conduct quarterly compliance reviews; | |
• | providing all actions necessary for compliance by our company to make required U.S. federal, state and local regulatory requirements applicable to us in respect of our business activities, including preparing or causing to be prepared all financial statements under applicable regulations and contractual undertakings and all reports, documents and filings, if any, required under the Securities Exchange Act of 1934, or the Exchange Act, and all applicable tax report filings; and | |
• | performing such other services as may be required from time to time for management and other activities relating to the assets of our company as our board of directors reasonably request or Vestin Mortgage deems appropriate under the particular circumstances, including without limitation winding up the affairs of our company upon our dissolution. |
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• | do any act in contravention of the management agreement; | |
• | do any act which would make it impossible to carry on the ordinary business of our company; | |
• | confess a judgment against our company; | |
• | possess company property or assign our rights in property for other than a company purpose; | |
• | sell all or substantial all of our assets in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of our unaffiliated directors; | |
• | grant to any of its affiliates an exclusive right to sell any company assets; | |
• | receive or permit Vestin Mortgage or any of its affiliates to receive any insurance brokerage fee or write any insurance policy covering our company or any company property; | |
• | receive from us a rebate or participate in any reciprocal business arrangement which would enable Vestin Mortgage or any of its affiliates to do so; | |
• | commingle our assets with those of any other person; | |
• | use or permit another person to use our assets in any manner, except for the exclusive benefit of our company; | |
• | obtain a loan from our company to Vestin Mortgage or any of its affiliates; or | |
• | sell any real property owned by our company or our subsidiaries as a result of foreclosure of secured assets by our company or any of our subsidiaries to Vestin Mortgage or any of its affiliates. |
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• | General. Under no circumstances may Vestin Mortgage receive any compensation not permitted under the Mortgage Program Guidelines of the NASAA unless indicated to the contrary by the context or unless a majority of our unaffiliated directors determines that it is in our best interests not to comply with the NASAA Guidelines. We will pay Vestin Mortgage an annual management fee up to 0.25% of the aggregate capital contributions. Following the REIT conversion, the annual management fee will continue to be calculated based on total capital contributions made to our company. The fee will increase to the extent stockholders contribute additional capital through distribution reinvestments, but it will not otherwise change based on the performance of our loan portfolio. For the three months ended September 30, 2005, Vestin Mortgage received from Fund I as the management fee approximately $69,000. For the nine month transition period ended June 30, 2005 and the year ended September 30, 2004, Vestin Mortgage received from Fund I as the management fee approximately $201,000 and $255,000, respectively. Vestin Mortgage will be reimbursed for out-of-pocket expenses incurred on our behalf, such as legal and accounting fees. No additional reimbursement will be paid to Vestin Mortgage or its affiliates for any general or administrative overhead expenses incurred by Vestin Mortgage or its affiliates or for any other expenses they may incur, including (a) rent, depreciation, utilities, capital equipment and other administrative items and (b) salaries, fringe benefits, travel expenses and other administrative items incurred or allocated to any controlling person of Vestin Mortgage or its affiliates. | |
• | Administrative Fees on Resales of Foreclosed Property. Our company or any of our subsidiaries will pay Vestin Mortgage up to 3% of proceeds where Vestin Mortgage substantially contributed to the sale and up to 6% for all persons involved. For the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, Vestin Mortgage did not receive from Fund I any administrative fees on resales of foreclosed property. Our company or any of our subsidiaries, as the case may be, will pay these fees promptly out of the proceeds of a sale of the relevant real estate. No foreclosed property will be sold by our company or any of our subsidiaries to Vestin Mortgage or its affiliates unless approved by a majority of our unaffiliated directors. | |
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• | Loan Placement Fees for Loan Selection and Brokerage. Vestin Mortgage will be entitled to receive a fee of an amount equal to approximately 2%-6% of the principal amount of each loan. The percentage to be received by Vestin Mortgage will be a competitive fee, based on local market conditions, and may exceed 6% of the principal amount. For the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, Vestin Mortgage received as placement fees for loans selected and brokered approximately $1.9 million, $7.2 million and $12.2 million, respectively. These amounts represent fees earned by Vestin Mortgage for loans originated for all of its managed funds, including Fund I, Fund II, Fund III and inVestin Nevada. | |
• | Loan Evaluation and Processing Fees. Vestin Mortgage will be entitled to receive a fee of an amount equal to approximately 5% of each loan, the exact percentage of which may be higher than 5%, but which will be a competitive fee based on local market conditions. For the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, Vestin Mortgage received as fees for loans evaluated and processed approximately $105,000, $142,000 and $154,000, respectively. These amounts represent fees earned by Vestin Mortgage for loans originated for all of its managed funds, including Fund I, Fund II, Fund III and inVestin Nevada. | |
• | Service Fee for Administering Loans. Subject to regulatory requirements, Vestin Mortgage will be entitled to receive, where permitted, mortgage service fees, which when added to all other fees paid in connection with the servicing of a particular mortgage, does not exceed an amount equal to approximately one-fourth of one percent (0.25%) of the principal amount outstanding on such loan. For the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, Vestin Mortgage received as service fees for loans administered approximately $584,000, $2.1 million and $2.4 million, respectively. These amounts represent fees earned by Vestin Mortgage for loans originated for all of its managed funds, including Fund I, Fund II, Fund III and inVestin Nevada. | |
• | Loan Extension or Modification Fee. Vestin Mortgage will be entitled to receive a fee equal to approximately 2%-5% of outstanding principal amount of the loan, as permitted by local law and local market conditions, and may exceed 5% of the outstanding principal amount if permitted by local law and consistent with local market conditions. For the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, Vestin Mortgage received as fees for loans extended or modified approximately $564,000, $4.4 million and $4.8 million, respectively. These amounts represent fees earned by Vestin Mortgage for loans originated for all of its managed funds, including Fund I, Fund II, Fund III and inVestin Nevada. | |
• | Loan Assumption and Reconveyance Fees. Vestin Mortgage will be entitled to receive a fee in connection with the assumption or reconveyance of a loan. Vestin Mortgage charges a $125 fee for each reconveyance of a loan. Vestin Mortgage also charges an assumption fee of at least 5% of the original principal balance of the loan for any loan assumption. The fee will be competitive, based on local market conditions. For the three months ended September 30, 2005 and the years ended June 30, 2005 and 2004, Vestin Mortgage received as fees for loans assumed or reconveyed approximately $21,000, $24,000 and $39,000, respectively. These amounts represent fees earned by Vestin Mortgage for loans originated for all of its managed funds, including Fund I, Fund II, Fund III and inVestin Nevada. | |
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• | if a majority of our unaffiliated directors determines that Vestin Mortgage has violated the management agreement in any material respect and, after written notice of such violation, Vestin Mortgage has failed to cure such violation within 30 days, unless during such 30-day period Vestin Mortgage has commenced to cure such violation and thereafter diligently prosecutes to cure such violation; or | |
• | there is entered an order for relief or similar decree or order with respect to Vestin Mortgage by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws relating to insolvency; or Vestin Mortgage (i) ceases, or admits in writing its inability, to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of Vestin Mortgage or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against Vestin Mortgage and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against Vestin Mortgage without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days; provided, that in the event Vestin Mortgage becomes the subject of a case under federal bankruptcy or similar federal or state laws and remains in possession of its property and continues to operate its business (as a debtor in possession or otherwise), we will not have the option to terminate the management agreement unless the unaffiliated directors determine in good faith that as a result of such proceeding Vestin Mortgage cannot reasonably be expected to fulfill its obligations under the management agreement. |
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Nine Month | ||||||||||||||||||||||||||||
Three | Three | Transition | ||||||||||||||||||||||||||
Months | Months | Period | 12 Months | 12 Months | 12 Months | 12 Months | ||||||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | Ended | ||||||||||||||||||||||
September 30, | September 30, | June 30, | September 30, | September 30, | September 30, | December 31, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||
Cash distributions | $ | 1,160,000 | $ | 1,393,000 | $ | 3,694,000 | $ | 5,098,000 | $ | 10,364,000 | $ | 9,637,000 | $ | 10,757,000 | ||||||||||||||
Cash distributions in excess of net income available for distribution | — | $ | 724,000 | — | — | $ | 2,065,000 | — | — | |||||||||||||||||||
Cash distributions per weighted average membership units | $ | 0.15 | $ | 0.17 | $ | 0.47 | $ | 0.61 | $ | 1.07 | $ | 0.95 | $ | 1.26 | ||||||||||||||
Cash distributions, less distributions in excess of net income available for distribution, per weighted average membership units | $ | 0.15 | $ | 0.08 | $ | 0.47 | $ | 0.61 | $ | 0.86 | $ | 0.95 | $ | 1.26 | ||||||||||||||
Weighted average membership units | 7,667,852 | 8,385,189 | $ | 7,919,354 | 8,339,404 | 9,668,310 | 10,193,776 | 8,519,804 |
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• | produce revenues from the interest income on our real estate loans; | |
• | provide quarterly cash distributions from the net income earned on our real estate loans; and | |
• | reinvest, to the extent permissible, payments of principal and sales (net of expenses). |
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• | the ratio of the amount of the investment to the value of the property by which it is secured, or the loan-to-value ratio; | |
• | the potential for capital appreciation or depreciation of the property securing the investment; | |
• | expected levels of rental and occupancy rates, if applicable; | |
• | potential for rental increases, if applicable; | |
• | current and projected revenues from the property, if applicable; | |
• | the status and condition of the record title of the property securing the investment; | |
• | geographic location of the property securing the investment; and | |
• | the financial condition of the borrowers and their principals, if any, who guarantee the loan. |
1. Priority of Loans. Generally, our assets are secured by first deeds of trust. First deeds of trust are loans secured by a full or divided interest in a first deed of trust secured by the property. Other loans that we invest in on the security property are not intended to be junior to more than one other loan. As of September 30, 2005, 100% of the principal amount of our outstanding interest in loans was secured by first deeds of trust. | |
2. Loan-to-Value Ratio. The amount of our loan combined with the outstanding debt secured by a senior loan on a security property generally does not exceed the following percentage of the appraised value of the security property at origination: |
Type of Secured Property | Loan-to-Value Ratio | |
Residential | 75% | |
Unimproved Land | 60% (of the anticipated as-if developed value) | |
Acquisition and Development | 60% (of the anticipated as-if developed value) | |
Commercial Property(1) | 75% (of the anticipated as-if developed value) | |
Construction | 75% (of the anticipated post-construction value) | |
Leasehold Interest | 75% (of the value of leasehold interest) |
(1) | Bridge loans are a subcategory of commercial loans in which we provide interim financing for borrowers seeking long-term, permanent financing. As of September 30, 2005, bridge loans have been reported within the commercial category. |
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The target loan-to-value ratio for our loan portfolio as a whole is approximately 70%. As of September 30, 2005, the weighted average loan-to-value ratio for our loan portfolio was approximately 66%. However, we may deviate from these guidelines under certain circumstances. For example, Vestin Mortgage, in its discretion, may increase any of the above loan-to-value ratios if a given loan is supported by credit adequate to justify a higher loan-to-value ratio, including personal guarantees. We do not have specific requirements with respect to the projected income or occupancy levels of a property securing our investment in a particular loan. These loan-to-value ratios will not apply to financing offered by us to the purchaser of any real estate acquired through foreclosure, or to refinance an existing loan that is in default when it matures. In those cases, Vestin Mortgage, in its sole discretion, shall be free to accept any reasonable financing terms it deems to be in our best interest. | |
Vestin Mortgage receives an appraisal at the time of loan underwriting, which may have been commissioned by the borrower and also may precede the placement of the loan with us. Such appraisals are generally dated no greater than 12 months prior to the date of loan origination. The appraisal may be for the current estimate of the as-if developed value of the property which approximates the post-construction value of the collateralized property assuming that such property is developed. As-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, selection by a purchaser against multiple alternatives, and successful development by the purchaser, upon which development is dependent on availability of financing. As most of the appraisals will be prepared on an as-if developed basis, if a loan goes into default prior to any development of a project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of the loan. | |
Vestin Mortgage retains appraisers who are licensed or qualified as independent appraisers and certified by or hold designations from one or more of the following organizations: the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the National Association of Review Appraisers, the Appraisal Institute, the Society of Real Estate Appraisers, M.A.I., Class IV Savings and Loan appraisers or from among appraisers with other qualifications acceptable to Vestin Mortgage. In some cases, Vestin Mortgage may accept an appraiser selected by the borrowers. However, appraisals are only estimates of value and cannot be relied on as measures of realizable value. An employee or agent of Vestin Mortgage will review each appraisal report and will conduct a physical inspection for each property. A physical inspection includes an assessment of the subject property, the adjacent properties and the neighborhood but generally does not include entering any structures on the property. | |
3. Construction Loans. We invest in construction loans other than home improvement loans on residential property, when the loan-to-value ratio does not exceed 75% of the appraised, completed value of the security property at origination. | |
4. Terms of Loans. Our loans as of September 30, 2005 ranged from a 12-month term to a 36-month term. Most of our loans are for a term of 12 months. As of September 30, 2005, the weighted average term of our outstanding loans was 18 months. Our original loan agreements, however, permit extensions to the term of the loan by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take out financing. | |
Currently, all but one of our loans provide for payments of interest only with a “balloon” payment of principal payable in full at the end of the term. One of our loans is an amortizing loan with a balance of approximately $7.8 million and a term of 36 months. In addition, we invest in real estate loans which require the borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At September 30, 2005, we had $9.7 million in investments in real estate loans that had interest reserves where the total outstanding principal was approximately $62.0 million, including participating lenders. These loans had interest reserves of approximately $3.2 million, of which our portion was $1.7 million. | |
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5. Escrow Conditions. Our loans will often be funded by us through an escrow account held by a title insurance company or a lawyer where permitted by law, subject to the following conditions: |
• | Borrowers will obtain title insurance coverage for all loans, providing title insurance in an amount at least equal to the principal amount of the loan. Title insurance insures only the validity and priority of our deed of trust, and does not insure us against loss by other causes, such as diminution in the value of the security property. | |
• | Borrowers will obtain fire and casualty insurance for all loans secured by improved real property, covering us in an amount sufficient to cover the replacement cost of improvements. | |
• | All insurance policies, notes, deeds of trust and any other loan documents for a particular transaction will cover us as a beneficiary. |
6. Purchase of Investments from Affiliates. We may acquire real estate loans from our affiliates, including Vestin Mortgage, for a price not in excess of the carrying value of the note, plus allowable fees and expenses, but without the allowance of any other compensation for the loans. | |
7. Note Hypothecation. We may also acquire real estate loans secured by assignments of secured promissory notes. These loans must satisfy our stated investment standards, including our loan-to-value ratios, and also may not exceed 80% of the principal amount of the assigned note upon acquisition. For example, if the property securing a note we acquire is commercial property, the total amount of outstanding debts secured by the property must not exceed 75% of the appraised value of the property, and the loan will not exceed 80% of the principal amount of the assigned note. For loans secured by promissory notes, we will rely on the appraised value of the underlying property, as determined by an independent written appraisal which was conducted within the then- preceding twelve months. If an appraisal was not conducted within that period, then we will arrange for a new appraisal to be prepared for the property prior to acquisition of the loan. | |
8. Participation. We participate in loans with other lenders, including affiliates as permitted by NASAA Guidelines, by providing funds for or purchasing an undivided interest in a loan meeting our investment guidelines described above. Typically, we participate in loans if: |
• | We did not have sufficient funds to invest in an entire loan; | |
• | We are seeking to increase the diversification of our loan portfolio; or | |
• | Vestin Mortgage originated a loan that fit within our investment guidelines but it would constitute more than 20% of our anticipated capital contribution or otherwise be disproportionately large given our then existing portfolio. |
Loans in which third-party investors have participated through inter-creditor agreements are accounted for as secured borrowings in accordance with SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Inter-creditor agreements generally provide us additional funding sources for loans whereby a third-party investor may participate on a senior basis in certain loans with us and/or Fund II and/or Fund III, or collectively, the lead lenders. In the event of borrower non-performance, the agreements generally provide that the lead lenders must repay the investor’s loan amount either by (i) continuing to remit to the investor the interest due on the participated loan amount, (ii) substituting an alternative loan acceptable to the investor or (iii) repurchasing the participation from the investor for the outstanding balance plus accrued interest. | |
An investor may participate in certain loans with the lead lenders through participation agreements. In the event of borrower non-performance, the participation agreement may allow the investor to be repaid up to the amount of the investor’s investment prior to the lead lenders being repaid. | |
As of September 30, 2005, all of our loans were loans in which we participated with other lenders, most of whom were our affiliates. | |
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9. Diversification. We will continue to comply voluntarily with the NASAA Guidelines unless a majority of our unaffiliated board members determines that it is in our best interests not to comply with such guidelines. The NASAA Guidelines provide that we neither invest in nor make real estate loans on any one property which would exceed, in the aggregate, an amount equal to 20% of our capital nor may we invest in or make real estate loans to or from any one borrower which would exceed, in the aggregate, an amount greater than 20% of our capital. As of September 30, 2005, our single largest loan had an outstanding balance of approximately $7.8 million, which represented approximately 10.6% of our capital. The loan bears interest at 5% per annum and matures in September 2007. | |
10. Reserve Fund. We have established contingency working capital reserves of approximately 3% of our capital to cover our unexpected cash needs. | |
11. Credit Evaluations. When reviewing a loan proposal, Vestin Mortgage determines whether a borrower has sufficient equity in the security property. Vestin Mortgage may also consider the income level and creditworthiness of a borrower to determine its ability to repay the loan. | |
12. Sale of Real Estate Loan Investments. Although Vestin Mortgage has no plans to do so, Vestin Mortgage may sell our real estate loans or interest in our loans to either affiliates or non-affiliated parties when Vestin Mortgage believes that it is advantageous for us to do so. However, we do not expect that the loans will be marketable or that a secondary market will ever develop for them. |
Raw and Unimproved Land Loans |
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Acquisition and Development Loans |
Construction Loans |
Commercial Property Loans |
Residential Loans |
Local Agency Bonds |
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First Deed of Trust |
Second Deed of Trust |
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• | make distributions to enable us to comply with REIT distribution requirements; | |
• | finance our investments in real estate loans; | |
• | prevent a default under loans that are senior to our real estate loans; | |
• | discharge senior loans if this becomes necessary to protect our investment in real estate loans; or | |
• | operate or develop a property that we acquired under a defaulted loan. |
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Matters Involving Our Manager |
Matters Involving Our Company |
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Non-judicial Foreclosure |
Judicial Foreclosure |
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• | pay before delinquency all taxes and assessments on the property and, when due, all encumbrances, charges and liens on the property which appear prior to the mortgage; | |
• | provide and maintain fire insurance on the property; | |
• | maintain and repair the property; | |
• | not to commit or permit any waste on the property; and | |
• | appear and defend any action or proceeding purporting to affect the property or the rights of the mortgagee under the mortgage. |
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Due-on-Sale Provisions |
Acceleration on Default |
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Prepayment Provisions |
Secondary Financing: Due-on-Encumbrance Provisions |
• | the borrower may have difficulty servicing and repaying multiple loans; | |
• | acts of the senior lender which prejudice the junior lender or impair the junior lender’s security may create a superior equity in favor of the junior lender; | |
• | if the borrower defaults on the senior loan and/or any junior loan or loans, the existence of junior loans and actions taken by junior lenders can impair the security available to the senior lender and can interfere with, delay and even prevent the taking of action by the senior lender; and | |
• | the bankruptcy of a junior lender may operate to stay foreclosure or similar proceedings by the senior lender. |
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Applicability of Usury Laws |
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Investments in Real Estate or Interests in Real Estate |
Investments in Real Estate Loans |
• | produce revenues from the interest income on our real estate loans; | |
• | provide quarterly cash distributions from the net income earned on our real estate loans; and | |
• | reinvest, to the extent permissible, payments of principal and sales (net of expenses). |
Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers |
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• | the fact of the common directorship or interest is disclosed or known to our board of directors or a committee of our board, and our board or committee authorizes, approves or ratifies the transaction or contract by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum; | |
• | the fact of the common directorship or interest is disclosed or known to our stockholders entitled to vote thereon, and the transaction or contract is authorized, approved or ratified by a majority of the votes cast by the stockholders entitled to vote other than the votes of shares owned of record or beneficially by the interested director or corporation, firm or other entity; or | |
• | the transaction or contract is fair and reasonable to us. |
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• | annual management fee; and | |
• | real estate brokerage commissions payable upon the resale of foreclosed properties. |
• | loan brokerage fees; | |
• | loan evaluation and processing fees; | |
• | loan servicing fees (where permitted); | |
• | loan extension or modification fees; and | |
• | loan assumption and reconveyance fees. |
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Name | Age | Position | ||||
Michael V. Shustek | 46 | President, Chief Executive Officer and Director | ||||
John W. Alderfer | 61 | Chief Financial Officer and Director | ||||
Robert J. Aalberts(1)(2) | 54 | Director | ||||
Fredrick J. Zaffarese Leavitt(1)(2) | 34 | Director | ||||
Roland M. Sansone(1)(2) | 50 | Director |
(1) | Member of the audit committee. |
(2) | Member of the nominating committee. |
Name | Age | Position | ||||
Michael V. Shustek | 46 | President, Chief Executive Officer and Chairman | ||||
John W. Alderfer | 61 | Chief Financial Officer | ||||
Michael J. Whiteaker | 55 | Vice President of Regulatory Affairs | ||||
Daniel B. Stubbs | 44 | Senior Vice President, Underwriting | ||||
Jennifer Tsuneta | 34 | Vice President of Loan Servicing | ||||
Shannon Haddow | 37 | Vice President of Investor Relations |
Directors and Executive Officers of Vestin Realty Trust and Vestin Mortgage |
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Unaffiliated Directors of Vestin Realty Trust |
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• | the class I director will be Mr. Zaffarese, and his term will expire at the 2006 annual meeting of stockholders; | |
• | the class II directors will be Messrs. Alderfer and Sansone, and their terms will expire at the 2007 annual meeting of stockholders; and | |
• | the class III directors will be Messrs. Aalberts and Shustek, and their terms will expire at the 2008 annual meeting of stockholders. |
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• | selecting and hiring our independent auditors; | |
• | evaluating the qualifications, independence and performance of our independent auditors; | |
• | approving the audit and nonaudit services to be performed by our independent auditors; | |
• | reviewing the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies; | |
• | overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; and | |
• | reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations. |
• | evaluating the composition, size and governance of our board of directors and make recommendations regarding future planning and the appointment of directors; | |
• | establishing a policy for considering stockholder nominees for election to our board of directors; and | |
• | evaluating and recommending candidates for election to our board of directors. |
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September 30, | June 30, | September 30, | September 30, | September 30, | December 31, | |||||||||||||||||||
2005 | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
Investments in real estate loans (net of allowance) | $ | 56,437,000 | $ | 54,878,000 | $ | 47,344,000 | $ | 51,695,000 | $ | 91,091,000 | $ | 97,228,000 | ||||||||||||
Cash, cash equivalents, certificates of deposits and short-term investments | $ | 5,730,000 | $ | 3,162,000 | $ | 10,130,000 | $ | 14,883,000 | $ | 5,538,000 | $ | 4,257,000 | ||||||||||||
Interest and other receivables | $ | 1,181,000 | $ | 682,000 | $ | 1,327,000 | $ | 1,632,000 | $ | 1,176,000 | $ | 1,009,000 | ||||||||||||
Due from manager | $ | 48,000 | — | — | — | — | — | |||||||||||||||||
Real estate held for sale | $ | 4,310,000 | $ | 7,757,000 | $ | 15,287,000 | $ | 22,517,000 | $ | 1,541,000 | — | |||||||||||||
Real estate held for sale-seller financed | $ | 8,634,000 | $ | 10,374,000 | $ | 10,801,000 | $ | 4,006,000 | — | — | ||||||||||||||
Note receivable (net of allowance) | $ | 119,000 | 119,000 | $ | 119,000 | — | — | — | ||||||||||||||||
Assets under secured borrowing | $ | 1,643,000 | 11,391,000 | $ | 6,134,000 | $ | 20,324,000 | $ | 6,637,000 | — | ||||||||||||||
Other assets | — | — | — | $ | 7,000 | $ | 84,000 | $ | 28,000 | |||||||||||||||
Total assets | $ | 78,102,000 | $ | 88,363,000 | $ | 91,142,000 | $ | 115,064,000 | $ | 106,067,000 | $ | 102,522,000 | ||||||||||||
Total liabilities | $ | 4,250,000 | $ | 15,092,000 | $ | 8,864,000 | $ | 28,549,000 | $ | 7,068,000 | $ | 66,000 | ||||||||||||
Members’ equity | $ | 73,852,000 | $ | 73,271,000 | $ | 82,278,000 | $ | 86,515,000 | $ | 98,999,000 | $ | 102,456,000 | ||||||||||||
Total liabilities and members’ equity | $ | 78,102,000 | $ | 88,363,000 | $ | 91,142,000 | $ | 115,064,000 | $ | 106,067,000 | $ | 102,522,000 |
9 Month | ||||||||||||||||||||||||||||
Transition | ||||||||||||||||||||||||||||
3 Months | 3 Months | Period | 12 Months | 12 Months | 12 Months | 12 Months | ||||||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | Ended | ||||||||||||||||||||||
September 30, | September 30, | June 30, | September 30, | September 30, | September 30, | December 31, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||
Total revenues | $ | 2,214,000 | $ | 1,821,000 | $ | 6,069,000 | $ | 12,666,000 | $ | 10,365,000 | $ | 13,151,000 | $ | 11,565,000 | ||||||||||||||
Total expenses | $ | 305,000 | $ | 1,166,000 | $ | 4,941,000 | $ | 4,099,000 | $ | 6,054,000 | $ | 566,000 | $ | 177,000 | ||||||||||||||
Net income | $ | 1,909,000 | $ | 655,000 | $ | 1,128,000 | $ | 8,567,000 | $ | 4,311,000 | $ | 12,585,000 | $ | 11,388,000 | ||||||||||||||
Net income allocated to members | $ | 1,909,000 | $ | 655,000 | $ | 1,128,000 | $ | 8,567,000 | $ | 4,311,000 | $ | 12,585,000 | $ | 11,388,000 | ||||||||||||||
Net income allocated to members per weighted average membership units | $ | 0.25 | $ | 0.08 | $ | 0.14 | $ | 1.03 | $ | 0.45 | $ | 1.23 | $ | 1.34 | ||||||||||||||
Cash distributions | $ | 1,160,000 | $ | 1,393,000 | $ | 3,694,000 | $ | 5,098,000 | $ | 10,364,000 | $ | 9,637,000 | $ | 10,757,000 | ||||||||||||||
Cash distributions per weighted average membership units | $ | 0.15 | $ | 0.17 | $ | 0.47 | $ | 0.61 | $ | 1.07 | $ | 0.95 | $ | 1.26 | ||||||||||||||
Weighted average membership units | 7,667,852 | 8,385,189 | $ | 7,919,354 | 8,339,404 | 9,668,310 | 10,193,776 | 8,519,804 |
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Revenue Recognition |
Increase (Decrease) | ||||
Changed Assumption | in Interest Income | |||
Weighted average interest rate assumption increased by 1% or 100 basis points | $ | 575,000 | ||
Weighted average interest rate assumption increased by 5% or 500 basis points | $ | 2,875,000 | ||
Weighted average interest rate assumption decreased by 1% or 100 basis points | $ | (575,000 | ) | |
Weighted average interest rate assumption decreased by 5% or 500 basis points | $ | (2,875,000 | ) |
Real Estate Held For Sale |
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• | Our manager commits to a plan to sell the properties; | |
• | The property is available for immediate sale in its present condition subject only to terms that are usual and customary; | |
• | An active program to locate a buyer and other actions required to complete a sale have been initiated; | |
• | The sale of the property is probable; | |
• | The property is being actively marketed for sale at a reasonable price; and | |
• | Withdrawal or significant modification of the sale is not likely. |
Real Estate Held for Sale — Seller Financed |
Investments in Real Estate Loans |
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Allowance for Loan Losses |
Increase (Decrease) | ||||
in Allowance for | ||||
Changed Assumption | Loan Losses | |||
Allowance for loan losses assumption increased by 1% of loan portfolio | $ | 670,000 | ||
Allowance for loan losses assumption increased by 5% of loan portfolio | $ | 3,348,000 | ||
Allowance for loan losses assumption decreased by 1% of loan portfolio | $ | (670,000 | ) | |
Allowance for loan losses assumption decreased by 5% of loan portfolio | $ | (3,348,000 | ) |
• | Declines in real estate market conditions, which can cause a decrease in expected market value; | |
• | Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes; | |
• | Lack of progress on real estate developments when we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances; | |
• | Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and | |
• | Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property. |
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Secured Borrowings |
Classification of Operating Results from Real Estate Held for Sale |
Comparison of Three Months Ended September 30, 2005 and 2004 |
At or For the | At or For the | |||||||
Three Months | Three Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2005 | 2004 | |||||||
(Unaudited) | (Unaudited) | |||||||
Total revenues | $ | 2,214,000 | $ | 1,821,000 | ||||
Total expenses | $ | 305,000 | $ | 1,166,000 | ||||
Net income | $ | 1,909,000 | $ | 655,000 | ||||
Net income allocated to members per weighted average membership units | $ | 0.25 | $ | 0.08 | ||||
Annualized rate of return to members(a) | 9.88 | % | 3.10 | % | ||||
Weighted average membership units | $ | 7,667,852 | $ | 8,385,189 | ||||
Cash distributions | $ | 1,160,000 | $ | 1,393,000 | ||||
Cash distributions per weighted average membership unit | $ | 0.15 | $ | 0.17 | ||||
Weighted average term of outstanding loans (in months) | 18 | 19 | ||||||
(a) | The annualized rate of return to members is calculated based upon the GAAP net income allocated to members per weighted average units as of September 30, 2005 and 2004 divided by 92 days (the number of days during each respective period) and multiplied by 365 days, then divided by ten (the original cost of $10 per unit). | |
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• | Revenues for the three months ended September 30, 2005 included other income of $336,000, compared to $11,000 for the three months ended September 30, 2004. The increase in other income is primarily related to a title settlement received in the amount of $272,000 during the three months ended September 30, 2005. In addition, we received $32,000 relating to a settlement agreement with the guarantors of a loan relating to the 126-unit hotel in Mesquite, Nevada property which was sold in March 2005. | |
• | Approximately $254,000 of our interest revenue for the three months ended September 30, 2005 was derived from interest reserves compared to interest revenue of $461,000 for the three months ended September 30, 2004. | |
• | Expenses related to the maintenance of real estate held for sale decreased by approximately $154,000, due to the decrease of real estate held for sale of approximately $11 million from September 30, 2004 to September 30, 2005. | |
• | Interest expense related to secured borrowings decreased by approximately $258,000 due to the decrease in the balance of secured borrowings of approximately $4.5 million from September 30, 2004 to September 30, 2005. | |
• | During the three months ended September 30, 2004, we and Fund II sold and provided financing on an assisted living facility in Las Vegas, Nevada. The sale resulted in a loss of approximately $463,000. | |
• | For the three months ended September 30, 2005 and 2004, we had professional fees of approximately $110,000 and $86,000, respectively, which was an increase of $24,000. Generally, we expect fees to continue at the amounts being incurred during the three months ended September 30, 2005 due to the implementation and maintenance requirements of the Sarbanes-Oxley Act of 2002 and costs related to foreclosures. | |
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For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
September 30, | September 30, | |||||||
2005 | 2004 | |||||||
(Unaudited) | (Unaudited) | |||||||
Distributions of net income available for distribution | $ | 1,160,000 | $ | 669,000 | ||||
Distributions in excess of net income available for distributions generated during the period | — | 724,000 | ||||||
Total distributions | $ | 1,160,000 | $ | 1,393,000 | ||||
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For the Three | For the Three | ||||||||
Months Ended | Months Ended | ||||||||
September 30, | September 30, | ||||||||
2005 | 2004 | ||||||||
(Unaudited) | (Unaudited) | ||||||||
Distributions of net income available for distribution | $ | 1,160,000 | $ | 669,000 | |||||
Additions to working capital reserves (amount not distributed) | 749,000 | — | |||||||
Recovery of losses on sale of real estate held for sale | (5,000 | ) | — | ||||||
Loss on sale of real estate held for sale | — | 463,000 | |||||||
Change in operating assets and liabilities: | |||||||||
Net change in amounts due to related parties | (937,000 | ) | 2,033,000 | ||||||
Net change in other operating assets | 16,000 | (61,000 | ) | ||||||
Net change in accounts payable and accrued liabilities | 26,000 | 344,000 | |||||||
Deferred income | (369,000 | ) | 72,000 | ||||||
Net cash provided by operating activities | $ | 640,000 | $ | 3,520,000 | |||||
Net cash provided by investing activities | $ | 3,256,000 | $ | 3,189,000 | |||||
Net cash used in financing activities | $ | (1,328,000 | ) | $ | (3,451,000 | ) | |||
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Comparison of Nine Month Transition Period Ended June 30, 2005 and Nine Months Ended June 30, 2004 |
Nine Month | ||||||||
Transition Period | Nine Months | |||||||
Ended June 30, | Ended June 30, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Total revenues | $ | 6,069,000 | $ | 10,845,000 | ||||
Total expenses | $ | 4,941,000 | $ | 2,933,000 | ||||
Net income | $ | 1,128,000 | $ | 7,912,000 | ||||
Net income allocated to members per weighted average membership units | $ | 0.14 | $ | 0.94 | ||||
Annualized rate of return to members(a) | 1.9 | % | 12.6 | % | ||||
Weighted average membership units | 7,919,354 | 8,398,813 | ||||||
Cash distributions | $ | 3,694,000 | $ | 3,705,000 | ||||
Cash distributions per weighted average membership unit | $ | 0.47 | $ | 0.44 | ||||
Weighted average term of outstanding loans (in months) | 19 | 16 |
(a) | The annualized rate of return to members is calculated based upon the net GAAP income allocated to members per weighted average units as of June 30, 2005 and 2004 divided by 273 days and 274 days (the number of days during each respective period), respectively, and multiplied by 365 days, then divided by ten (the original $10 cost per unit). |
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• | We have commenced a judicial foreclosure on a loan secured by 4 cemeteries and 8 mortuaries in Hawaii. Upon completion of a valuation analysis, it was deemed necessary to provide a valuation allowance of approximately $1,225,000 during the quarter ended June 30, 2005. See “Rightstar Loan Allowance.” | |
• | We wrote down the carrying value of the 166 residential lots located in Henderson, Nevada by $354,000 during the nine month transition period ended June 30, 2005. | |
• | We wrote down the carrying value of a custom residential property located in Santa Fe, New Mexico by approximately $278,000 during the quarter ended December 31, 2004. | |
• | We sold a 126 unit hotel in Mesquite, Nevada and sustained a loss of approximately $389,000 during the quarter ended March 31, 2005. | |
• | For the nine months ended June 30, 2005 and 2004, we recognized professional fees of approximately $494,000 and $144,000, respectively, which was an increase of approximately $350,000. We expect these fees to continue at the amounts being incurred during the nine months ended June 30, 2005 due to continued costs related to foreclosures and the implementation and maintenance of requirements of the Sarbanes-Oxley Act of 2002. | |
• | Expenses related to the maintenance of real estate held for sale increased by approximately $340,000. This increase includes expenses of approximately $160,000 in property taxes. |
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For the Nine | ||||||||
Month Transition | For the Nine | |||||||
Period Ended | Months Ended | |||||||
June 30, 2005 | June 30, 2004 | |||||||
Distributions of net income available for distribution | $ | 3,694,000 | $ | 3,705,000 | ||||
Distributions in excess of net income available for distribution generated during the period | — | — | ||||||
Total distributions | $ | 3,694,000 | $ | 3,705,000 |
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For the Nine Month | |||||||||
Transition | For the Nine | ||||||||
Period Ended | Months Ended | ||||||||
June 30, | June 30, | ||||||||
2005 | 2004 | ||||||||
Distributions of net income available for distribution | $ | 3,694,000 | $ | 3,705,000 | |||||
Additions to working capital reserves (amount not distributed) | 1,000 | 4,828,000 | |||||||
Gain on sale of real estate held for sale | (1,072,000 | ) | — | ||||||
Loss on sale of real estate held for sale | 400,000 | — | |||||||
Change in operating assets and liabilities: | |||||||||
Net change in other operating assets | 612,000 | 294,000 | |||||||
Net change in accounts payable and accrued liabilities | 92,000 | (16,000 | ) | ||||||
Net change in amounts due to related parties | 354,000 | 2,202,000 | |||||||
Deferred income | 516,000 | 152,000 | |||||||
Net cash provided by operating activities | $ | 4,597,000 | $ | 11,165,000 | |||||
Net cash used in investing activities | $ | (1,430,000 | ) | $ | (6,949,000 | ) | |||
Net cash used in financing activities | $ | (10,135,000 | ) | $ | (11,353,000 | ) | |||
Comparison of Fiscal Years Ended September 30, 2004 and September 30, 2003 |
For the Year Ended | For the Year Ended | |||||||
September 30, | September 30, | |||||||
2004 | 2003 | |||||||
Total revenues | $ | 12,666,000 | $ | 10,365,000 | ||||
Total expenses | $ | 4,099,000 | $ | 6,054,000 | ||||
Net income | $ | 8,567,000 | $ | 4,311,000 | ||||
Net income allocated to members per weighted average membership units | $ | 1.03 | $ | 0.45 | ||||
Annualized rate of return to members(a) | 10.27 | % | 4.45 | % | ||||
Weighted average membership units | 8,339,404 | 9,668,310 | ||||||
Cash distributions | $ | 5,098,000 | $ | 10,364,000 | ||||
Cash distributions per weighted average membership units | $ | 0.61 | $ | 1.07 | ||||
Weighted average term of outstanding loans (in months) | 19 | 13 |
(a) | The annualized rate of return to members is calculated based upon the net GAAP income allocated to members per weighted average units as of September 30, 2004 and 2003 divided by ten (the original $10 cost per unit). |
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• | Provisions for loan losses decreased by $0.3 million to $0.1 million for the year ended September 30, 2004 compared to $0.4 million for the same period in the prior year due to our manager’s determination that our general allowance for loan losses was sufficient to cover any inherent losses related to our loan portfolio. Therefore, the general provision for loan losses was limited to $0.1 million for the year ended September 30, 2004. | |
• | We incurred valuation losses on real estate held for sale of approximately $1.1 million for the year ended September 30, 2004 as compared to $3.4 million in the prior year, a decrease of approximately $2.3 million. The decrease is based on factors specific to each property but generally related to our manager’s evaluation of the real estate held for sale portfolio and the respective estimated values. |
For the Year | For the Year | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2004 | 2003 | |||||||
Distributions of net income available for distribution | $ | 5,098,000 | $ | 8,174,000 | ||||
Distributions in excess of net income available for distribution generated during the period | — | 2,190,000 | ||||||
Total distributions | $ | 5,098,000 | $ | 10,364,000 | ||||
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For the Year | For the Year | ||||||||
Ended | Ended | ||||||||
September 30, | September 30, | ||||||||
2004 | 2003 | ||||||||
Distributions of net income available for distribution | $ | 5,098,000 | $ | 8,174,000 | |||||
Additions to working capital reserves (amount not distributed) | 3,569,000 | — | |||||||
Loss on sale of real estate held for sale | 998,000 | 3,247,000 | |||||||
Change in operating assets and liabilities: | |||||||||
Net change in amounts due from related parties | — | 724,000 | |||||||
Net change in other operating assets | 234,000 | (458,000 | ) | ||||||
Net change in accounts payable and accrued liabilities | 326,000 | 23,000 | |||||||
Net change in amounts due to related parties | 4,235,000 | 748,000 | |||||||
Deferred income | 223,000 | 28,000 | |||||||
Net cash provided by operating activities | $ | 14,683,000 | $ | 12,486,000 | |||||
Net cash provided by (used in) investing activities | $ | (3,759,000 | ) | $ | 16,856,000 | ||||
Net cash used in financing activities | $ | (14,803,000 | ) | $ | (18,397,000 | ) | |||
Comparison of Fiscal Years Ended September 30, 2003 and September 30, 2002 (Unaudited) |
For the Year Ended | For the Year Ended | |||||||
September 30, | September 30, | |||||||
2003 | 2002 | |||||||
(Unaudited) | ||||||||
Total revenues | $ | 10,365,000 | $ | 13,151,000 | ||||
Total expenses | $ | 6,054,000 | $ | 566,000 | ||||
Net income | $ | 4,311,000 | $ | 12,585,000 | ||||
Net income allocated to members per weighted average membership units | $ | 0.45 | $ | 1.23 | ||||
Annualized rate of return to members(a) | 4.45 | % | 12.35 | % | ||||
Weighted average membership units | 9,668,310 | 10,193,776 | ||||||
Weighted average term of outstanding loans (in months) | 13 | 12 |
(a) | The annualized rate of return to members is calculated based upon the net income allocated to members per weighted average units as of September 30, 2003, and 2002 divided by ten (the original $10 cost per unit). |
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Weighted | ||||||||||||||||||||
Number | Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | of Loans | Balance(1) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 2 | $ | 4,343,000 | 8.04% | 6.49% | 79.28% | ||||||||||||||
Commercial(3) | 16 | 47,073,000 | 9.57% | 70.29% | 66.90% | |||||||||||||||
Construction | 3 | 2,298,000 | 12.00% | 3.43% | 62.32% | |||||||||||||||
Land | 5 | 13,253,000 | 12.74% | 19.79% | 58.44% | |||||||||||||||
26 | $ | 66,967,000 | 10.18% | 100.00% | 65.87% | |||||||||||||||
Number of | Weighted Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | Loans | Balance(1) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 4 | $ | 7,272,000 | 8.49 | % | 10.82 | % | 71.05 | % | |||||||||||
Bridge(3) | 5 | 7,063,000 | 10.16 | % | 10.52 | % | 50.78 | % | ||||||||||||
Commercial | 10 | 31,376,000 | 9.99 | % | 46.73 | % | 67.17 | % | ||||||||||||
Construction | 3 | 3,712,000 | 9.40 | % | 5.53 | % | 69.94 | % | ||||||||||||
Land | 7 | 17,725,000 | 12.89 | % | 26.40 | % | 61.67 | % | ||||||||||||
29 | $ | 67,148,000 | 10.58 | % | 100.00 | % | 64.56 | % |
Number of | Weighted Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | Loans | Balance(1) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 10 | $ | 18,810,000 | 9.71 | % | 32.02 | % | 63.01 | % | |||||||||||
Bridge(3) | 9 | 8,687,000 | 10.65 | % | 14.79 | % | 49.98 | % | ||||||||||||
Commercial | 8 | 12,932,000 | 12.22 | % | 22.01 | % | 77.19 | % | ||||||||||||
Construction | 4 | 12,182,000 | 7.64 | % | 20.74 | % | 76.81 | % | ||||||||||||
Land | 4 | 6,134,000 | 12.65 | % | 10.44 | % | 71.42 | % | ||||||||||||
35 | $ | 58,745,000 | 10.28 | % | 100.00 | % | 67.94 | % |
(1) | The table below reconciles the balance of the loan portfolio to the amount shown on the balance sheet to our financial statements. The contra accounts represent the amount of real estate held for sale sold to third parties where we provided financing. GAAP requires the borrower to have a certain percentage equity ownership (typically 20%) to allow our company to record the sale of a property. In |
84
addition, the borrower must maintain a minimum commitment in the property on a continuing basis. Therefore, until the borrower meets this requirement, the investment in the new loan is reduced by the amount originally invested in the real estate held for sale. |
September 30, 2005 | June 30, 2005 | September 30, 2004 | ||||||||||
Balance | Balance | Balance | ||||||||||
Balance per loan portfolio | $ | 66,967,000 | $ | 67,148,000 | $ | 58,745,000 | ||||||
Less: | ||||||||||||
Seller financed loans included in real estate held for sale | (8,634,000 | ) | (10,374,000 | ) | (10,801,000 | ) | ||||||
Allowance for loan losses | (1,896,000 | (1,896,000 | ) | (600,000 | ) | |||||||
Balance per balance sheet | $ | 56,437,000 | $ | 54,878,000 | $ | 47,344,000 |
(2) | Loan to value ratios are based on appraisals obtained at the time of loan origination and may not reflect subsequent changes in value estimates. Such appraisals are generally dated no greater than 12 months prior to the date of loan origination and may have been commissioned by the borrower. The appraisals may be for the current estimate of the as-if developed value of the property, and which approximates the post-construction value of the collateralized property assuming that such property is developed. As-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, selection by a purchaser against multiple alternatives, and successful development by the purchaser; upon which development is dependent on availability of financing. As most of the appraisals will be prepared on an as-if developed basis, if a loan goes into default prior to any development of a project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of the loan. |
(3) | Bridge loans are a subcategory of commercial loans in which we provide interim financing for borrowers seeking long-term, permanent financing. As of September 30, 2005, bridge loans have been reported within the commercial category. |
September 30, 2005 | Portfolio | June 30, 2005 | Portfolio | September 30, 2004 | Portfolio | |||||||||||||||||||
Loan Type | Balance*** | Percentage | Balance*** | Percentage | Balance*** | Percentage | ||||||||||||||||||
First trust deeds | $ | 66,967,000 | 100.00% | $ | 66,645,000 | 99.25 | % | $ | 57,830,000 | 98.44 | % | |||||||||||||
Second trust deeds(4) | — | — | 503,000 | 0.75 | % | 915,000 | 1.56 | % | ||||||||||||||||
$ | 66,967,000 | 100.00% | $ | 67,148,000 | 100.00 | % | $ | 58,745,000 | 100.00 | % |
*** | Please see footnote (1) above. |
(4) | Generally, our second trust deeds are junior to a first trust deed position held by us or our manager. |
2005 | $ | 14,705,000 | ||
2006 | 43,515,000 | |||
2007 | 8,747,000 | |||
$ | 66,967,000 |
2005 | 27,377,000 | |||
2006 | 31,201,000 | |||
2007 | 8,570,000 | |||
$ | 67,148,000 |
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September 30, | September 30, | |||||||||||||||||||||||
2005 | Portfolio | June 30, 2005 | Portfolio | 2004 | Portfolio | |||||||||||||||||||
Balance*** | Percentage | Balance*** | Percentage | Balance*** | Percentage | |||||||||||||||||||
Arizona | $ | 11,386,000 | 17.00 | % | $ | 13,063,000 | 19.45 | % | $ | 11,682,000 | 19.89 | % | ||||||||||||
California | 13,574,000 | 20.27 | % | 19,794,000 | 29.48 | % | 11,475,000 | 19.53 | % | |||||||||||||||
Hawaii | 9,031,000 | 13.49 | % | 4,139,000 | 6.16 | % | 4,139,000 | 7.05 | % | |||||||||||||||
Nevada | 17,623,000 | 26.32 | % | 24,428,000 | 36.38 | % | 23,236,000 | 39.56 | % | |||||||||||||||
New York | 3,249,000 | 4.85 | % | 3,320,000 | 4.94 | % | 3,320,000 | 5.65 | % | |||||||||||||||
North Carolina | 1,000,000 | 1.49 | % | — | — | 90,000 | 0.15 | % | ||||||||||||||||
Oklahoma | 1,237,000 | 1.85 | % | 1,237,000 | 1.84 | % | 996,000 | 1.70 | % | |||||||||||||||
Oregon | 3,200,000 | 4.78 | % | — | — | — | — | |||||||||||||||||
Texas | 2,167,000 | 3.23 | % | 1,167,000 | 1.75 | % | 1,728,000 | 2.94 | % | |||||||||||||||
Utah | — | — | — | — | 1,503,000 | 2.56 | % | |||||||||||||||||
Washington | 2,500,000 | 3.73 | % | — | — | 576,000 | 0.97 | % | ||||||||||||||||
Wisconsin | 2,000,000 | 2.99 | % | — | — | — | — | |||||||||||||||||
$ | 66,967,000 | 100.00 | % | $ | 67,148,000 | 100.00 | % | $ | 58,745,000 | 100.00 | % |
*** | Please see footnote (1) above. |
Balance at | Number of Months | Percentage of Total | ||||||||||||||
Description of Collateral | September 30, 2005 | Maturity Date | Non-Performing | Loan Balance | ||||||||||||
4 cemeteries and 8 mortuaries in Hawaii Part I | $ | 4,139,000 | 03/31/2004 | 18 | 21.00% of Part I | |||||||||||
4 cemeteries and 8 mortuaries in Hawaii Part II | 4,893,000 | 03/31/2004 | 18 | 35.00% of Part II | ||||||||||||
Racetrack and hotel in Vernon, NY | 3,249,000 | 06/30/2005 | 14 | 12.50% | ||||||||||||
$ | 12,281,000 | |||||||||||||||
Balance at | Number of Months | Percentage of Total | ||||||||||||||
Description of Collateral | July 30, 2005 | Maturity Date | Non-Performing | Loan Balance | ||||||||||||
4 cemeteries and 8 mortuaries in Hawaii | $ | 4,139,000 | 03/31/2004 | 15 | 12.17 | % | ||||||||||
Racetrack and hotel in Vernon, NY | 3,320,000 | 06/30/2005 | 10 | 12.77 | % | |||||||||||
25 acres tentatively mapped for 104 single family residential lots in Palm Springs, California | 66,000 | 01/23/2006 | 8 | 5.11 | % | |||||||||||
4 separate commercial parcels in Rancho Cucamunga, Palm Springs and Cathedral City, CA | 51,000 | 04/16/2005 | 3 | 0.72 | % | |||||||||||
Development of 400 single and multi-family residential lots in Cathedral City, California | 503,000 | 04/20/2005 | 8 | 7.74 | % | |||||||||||
$ | 8,079,000 |
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Balance at | Balance at | |||||||||||||||
June 30, | September 30, | |||||||||||||||
Description | 2005 | Provisions | Deductions | 2005 | ||||||||||||
General Valuation Allowance | $ | 671,000 | $ | — | $ | — | $ | 671,000 | ||||||||
Specific allowance | 1,225,000 | — | — | 1,225,000 | ||||||||||||
Total | $ | 1,896,000 | $ | — | $ | — | $ | 1,896,000 |
Balance at | Balance at | |||||||||||||||
September 30, | June 30, | |||||||||||||||
Description | 2004 | Provisions | Deductions | 2005 | ||||||||||||
General Valuation Allowance | $ | 600,000 | $ | 71,000 | — | $ | 671,000 | |||||||||
Specific allowance | — | 1,225,000 | — | 1,225,000 | ||||||||||||
Total | $ | 600,000 | $ | 1,296,000 | — | $ | 1,896,000 |
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• | prevailing economic conditions; | |
• | historical experience; | |
• | the nature and volume of the loan portfolio; | |
• | the borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay; | |
• | evaluation of industry trends; and | |
• | estimated net realizable value of any underlying collateral in relation to the loan amount. |
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Deferred | ||||||||||||||||||||||||||||
Gain | ||||||||||||||||||||||||||||
Balance at | Seller | (Loss) on | Balance at | |||||||||||||||||||||||||
Date | Percentage of | June 30, | Financed | Proceed From | Sale of | September 30, | ||||||||||||||||||||||
Description | Acquired | Ownership | 2005 | Sales | Sales | Real Estate | 2005 | |||||||||||||||||||||
Land containing 82 residential lots in Henderson, Nevada(1) | 2/28/2003 | 66 | % | $ | 5,058,000 | $ | — | $ | (2,561,000 | ) | $ | — | $ | 2,497,000 | ||||||||||||||
126 unit, (207 bed) assisted living facility in Phoenix, Arizona(1) | 9/08/2004 | 10 | % | 886,000 | (1,030,000 | ) | — | 144,000 | — | |||||||||||||||||||
460 acre residential sub-division in Lake Travis, Texas | 8/03/2004 | 34 | % | 1,813,000 | — | — | 1,813,000 | |||||||||||||||||||||
Total | $ | 7,757,000 | $ | (1,030,000 | ) | $ | (2,561,000 | ) | $ | 144,000 | $ | 4,310,000 | ||||||||||||||||
(1) | Sales of Real Estate Held for Sale for the Three Months Ended September 30, 2005: |
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Gain | Write Down | |||||||||||||||||||||||||||||||
Balance at | (Loss) on | on Real | Balance at | |||||||||||||||||||||||||||||
Date | Percentage of | September 30, | Proceeds | Sale of | Estate Held | June 30, | ||||||||||||||||||||||||||
Description | Acquired | Ownership | 2004 | Acquisitions | from Sales | Real Estate | for Sale | 2005 | ||||||||||||||||||||||||
Custom residential property located in Santa Fe, New Mexico(2) | 3/4/2003 | 93 | % | $ | 1,052,000 | $ | — | $ | (798,000 | ) | $ | 24,000 | $ | (278,000 | ) | $ | — | |||||||||||||||
Land containing 166 residential lots in Henderson, Nevada(2) | 2/28/2003 | 66 | % | 5,412,000 | — | — | — | (354,000 | ) | 5,058,000 | ||||||||||||||||||||||
30 unit condominium complex in Las Vegas, Nevada(2) | 2/4/2003 | 17 | % | 216,000 | — | (216,000 | ) | — | — | — | ||||||||||||||||||||||
126 unit, (207 bed) assisted living facility in Phoenix, Arizona(2) | 9/8/2004 | 10 | % | 1,526,000 | — | — | — | (640,000 | ) | 886,000 | ||||||||||||||||||||||
460 acre residential sub-division in Lake Travis, Texas | 8/3/2004 | 34 | % | 1,784,000 | 29,000 | — | — | — | 1,813,000 | |||||||||||||||||||||||
140 unit/224 bed senior facility in Mesa, Arizona(2) | 5/26/2004 | 14 | % | 1,020,000 | — | (1,009,000 | ) | (11,000 | ) | — | — | |||||||||||||||||||||
28 acres of raw land in Mesquite, Nevada(2) | 11/27/2002 | 58 | % | 2,159,000 | — | (3,208,000 | ) | 1,049,000 | — | — | ||||||||||||||||||||||
Hotel/Casino in Las Vegas, Nevada | 2/2/2004 | 27 | % | 2,118,000 | — | (2,118,000 | ) | — | — | — | ||||||||||||||||||||||
126 unit Hotel in Mesquite, Nevada(1)(2) | 10/4/2004 | 32 | % | — | 2,153,000 | (1,764,000 | ) | (389,000 | ) | — | — | |||||||||||||||||||||
Total | $ | 15,287,000 | $ | 2,182,000 | $ | (9,113,000 | ) | $ | 673,000 | $ | (1,272,000 | ) | $ | 7,757,000 | ||||||||||||||||||
(1) | Foreclosures for the nine month transition period ended June 30, 2005: |
(2) | Sales of real estate held for sale for the nine month transition period ended June 30, 2005: |
90
Principal | ||||||||||||||||||||||||
Percentage | Payments | Balance at | ||||||||||||||||||||||
of | Balance at | Received from | September 30, | |||||||||||||||||||||
Description | Date Acquired | Ownership | June 30, 2005 | Acquisitions | Borrower | 2005 | ||||||||||||||||||
An approximately 200-unit apartment complex located in Las Vegas, Nevada | 1/27/2003 | 5 | % | $ | 171,000 | $ | — | $ | (171,000 | ) | $ | — | ||||||||||||
A completed golf course and raw land in Mesquite, Nevada | 11/06/2002 | 55 | % | 1,475,000 | — | (1,475,000 | ) | — | ||||||||||||||||
36 acres of raw land in Mesquite, Nevada | 11/27/2002 | 48 | % | 334,000 | — | (334,000 | ) | — | ||||||||||||||||
Assisted living facility in Las Vegas, Nevada | 9/23/2004 | 52 | % | 7,789,000 | — | (41,000 | ) | 7,748,000 | ||||||||||||||||
126 Unit (207 bed) assisted living facility in Phoenix, AZ | 9/08/2004 | 10 | % | — | 886,000 | — | 886,000 | |||||||||||||||||
Raw land in Mesquite, Nevada | 11/27/2002 | 53 | % | 605,000 | — | (605,000 | ) | — | ||||||||||||||||
$ | 10,374,000 | $ | 886,000 | $ | (2,626,000 | ) | $ | 8,634,000 | ||||||||||||||||
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Principal | ||||||||||||||||||||||||||||
Balance at | Payments | Valuation/ | ||||||||||||||||||||||||||
Percentage of | September 30, | Received from | Other | Balance at | ||||||||||||||||||||||||
Description | Date Acquired | Ownership | 2004 | Acquisitions | Borrower | Adjustments | June 30, 2005 | |||||||||||||||||||||
An approximate 200-unit apartment complex located in Las Vegas, Nevada | 1/27/2003 | 5 | % | $ | 171,000 | — | — | — | $ | 171,000 | ||||||||||||||||||
A completed golf course in Mesquite, Nevada | 11/6/2002 | 55 | % | 1,475,000 | — | — | — | 1,475,000 | ||||||||||||||||||||
36 acres of raw land in Mesquite, Nevada | 11/27/2002 | 48 | % | 334,000 | — | — | — | 334,000 | ||||||||||||||||||||
Assisted living facility in Las Vegas, Nevada | 9/23/2004 | 52 | % | 7,910,000 | — | $ | (121,000 | ) | — | 7,789,000 | ||||||||||||||||||
Raw land in Mesquite, Nevada | 11/27/2002 | 53 | % | 911,000 | — | (306,000 | ) | — | 605,000 | |||||||||||||||||||
$ | 10,801,000 | — | $ | (427,000 | ) | — | $ | 10,374,000 |
92
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Payment Due by Period | ||||||||||||||||
Less Than | More Than | |||||||||||||||
Contractual Obligation | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||
Secured Borrowings | $1,643,000 | $1,643,000 | — | — | — |
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Interest Earning Assets | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | |||||||||||||||||||||
Investments in real estate loans | $ | 14,705,000 | $ | 43,515,000 | $ | 8,747,000 | $ | — | $ | — | $ | — | $ | 66,967,000 | ||||||||||||||
Weighted average interest rates | 13.07 | % | 10.09 | % | 5.80 | % | — | — | — | 10.18 | % |
96
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• | 10 business days following a public announcement that a person or group of related persons has acquired, or obtained the right to acquire, beneficial ownership of more than 15% of the outstanding shares of common stock, with certain exceptions (an “Acquiring Person”); or | |
• | 10 business days (or such date as may be determined by our board of directors prior to the occurrence of the triggering event) following the date that notice of a tender offer or exchange offer by any person (with certain exceptions) is first published, sent or given, that would result in such a person or group becoming an Acquiring Person. |
• | $0.01; or | |
• | 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount, payable in kind, of all non-cash dividends or other distributions, other than dividends payable in shares of common stock, declared on the common stock since the immediately preceding quarterly dividend payment date, or, with respect to the first quarterly dividend payment date, since the first issuance of any share or fraction of a share of Series A preferred stock. |
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• | any person from beneficially or constructively owning shares of our stock that would result in us being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT; and | |
• | any person from transferring shares of our stock if such transfer would result in shares of our stock being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution). |
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• | to rescind as void any vote cast by a purported record transferee prior to our discovery that the shares have been transferred to the trust; and | |
• | to recast the vote in accordance with the desires of the trustee acting for the benefit of the beneficiary of the trust. |
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• | with respect to an annual meeting of stockholders, nominations of individuals for election to our board of directors and the proposal of business to be considered by stockholders may be made only: |
• | pursuant to our notice of the meeting; | |
• | by or at the direction of our board of directors; or | |
• | by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws. |
• | with respect to special meetings of stockholders, only the business specified in our company’s notice of meeting may be brought before the meeting of stockholders and nominations of individuals for election to our board of directors may be made only: |
• | pursuant to our notice of the meeting; | |
• | by or at the direction of our board of directors; or | |
• | provided that our board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws. |
106
• | the act or omission of the director or officer was material to the matter giving rise to the proceeding and |
• | was committed in bad faith; or | |
• | was the result of active and deliberate dishonesty. |
• | the director or officer actually received an improper personal benefit in money, property or services; or | |
• | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
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• | a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by our company as authorized by our charter and bylaws; and | |
• | a written undertaking by or on his or her behalf to repay the amount paid or reimbursed by us if it is ultimately determined that the director or officer did not meet the standard of conduct. |
• | any present or former director or officer who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity; or | |
• | any individual who, while a director of our company and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity. |
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Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
Form of Organization, Purpose and Duration | Vestin Fund I, LLC, or Fund I, is a Nevada limited liability company. Its primary purpose is to generate cash flow and to distribute to its members profits from its operations. Fund I will cease operating on December 31, 2019, unless earlier terminated or extended by a vote of holders of a majority of the outstanding units, or a majority. | Vestin Realty Trust is a Maryland corporation. Vestin Realty Trust intends to operate as a REIT and distribute income to its stockholders in compliance with the Code and to minimize U.S. federal income taxation of Vestin Realty Trust. Vestin Realty Trust will be dissolved on December 31, 2019 unless the holders of a majority of its common stock determine otherwise. | Same as common stock. | |||
Authorized Shares/ Outstanding Units | 7,672,033 units were outstanding as of October 31, 2005. | 25,000,000 shares of common stock are authorized. Upon consummation of the REIT conversion, shares of common stock will be outstanding. | All 1,000,000 shares of preferred stock are designated as Series A preferred stock and authorized in the articles supplementary to be issued solely for the purposes of, and under the terms and conditions set forth in, a Rights Agreement, as described below. The board of directors does not have the right to issue blank check preferred stock. | |||
Public Market | The units are not publicly traded. | We have applied to list the Vestin Realty Trust common stock on the Nasdaq National Market under the symbol “VRTA.” Listing of the | Initially, the Rights (as defined below) will attach to the common stock certificates and no separate Rights certificates will be |
109
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
shares on Nasdaq or a national securities exchange acceptable to Fund I is a condition to consummation of the merger and REIT conversion. | distributed. After a Distribution Date, as defined below, the Series A preferred stock may be listed or publicly traded. | |||||
Investor Limitations | Members must meet certain investor suitability standards to invest in Fund I. | Investors must comply with provisions in the articles of incorporation of Vestin Realty Trust required to maintain status as a REIT. | Same as common stock. | |||
Limitations on Beneficial Ownership | None. | Article VII of the articles of incorporation of Vestin Realty Trust imposes limitations on stock ownership required in part to maintain status as a REIT. Specifically, a 9.8% limit on beneficial ownership by a single stockholder is imposed, which generally can be waived and adjusted by the board of directors provided that no person can acquire more than 15% of Vestin Realty Trust’s stock even with a waiver. | Same as common stock. | |||
Management of the Company — Number and Election of Managers/ Directors | Fund I is managed by a member-manager, currently Vestin Mortgage, an affiliate of Fund I pursuant to the terms of the operating agreement for Fund I. As of record date, Vestin Mortgage held 100,000 units of Fund I, representing approximately one percent of the outstanding units. Vestin Mortgage is indirectly wholly-owned by Michael V. Shustek, the President and Chief Executive Officer of Fund I and Vestin Realty Trust. Vestin Mortgage shall serve as | The assets of Vestin Realty Trust will be managed by Vestin Mortgage pursuant to the terms of a management agreement, a form of which is attached as Annex E to this proxy statement/ prospectus. Vestin Mortgage shall serve as manager until it voluntarily withdraws as manager under the agreement, or until a majority of the outstanding shares entitled to vote terminates the management agreement or the board of directors of Vestin Realty Trust terminates the | Same as common stock. |
110
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
manager until it either voluntarily withdraws or is removed by vote of a majority in interest of the members. A successor or additional manager may be admitted with the consent of a majority and all managers. | management agreement for cause. A successor or additional manager may be obtained by Vestin Realty Trust upon entering into a new or additional management agreement, approved by the board of directors of Vestin Realty Trust. | |||||
Powers of Managers/Directors | The manager has exclusive control over the business and affairs of Fund I; provided, however, that the manager, among other limitations set forth in the operating agreement, may not: (i) impair Fund I’s ability to carry on or change the nature of its business, (ii) admit a manager without prior majority approval; (iii) sell all or substantially all of Fund I’s assets without prior majority approval; (iv) amend the operating agreement (subject to certain exceptions); (v) make loans to the manager or an affiliate of the manager; (vi) grant any affiliate an exclusive right to sell any company assets; or (vii) dissolve, terminate or cause the merger or other reorganization of Fund I without prior majority approval. Fund I does not have its own separate board of directors. | The board of directors of Vestin Realty Trust manages the business and affairs of Vestin Realty Trust. The board has delegated managerial control over the investment of the assets of Vestin Realty Trust to Vestin Mortgage pursuant to the terms of the management agreement. Under the terms of the management agreement, Vestin Mortgage may not (i) do any act which would make it impossible to carry out the ordinary business of Vestin Realty Trust; (ii) sell all or substantially all of the assets of Vestin Realty Trust in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of the unaffiliated directors; or (iii) obtain a loan from Vestin Realty Trust for itself or any affiliate. | Same as common stock. | |||
Removal/Withdrawal of Managers/Directors | A manager may voluntarily withdraw from Fund I upon not less than 120 days written notice and with the affirmative vote or consent of a majority, unless its withdrawal | A director may resign at any time from Vestin Realty Trust by sending a written notice of resignation to the Chairman of or the President. The resignation takes effect | Same as common stock. |
111
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
would neither affect the tax status of Fund I nor materially adversely affect the members. A majority may remove Vestin Mortgage as manager upon the following conditions: (i) if the members have not previously elected an additional manager, the removal will not become effective for at least 120 days following the consent or authorizing vote by the majority; (ii) during such 120 day period, a majority can agree in writing to continue Fund I’s business and, within six months following the termination date of the last remaining manager, elect and admit a new manager who agrees to continue Fund I’s existence; and (iii) the substitution of a new manager shall be effective when the new manager accepts in writing the duties and responsibilities of a manager. | as specified in the notice, or upon receipt by the Chairman or President. A director, or the entire board of directors, may be removed from office at any time, but only for cause, and only by the affirmative vote of at least a majority of the votes of stockholders entitled to be cast in the election of directors. Vestin Realty Trust may terminate the management agreement for cause upon 90 days’ written notice from the board of directors to the manager if (i) a majority of the unaffiliated directors determines the manager has violated the management agreement in any material respect and failed to cure, or commence to cure, such violation within 30 days or (ii) the manager becomes insolvent as set forth in the management agreement. The management agreement will automatically terminate upon the affirmative vote of a majority in interest of stockholders entitled to vote on the matter. | |||||
Management Liability and Exculpation | The manager will have no liability to Fund I unless Fund I establishes that the manager intentionally caused the damages or losses or failed to act with the same degree of care that a reasonably careful person would have used in the same circumstances. | The board of directors and officers of Vestin Realty Trust shall not be liable to Vestin Realty Trust or its stockholders for money damages, to the maximum extent permitted under Maryland law. Determinations made by the board of directors in good faith and in the absence of actual receipt of an improper benefit in money, property or | Same as common stock. |
112
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
service or active and deliberate dishonesty shall be final, binding and conclusive. | ||||||
The manager under the management agreement will not be liable to Vestin Realty Trust and the stockholders for any acts or omissions, errors of judgment or mistakes of law unless they constitute bad faith, willful misconduct, negligence or disregard of their duties under the management agreement. | ||||||
Management Indemnification | Fund I will indemnify the manager, its affiliates and agents for liabilities they incur on Fund I’s behalf in dealing with third parties if they believed the relevant conduct was in Fund I’s best interest, and where there was no fraud and no breach of a fiduciary duty or the operating agreement. | Vestin Realty Trust has the power to the maximum extent permitted by Maryland law to indemnify officers and directors of Vestin Realty Trust from and against any claim or liability which such person may become subject by reason of his status as a present or former officer or director of Vestin Realty Trust. Vestin Realty Trust also has the power, with the approval of the board of directors, to similarly indemnify any person that was an indemnified party under the terms of the operating agreement for Fund I. | Same as common stock. | |||
Under the terms of the management agreement, Vestin Realty Trust has agreed to indemnify the manager and its affiliates from any claim or liability arising out of acts or omissions, errors of judgment or mistakes of law made in good faith in the performance of the manager’s duties under the management |
113
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
agreement and not constituting bad faith, willful misconduct, negligence or disregard of their duties under the management agreement. | ||||||
Voting Rights | Each unit is entitled to one vote on all matters voted upon by members. A vote of the majority is required to: (i) amend the operating agreement (subject to certain exceptions); (ii) dissolve Fund I and wind up its business, (iii) add or remove a manager; (iv) cause Fund I to merge with another company; (v) approve or disapprove the sale of all or substantially all of Fund I’s assets; or (vi) change the nature of Fund I’s business. Members do not otherwise participate in the management of Fund I. | Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. A plurality of votes cast by stockholders is sufficient to elect a director. Pursuant to the terms of Maryland law and the charter of Vestin Realty Trust, Vestin Realty Trust shall not dissolve, terminate, merge, reorganize, sell all or substantially all of its assets, engage in a share exchange or engage in similar transaction in one or a series of related transaction outside of the ordinary course of business unless approved by the affirmative vote of not less than a majority of all votes of stockholders entitled to be cast on the matter. | Each share of Series A preferred stock is entitled to 1,000 votes on all matters submitted to a vote of the stockholders. | |||
Meeting of Holders; Right to Call Special Meetings; Action by Written Consent | Either Vestin Mortgage or members holding at least 10% of the outstanding units may call special meetings of the members. Notice must be given not less than 15 nor more than 60 days before date of meeting. Members may approve by written consent of a majority any matter upon which members are entitled to vote at a duly convened meeting. | Vestin Mortgage has no right to call a special meeting of stockholders. The Chairman, Chief Executive Officer, board of directors and stockholders holding at least 10% of the outstanding common stock may call a special meeting of stockholders. Notice must be given not less than 10 nor more than 90 days before the date of a meeting. The charter of Vestin Realty Trust does not provide for action by less than unanimous written | Same as common stock. |
114
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
consent of the stockholders. | ||||||
Limited Liability | Members are not personally liable for the obligations of Fund I under Nevada law. All written agreements entered into by Fund I are not enforceable against members personally. | Stockholders are not personally liable for the obligations of Vestin Realty Trust under Maryland Law. All written agreements entered into by Vestin Realty Trust are not enforceable against stockholders individually. | Same as common stock. | |||
Access to Books and Records | Members may inspect Fund I’s books and records at its principal office during regular business hours. | Under Maryland law, stockholders may inspect the bylaws, minutes of the proceedings of stockholders, annual statement of affairs and voting trust agreements of Vestin Realty Trust at its principal office during regular business hours. On written request, Vestin Realty Trust, within twenty days, will prepare and have available at its principal office, a statement of the number of shares or other securities issued during a specified period, not to exceed twelve months prior to the date of such request, the consideration received per share and the value of any consideration received other than money. Any stockholder who for more than six months, separately or as part of a group, has owned at least 5% of Vestin Realty Trust’s outstanding common stock is entitled to inspect and copy its books of account and stock ledger and receive a written statement of its affairs and a verified list of its stockholders. | Same as common stock. |
115
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
Management Reports | The manager shall prepare and distribute to members (i) annual reports and audited financial statements within 120 days after the close of each taxable year, (ii) quarterly reports on Form 10-Q if Fund I is a reporting company within 45 days after the end of each quarterly report; and (iii) special reports (which may be included in the quarterly reports) upon the purchase of any mortgage loan if the proceeds of such loans are not fully committed or returned to investors. | As a reporting company under the Exchange Act, Vestin Realty Trust is obligated to file annual reports on Form 10-K and quarterly reports on Form 10-Q. | Same as common stock. | |||
Investment Policies | The manager shall take all reasonable steps to commit 97% of capital contributions to investments in mortgage loans. Mortgage loans shall be selected using certain specified criteria as disclosed in the Fund I prospectus. | Vestin Realty Trust’s investment policies are substantially similar to Fund I’s policies. | Same as common stock. | |||
Distributions and Dividends | Fund I distributes all net income attributable to interest and fee payments it receives from borrowers in cash, or in reinvested distributions, each month in proportion to the members’ capital contribution. Net proceeds received from the repayment of principal, the prepayment of a mortgage loan, or a foreclosure sale may be reinvested or distributed to members at the discretion of the manager. Before making any distributions, Fund I pays its expenses and other liabilities and confirms that its working | Vestin Realty Trust intends to make distributions in compliance with the REIT provisions of the Code and to minimize its U.S. federal income taxation, which generally will require Vestin Realty Trust to distribute substantially all of its income and gain to its stockholders. Distributions will be made on a quarterly basis. | If, as and when authorized by the board, each share of Series A preferred stock will have a minimum cumulative preferential quarterly dividend in an amount per share equal to the greater of (i) $0.01 or (ii) 1,000 times the aggregate per share amount of all cash dividends and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions declared on the common stock since the immediately preceding quarterly |
116
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
capital reserves are adequate. | dividend payment date. | |||||
Distribution Reinvestment Plan | Members who meet investor suitability standards may elect to participate in the distribution reinvestment plan, pursuant to which participating members use distributions to purchase additional units in Fund I. | Vestin Realty Trust will adopt a distribution reinvestment plan, and register the shares issuable thereunder, concurrently with the REIT conversion. | Same as common stock. | |||
Withdrawal & Redemption Rights | A member may withdraw, or partially withdraw, from Fund I and obtain the return of all or part of their capital account within 61 to 91 days after the member delivers written notice of redemption to the manager, subject to the following conditions: (i) redemptions generally cannot occur until one year after the member purchased units; (ii) redemptions are funded only from net proceeds and capital contributions; (iii) redemptions are limited to $100,000 per calendar year for each member; (iv) Fund I is not required to sell any portion of its assets to fund a redemption; (v) no more than 10% of the outstanding capital accounts of members may be redeemed during any calendar year, except upon Fund I’s dissolution. Payments on a redemption are on a “first-come, first-served” basis. If a member’s capital account would have a balance of less than $2,000 following a redemption request, the manager, at its discretion, any distribute | A stockholder has no rights to require Vestin Realty Trust to redeem shares of common stock. Vestin Realty Trust has applied to list its common stock on the Nasdaq National Market. Listing of the shares on Nasdaq or a national securities exchange acceptable to Fund I is a condition to consummation of the merger and REIT conversion. Accordingly, Vestin Realty Trust’s common stock may be sold publicly at market prices then in effect. | The Series A preferred stock may be redeemed at the option of Vestin Realty Trust at any time at a price per share equal to (i) 100% of the product of the Adjustment Number (as defined below) times the average market value and (ii) all accrued and unpaid dividends. Adjustment Number equals 1,000 as adjusted to reflect stock splits, stock dividends and recapitalizations of the common stock and average market value is the average of the closing sale prices of a share of common stock during the 30-day period immediately preceding the redemption date quoted on the NYSE, Nasdaq, or if either is unavailable, as determined by the board in good faith. |
117
Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
to the member the entire balance in the account. These limitations have resulted in fully- subscribed redemption requests through 2018. | ||||||
Restrictions on Assignment and Transfer of Securities | Members may transfer units subject to the following conditions: (i) a member may not transfer any units if, as a result, such member owns fewer than 200 units; (ii) all transferee must meet investor suitability standards; (iii) transfers must comply with securities laws; (iv) all transfers and transferees are subject to the manager’s consent; and (v) any transfer that would cause Fund I to be classified as a publicly traded partnership is prohibited. | Transfers must meet REIT restrictions contained in the articles of incorporation of Vestin Realty Trust in order to ensure that Vestin Realty Trust qualifies as a REIT. Shares held by affiliates, as defined in the Securities Act, of Fund I and Vestin Realty Trust may not be sold, transferred or otherwise disposed of unless made in conformity with the Securities Act. Subject to these limitations, the shares will be freely transferable and may be sold to the public. | Initially, the Rights will attach to the common stock certificates and no separate Rights certificates will be distributed. After a Distribution Date, as defined below, the Series A preferred Stock will be issued upon exercise of a Right. | |||
Conversion Rights | The units are not convertible. | The common stock is not convertible. | The Series A preferred stock is not convertible. | |||
Anti-Takeover Provisions | None. | The articles of incorporation and bylaws of Vestin Realty Trust include certain anti- takeover provisions that could have the effect of delaying, deterring or preventing a transaction or a change in the control, including (i) a staggered board where directors are divided into three classes, with one-third of the directors being elected each year; (ii) directors may only be terminated for cause by a majority vote of the shares entitled to be cast (ii) a Stockholders’ Rights Plan described below; (iii) the limitations on ownership described above; and | Same as common stock. |
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Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
(iv) advanced notice of director nominations and stockholder proposals described below. In addition, Vestin Realty Trust will automatically have the protection of certain anti-takeover provisions of Maryland law, except those provisions, such as the Control Share Acquisition Act, to which Vestin Realty Trust is not currently subject. | ||||||
Stockholders’ Rights Plan | None. | Yes, as described under the Series A preferred stock | In connection with the adoption of the Stockholders’ Rights Plan, the board will authorize and declare a dividend of one right (“Right”) for each share of its outstanding common stock. Each Right entitles the registered holder to purchase from the REIT one one- thousandth of a share of Series A preferred stock (a “Unit”) at a purchase price of $ per Unit. Initially, the Rights will attach to the common stock certificates and no separate Rights certificates will be distributed. The Rights will separate from the common stock upon the “Distribution Date” which occurs upon the earlier of (i) ten business days following a public announcement that a person or group of affiliated persons has acquired or otherwise obtained beneficial ownership of 15% or more of the then-outstanding shares of |
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Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
common stock (an “Acquiring Person”) and (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person becoming an Acquiring Person. The Rights are not exercisable until the Distribution Date. If a person becomes an Acquiring Person, then each holder of a Right will thereafter have the right to receive, upon exercise, Units of Series A preferred stock having a value equal to two times the exercise price of the Right. If, at any time following the date that a person becomes an Acquiring Person, the REIT is acquired in a merger, etc. each holder of a Right has the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. | ||||||
Advance Notice of Director Nominations and Stockholder Proposals | Fund I has no separate board of directors and, accordingly, members do not elect directors. The operating agreement does not provide for submission of member proposals. | Stockholders’ nominees for director and other stockholder proposals may be considered at the annual meeting of stockholders provided a stockholder of record delivers written notice to the Secretary of Vestin Realty Trust at the principal executive offices of Vestin Realty Trust not less than 120 days nor more than 150 days prior to the first anniversary of the date of mailing of the notice for the preceding year’s annual meeting. The | Same as common stock. |
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Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
written notice must contain all information specifically required as set forth in Vestin Realty Trust’s bylaws. | ||||||
Stockholder nominees for directors may be considered at special meetings of stockholders at which directors are to be elected provided that notice is given not earlier than the 150th day prior to the date of such special meeting, and not later than the 120th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting. | ||||||
Rights Upon Liquidation or Dissolution | Members have no preferential rights upon liquidation or dissolution. | Common stockholders have no preferential rights upon liquidation or dissolution. | Upon the dissolution, liquidation or winding up of Vestin Realty Trust, holders of Series A preferred stock are entitled to receive a liquidation preference of $1,000 per share plus accrued and unpaid dividends. | |||
Appraisal Rights | None. | None. | None. | |||
Amendment of Charter, Operating Agreement and Bylaws | The certificate of formation and operating agreement may be amended by a vote of a majority, except that the manager may amend the operating agreement (i) to grant to members additional rights, remedies, powers or authority; (ii) to cure any ambiguity and correct any inconsistencies; (iii) to conform the operating agreement to applicable laws; and (iv) to elect for Fund I to be | The articles of incorporation of Vestin Realty Trust may be amended if advised by the board of directors and approved by the affirmative vote of a majority of all the votes of stockholders entitled to be cast on the matter, except that, to the extent provided by Maryland Law, the board of directors, without any action by the stockholders of Vestin Realty Trust, may amend the articles of | The Rights Agreement may be amended without the approval of the holders of the Rights or the common stock at any time prior to the Distribution Date. After such date, the Rights Agreement may be amended in order to cure any ambiguity, to shorten or lengthen any time period under the Rights Agreement or to make change which does not adversely affect the interests of the holders |
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Vestin Fund I, LLC | Vestin | |||||
Limited Liability Company | Vestin Realty Trust I, Inc. | Realty Trust I, Inc. | ||||
Units | Common Stock | Series A Preferred Stock | ||||
governed by any successor Nevada statute governing limited liabilities company. | incorporation to increase or decrease the aggregate number of shares of stock or the number of shares of common stock of any class or series that Vestin Realty Trust has authority to issue. The bylaws of Vestin Realty Trust may be amended by the board of directors without any action of stockholders except for the following, which requires the affirmative vote of a majority of stockholders to (a) amend Article X (Investment Policy); (b) amend Article XI (Compensation of the Management Company and Conflicts of Interest); and (c) amend Article XV (Amendment of Bylaws). | of Rights (excluding the interests of any Acquiring Person); provided that no amendment may be made to lengthen the time period governing redemption at such time as the Rights are not redeemable or any other time period unless such lengthening is for the purposes of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. |
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• | a citizen or resident of the United States; | |
• | a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state or under the laws of the District of Columbia, unless, in the case of a partnership, Treasury Regulations provide otherwise; | |
• | an estate which is required to pay U.S. federal income tax regardless of the source of its income; or | |
• | a trust whose administration is under the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or which otherwise qualifies as a U.S. person. |
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• | Neither Fund I nor Vestin Realty Trust will recognize any gain or loss as a result of the merger. | |
• | You will not recognize any gain or loss upon the conversion of your Fund I units solely into Vestin Realty Trust common stock pursuant to the merger. | |
• | The aggregate tax basis of the Vestin Realty Trust common stock received by you pursuant to the merger will be equal to the aggregate tax basis in the Fund I units being converted pursuant to the merger. | |
• | The holding period of the Vestin Realty Trust common stock received by you pursuant to the merger will include your holding period with respect to the Fund I units being converted pursuant to the merger. | |
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• | Vestin Realty Trust will be taxed at regular corporate rates on any undistributed “REIT taxable income” and net capital gain. (However, Vestin Realty Trust can elect to “pass through” any of its taxes paid on its undistributed net capital gain income to stockholders on a pro rata basis.) REIT taxable income is the taxable income of the REIT subject to specified adjustments, including a deduction for dividends paid and excluding net capital gain. | |
• | Under some circumstances, Vestin Realty Trust may be subject to the “alternative minimum tax” on its items of tax preference. | |
• | If Vestin Realty Trust has net income from the sale or other disposition of “foreclosure property,” discussed below under “Foreclosure Property,” that is held primarily for sale to customers in the ordinary course of business, or other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on this income. | |
• | Vestin Realty Trust’s net income from “prohibited transactions” will be subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business other than foreclosure property. Under existing law, whether property is held as primarily for sale to customers in the ordinary course of business depends on all the facts and circumstances surrounding the particular transaction. | |
• | If Vestin Realty Trust fails to satisfy either the gross income tests or the asset tests discussed below, but nonetheless maintains its qualification as a REIT because other requirements are met, it will be subject to a penalty tax relating to such failure, computed as described below under “Income Tests Applicable to REITs” and “Asset Tests Applicable to REITs.” Also, if Vestin Realty Trust maintains its REIT status despite its failure to satisfy one or more requirements for REIT qualification, other than the gross income tests and assets tests, Vestin Realty Trust must pay a penalty of $50,000 for each such failure. |
125
• | Vestin Realty Trust will be subject to a 4% excise tax on the excess of the required distribution over the sum of amounts actually distributed and amounts retained for which U.S. federal income tax was paid, if Vestin Realty Trust fails to distribute during each calendar year at least the sum of: |
1. 85% of its REIT ordinary income for the year; | |
2. 95% of its REIT net capital gain income for the year; and | |
3. any undistributed taxable income from prior taxable years. |
• | Vestin Realty Trust will be subject to a 100% penalty tax on some payments it receives (or on certain expenses deducted by a taxable REIT subsidiary) if arrangements among Vestin Realty Trust and its taxable REIT subsidiaries are not comparable to similar arrangements among unrelated parties. | |
• | If Vestin Realty Trust acquires any asset from a taxable “C” corporation (i.e., generally a corporation subject to full corporate-level tax) in a carry-over basis transaction, it could become subject to a corporate-level tax on a subsequent taxable disposition of the asset. Specifically, if Vestin Realty Trust disposes of a built-in-gain asset in a taxable transaction prior to the expiration of a 10-year recognition period, Vestin Realty Trust would be subject to the highest regular corporate rate of tax (currently 35%) on the lesser of the gain recognized and the asset’s built-in gain. Built-in gain is the amount by which an asset’s fair market value exceeds Vestin Realty Trust’s adjusted basis in the asset immediately after Vestin Realty Trust acquires the asset in a carry-over basis transaction, and a built-in-gain asset is an asset with built-in gain potentially subject to this corporate-level tax. The 10-year recognition period generally ends on the tenth anniversary of the date Vestin Realty Trust acquires the built-in-gain asset. Provided that Fund I is not treated as a corporation for U.S. federal income tax purposes for any period prior to the merger, Vestin Realty Trust will not be subject to this “built-in gain” tax on the disposition of assets acquired from Fund I in the merger. | |
• | Vestin Realty Trust will conduct a portion of its business through one or more wholly-owned taxable REIT subsidiaries. Taxable REIT subsidiaries are subject to regular corporate income tax and cannot avail themselves of the dividends paid deduction available to REITs. Vestin Realty Trust’s taxable REIT subsidiaries therefore will pay corporate level tax on their net taxable income from their conduct of a portion of Vestin Realty Trust’s business. In addition, Vestin Realty Trust’s taxable REIT subsidiaries will be limited in their ability to deduct interest and other expenses paid to Vestin Realty Trust. |
1. that is managed by one or more trustees or directors; | |
2. the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; | |
3. that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; | |
4. that is neither a financial institution nor an insurance company subject to applicable provisions of the Code; | |
5. the beneficial ownership of which is held by 100 or more persons; | |
6. during the last half of each taxable year not more than 50% in value of the outstanding shares of which is owned directly or indirectly by five or fewer individuals, as defined in the Code to include specified entities; | |
7. that makes an election to be taxable as a REIT, or has made this election for a previous taxable year which has not been revoked or terminated, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status; |
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8. that uses a calendar year for U.S. federal income tax purposes and complies with the record-keeping requirements of the Code and regulations promulgated thereunder; and | |
9. that meets other applicable tests, described below, regarding the nature of its income and assets and the amount of its distributions. |
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128
129
1. At least 75% of the value of Vestin Realty Trust’s total assets must be represented by real estate assets (which include interests in real property, interests in mortgages on real property, and shares in other REITs), cash, cash items and government securities. Vestin Realty Trust’s real estate assets include, for this purpose, its allocable share of real estate assets held by non-corporate subsidiaries, as well as stock or debt instruments held for less than one year purchased with the proceeds of an offering of shares or long-term debt of Vestin Realty Trust; | |
2. Not more than 25% of Vestin Realty Trust’s total assets may be represented by securities other than those in the 75% asset class; | |
3. Except for equity investments in REITs, qualified REIT subsidiaries or taxable REIT subsidiaries or other securities that qualify as “real estate assets” for purposes of the test described in clause (1): |
• | the value of any one issuer’s securities owned by Vestin Realty Trust may not exceed 5% of the value of Vestin Realty Trust’s total assets; | |
• | Vestin Realty Trust may not own more than 10% of any one issuer’s outstanding voting securities; and | |
• | Vestin Realty Trust may not own more than 10% of the value of the outstanding securities of any one issuer; and |
4. Not more than 20% of Vestin Realty Trust’s total assets may be represented by securities of one or more taxable REIT subsidiaries. |
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1. 85% of its REIT ordinary income for the year; | |
2. 95% of its REIT capital gain net income for the year; and | |
3. any undistributed taxable income from prior taxable years. |
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132
1. will include in its income as long-term capital gains its proportionate share of such undistributed capital gains; and | |
2. will be deemed to have paid its proportionate share of the tax paid by Vestin Realty Trust on such undistributed capital gains and receive a credit or a refund to the extent that the tax paid by Vestin Realty Trust exceeds the stockholder’s tax liability on the undistributed capital gain. |
1. a 15% rate gain distribution, which would be taxable to most non-corporate stockholders at a maximum rate of 15%; or | |
2. an “unrecaptured Section 1250 gain” distribution, which would be taxable to non-corporate stockholders at a maximum rate of 25%. |
1. the amount of cash and the fair market value of any property received on the sale or other disposition; and | |
2. the holder’s adjusted basis in the shares for tax purposes. |
133
1. it qualified as a REIT only by reason of Section 856(h)(3) of the Code, which provides that stock owned by pension trusts will be treated, for purposes of determining if the REIT is closely held, as owned by the beneficiaries of the trust rather than by the trust itself; and | |
2. either (a) at least one pension trust holds more than 25% of the value of the REIT’s stock or (b) a group of pension trusts each individually holding more than 10% of the value of the REIT’s shares, collectively owns more than 50% of the value of the REIT’s shares. |
1. the payee fails to furnish a taxpayer identification number, or TIN, to the payer or to establish an exemption from backup withholding; | |
2. the IRS notifies the payer that the TIN furnished by the payee is incorrect; | |
3. there has been a notified payee under-reporting with respect to interest, dividends or original issue discount described in Section 3406 of the Code; or |
134
4. there has been a failure of the payee to certify under the penalty of perjury that the payee is not subject to backup withholding under the Code. |
135
• | each director; | |
• | our chief executive officer and our other executive officers; and | |
• | all executive officers and directors as a group; and |
Securities | ||||||||
Beneficially Owned | ||||||||
Prior to and After | ||||||||
the REIT Conversion | ||||||||
Beneficial Owner | Number | Percent | ||||||
Michael V. Shustek(1) | 101,010 | 1.3 | % | |||||
John W. Alderfer | — | — | ||||||
Robert J. Aalberts | — | — | ||||||
Frederick J. Zaffarese Leavitt | — | — | ||||||
Roland M. Sansone | — | — | ||||||
All directors and executive officers as a group (5 persons) | 101,010 | 1.3 | % |
(1) | Includes 100,000 units held by Vestin Mortgage and 1,010 units held by The Michael V. Shustek Trust. Mr. Shustek is the Chairman, President and Chief Executive Officer of Vestin Mortgage and indirectly owns all of the capital stock of Vestin Mortgage. Mr. Shustek is the trustee of the Michael V. Shustek Family Trust. |
136
By Order of the Board of Directors of Vestin Mortgage, Inc., as the sole manager of Vestin Fund I, LLC | |
Michael V. Shustek | |
Chairman, President and Chief Executive Officer |
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Page | ||||||
FOR THE NINE MONTH TRANSITION PERIOD ENDED JUNE 30, 2005 | ||||||
F-2 | ||||||
FINANCIAL STATEMENTS | ||||||
F-3 | ||||||
F-4 | ||||||
F-5 | ||||||
F-6 | ||||||
F-8 | ||||||
SUPPLEMENTARY INFORMATION | ||||||
F-28 | ||||||
F-29 | ||||||
F-30 | ||||||
F-31 | ||||||
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) | ||||||
FINANCIAL STATEMENTS | ||||||
F-32 | ||||||
F-33 | ||||||
F-34 | ||||||
F-35 | ||||||
F-36 |
F-1
/s/ Moore Stephens Wurth Frazer and Torbet, LLP |
F-2
June 30, | September 30, | |||||||||
2005 | 2004 | |||||||||
ASSETS | ||||||||||
Cash | $ | 2,862,000 | $ | 9,830,000 | ||||||
Certificates of deposit | 300,000 | 300,000 | ||||||||
Interest and other receivables | 682,000 | 1,327,000 | ||||||||
Note receivable, net of allowance of $2,000,000 at June 30, 2005 and $0 at September 30, 2004 | 119,000 | 119,000 | ||||||||
Real estate held for sale | 7,757,000 | 15,287,000 | ||||||||
Real estate held for sale — seller financed | 10,374,000 | 10,801,000 | ||||||||
Investment in mortgage loans, net of allowance for loan losses of $1,896,000 at June 30, 2005, and $600,000 at September 30, 2004 | 54,878,000 | 47,344,000 | ||||||||
Assets under secured borrowings | 11,391,000 | 6,134,000 | ||||||||
Total assets | $ | 88,363,000 | $ | 91,142,000 | ||||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||||
Liabilities | ||||||||||
Accounts payable and accrued liabilities | $ | 443,000 | $ | 351,000 | ||||||
Due to Manager | 922,000 | 652,000 | ||||||||
Due to Vestin Group | 2,000 | 5,000 | ||||||||
Due to Vestin Fund II | 1,560,000 | 1,470,000 | ||||||||
Due to Vestin Fund III | 6,000 | — | ||||||||
Secured borrowings | 11,391,000 | 6,134,000 | ||||||||
Deferred income | 768,000 | 252,000 | ||||||||
Total liabilities | 15,092,000 | 8,864,000 | ||||||||
Members’ equity — authorized 10,000,000 units, 7,686,323 units and 8,354,057 units issued at $10 per unit and outstanding at June 30, 2005 and September 30, 2004, respectively | 73,271,000 | 82,278,000 | ||||||||
Total members’ equity | 73,271,000 | 82,278,000 | ||||||||
Total liabilities and members’ equity | $ | 88,363,000 | $ | 91,142,000 | ||||||
F-3
For the Transition | For the Nine | For the Year | For the Year | |||||||||||||||
Period Ended | Months Ended | Ended | Ended | |||||||||||||||
June 30, | June 30, | September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2004 | 2003 | |||||||||||||||
(Unaudited) | ||||||||||||||||||
Revenues | ||||||||||||||||||
Interest income from investment in mortgage loans | $ | 4,303,000 | $ | 5,781,000 | $ | 7,519,000 | $ | 9,194,000 | ||||||||||
Loan fees | — | — | 72,000 | 527,000 | ||||||||||||||
Gain on sale of real estate held for sale | 1,072,000 | — | — | — | ||||||||||||||
Revenue related to the sale of real estate | — | 4,667,000 | 4,667,000 | — | ||||||||||||||
Other income | 694,000 | 397,000 | 408,000 | 644,000 | ||||||||||||||
Total revenues | 6,069,000 | 10,845,000 | 12,666,000 | 10,365,000 | ||||||||||||||
Operating expenses | ||||||||||||||||||
Management fees | 201,000 | 191,000 | 255,000 | 253,000 | ||||||||||||||
Provision for loan losses | 1,296,000 | 100,000 | 100,000 | 400,000 | ||||||||||||||
Interest expense | 408,000 | 1,481,000 | 1,789,000 | 1,121,000 | ||||||||||||||
Loss on sale of real estate held for sale | 400,000 | — | 463,000 | — | ||||||||||||||
Write down on real estate held for sale | 1,271,000 | 521,000 | 535,000 | 3,383,000 | ||||||||||||||
Write off of deferred bond offering costs | — | — | — | 204,000 | ||||||||||||||
Expenses related to real estate held for sale | 708,000 | 368,000 | 597,000 | 467,000 | ||||||||||||||
Professional fees | 494,000 | 144,000 | 230,000 | 195,000 | ||||||||||||||
Other | 163,000 | 128,000 | 130,000 | 31,000 | ||||||||||||||
Total operating expenses | 4,941,000 | 2,933,000 | 4,099,000 | 6,054,000 | ||||||||||||||
NET INCOME | $ | 1,128,000 | $ | 7,912,000 | $ | 8,567,000 | $ | 4,311,000 | ||||||||||
Net income allocated to members | $ | 1,128,000 | $ | 7,912,000 | $ | 8,567,000 | $ | 4,311,000 | ||||||||||
Net income allocated to members per | ||||||||||||||||||
weighted average membership units | $ | 0.14 | $ | 0.94 | $ | 1.03 | $ | 0.45 | ||||||||||
Weighted average membership units | 7,919,354 | 8,398,813 | 8,339,404 | 9,668,310 | ||||||||||||||
F-4
Units | Amount | |||||||
Members’ equity at September 30, 2002 | 9,928,052 | $ | 98,999,000 | |||||
Distributions | — | (10,364,000 | ) | |||||
Capital contribution from Manager | — | 1,600,000 | ||||||
Reinvestments of distributions | 231,487 | 2,315,000 | ||||||
Members’ redemptions | (1,034,973 | ) | (10,347,000 | ) | ||||
Net income | — | 4,312,000 | ||||||
Members’ equity at September 30, 2003 | 9,124,566 | 86,515,000 | ||||||
Distributions | — | (5,098,000 | ) | |||||
Reinvestments of distributions | 85,761 | 857,000 | ||||||
Members’ redemptions | (856,270 | ) | (8,563,000 | ) | ||||
Net income | — | 8,567,000 | ||||||
Members’ equity at September 30, 2004 | 8,354,057 | 82,278,000 | ||||||
Distributions | — | (3,694,000 | ) | |||||
Reinvestments of distributions | 48,930 | 489,000 | ||||||
Members’ redemptions | (716,664 | ) | (6,930,000 | ) | ||||
Net income | — | 1,128,000 | ||||||
Members’ equity at June 30, 2005 | 7,686,323 | $ | 73,271,000 | |||||
F-5
For the Transition | For the Nine | For the Year | For the Year | ||||||||||||||||
Period Ended | Months Ended | Ended | Ended | ||||||||||||||||
June 30, | June 30, | September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2004 | 2003 | ||||||||||||||||
(Unaudited) | |||||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net income | $ | 1,128,000 | $ | 7,912,000 | $ | 8,567,000 | $ | 4,311,000 | |||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||
Write down of real estate held for sale | 1,271,000 | 521,000 | — | 3,259,000 | |||||||||||||||
Write-off of deferred bond offering costs | — | — | — | 204,000 | |||||||||||||||
Loss on sale of real estate held for sale | 400,000 | — | 998,000 | 3,247,000 | |||||||||||||||
Gain on sale of real estate held for sale | (1,072,000 | ) | — | — | — | ||||||||||||||
Provision for loan losses | 1,296,000 | 100,000 | 100,000 | 400,000 | |||||||||||||||
Change in operating assets and liabilities: | |||||||||||||||||||
Interest and other receivables | 612,000 | 286,000 | 226,000 | (450,000 | ) | ||||||||||||||
Due to Manager | 270,000 | 98,000 | 260,000 | 272,000 | |||||||||||||||
Due to related parties | 84,000 | 2,104,000 | 3,975,000 | 476,000 | |||||||||||||||
Accounts payable and accrued liabilities | 92,000 | (16,000 | ) | 326,000 | 23,000 | ||||||||||||||
Note receivable from manager | — | — | — | 724,000 | |||||||||||||||
Prepaid expenses | — | 8,000 | 8,000 | (8,000 | ) | ||||||||||||||
Deferred income | 516,000 | 152,000 | 223,000 | 28,000 | |||||||||||||||
Net cash provided by operating activities | 4,597,000 | 11,165,000 | 14,683,000 | 12,486,000 | |||||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchase of investments in mortgage loans | (20,565,000 | ) | (38,604,000 | ) | (39,473,000 | ) | (17,298,000 | ) | |||||||||||
Purchase of investments in mortgage loans: | |||||||||||||||||||
from other related party | — | (350,000 | ) | (350,000 | ) | (6,509,000 | ) | ||||||||||||
from Vestin Fund II | (600,000 | ) | — | — | (14,470,000 | ) | |||||||||||||
from the manager | — | — | — | (479,000 | ) | ||||||||||||||
Proceeds from loan payoff | 11,490,000 | 34,229,000 | 35,011,000 | 35,079,000 | |||||||||||||||
Sale of investments in mortgage loans | — | — | 5,528,000 | 1,030,000 | |||||||||||||||
Proceeds from sale of mortgage loans to: | |||||||||||||||||||
Vestin Fund II | — | — | — | 13,112,000 | |||||||||||||||
Vestin Group | — | — | — | 4,500,000 | |||||||||||||||
Other related party | — | — | — | 291,000 | |||||||||||||||
Proceeds from sale of investment in real estate | 8,245,000 | — | — | 1,600,000 | |||||||||||||||
Cash outlays for real estate held for sale | — | (3,099,000 | ) | (5,350,000 | ) | — | |||||||||||||
Proceeds from redemptions of certificates of deposit | — | 875,000 | 875,000 | — | |||||||||||||||
Net cash provided by (used in) investing activities | (1,430,000 | ) | (6,949,000 | ) | (3,759,000 | ) | 16,856,000 | ||||||||||||
F-6
For the Transition | For the Nine | For the Year | For the Year | ||||||||||||||||
Period Ended | Months Ended | Ended | Ended | ||||||||||||||||
June 30, | June 30, | September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2004 | 2003 | ||||||||||||||||
(Unaudited) | |||||||||||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Payment on note payable | — | — | (2,000,000 | ) | — | ||||||||||||||
Members’ distributions, net of reinvestments | (3,205,000 | ) | (3,057,000 | ) | (4,241,000 | ) | (8,049,000 | ) | |||||||||||
Members’ redemptions | (6,930,000 | ) | (8,296,000 | ) | (8,562,000 | ) | (10,348,000 | ) | |||||||||||
Net cash used in financing activities | (10,135,000 | ) | (11,353,000 | ) | (14,803,000 | ) | (18,397,000 | ) | |||||||||||
NET CHANGE IN CASH | (6,968,000 | ) | (7,137,000 | ) | (3,879,000 | ) | 10,945,000 | ||||||||||||
Cash, beginning of period | 9,830,000 | 13,708,000 | 13,708,000 | 2,763,000 | |||||||||||||||
Cash, end of period | $ | 2,862,000 | $ | 6,571,000 | $ | 9,829,000 | $ | 13,708,000 | |||||||||||
Supplemental disclosures of cash flows information: | |||||||||||||||||||
Non-cash investing and financing activities: | |||||||||||||||||||
Deferred offering costs paid by manager | $ | — | $ | — | $ | — | $ | 125,000 | |||||||||||
Change in loans funded through secured borrowing | $ | 5,256,000 | $ | 1,319,000 | $ | 14,189,000 | $ | 13,686,000 | |||||||||||
Real estate held for sale acquired through foreclosure | $ | 2,149,000 | $ | 3,271,000 | $ | 6,580,521 | $ | 36,920,000 | |||||||||||
Loans rewritten with same or similar property as collateral | $ | 868,000 | $ | 5,579,000 | $ | 5,759,000 | $ | 14,348,000 | |||||||||||
Reduction in Note Payable to Fund II due to valuation allowance on real estate held for sale | $ | — | $ | 455,000 | $ | 455,000 | $ | — | |||||||||||
Investment in real estate held for sale reclassified from interest receivable | $ | 33,000 | $ | — | $ | — | $ | — | |||||||||||
Investment in mortgage loans on real estate acquired for investments in real estate held for sale | $ | — | $ | — | $ | — | $ | 479,000 | |||||||||||
Note receivable related to capital contribution by Manager | $ | — | $ | — | $ | — | $ | 724,000 | |||||||||||
In substance payoff of payable to Manager related to capital contribution by Manager | $ | — | $ | — | $ | — | $ | 876,000 | |||||||||||
Sale of rights to receive proceeds of guarantee | $ | — | $ | — | $ | — | $ | 3,084,000 | |||||||||||
Note receivable from guarantor in exchange for release of guarantee | $ | — | $ | — | $ | 119,000 | $ | — | |||||||||||
Sale of real estate held for sale where we provide the financing | $ | — | $ | — | $ | 7,910,000 | $ | — | |||||||||||
F-7
Organization |
F-8
Management Estimates |
Cash and Cash Equivalents |
Revenue Recognition |
Investments in Real Estate Loans |
F-9
Allowance for Loan Losses |
• | Declines in real estate market conditions which can cause a decrease in expected market value. | |
• | Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes. | |
• | Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances. |
F-10
Real Estate Held For Sale |
• | Management commits to a plan to sell the properties; | |
• | The property is available for immediate sale in its present condition subject only to terms that are usual and customary; | |
• | An active program to locate a buyer and other actions required to complete a sale have been initiated; | |
• | The sale of the property is probable; | |
• | The property is being actively marketed for sale at a reasonable price; and | |
• | Withdrawal or significant modification of the sale is not likely. |
Real Estate Held For Sale — Seller Financed |
Classification of Operating Results from Real Estate Held for Sale |
F-11
Secured Borrowings |
Fair Value of Financial Instruments |
(a) Certificate of Deposits and Short Term Investments: The carrying amount of these instruments are at amortized cost which approximates fair value. | |
(b) Investment in Real estate loans: The carrying value of these instruments, net of the allowance for loan losses, approximates the fair value due to their short-term maturities. Fair values for loans, which are delinquent and/or in foreclosure are indeterminable at this time as no ready market exists for these loans, but fair value may be significantly below the current carrying value. | |
(c) Assets under Secured Borrowing: The carrying amount of these instruments approximate fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. |
F-12
Net Income Allocated to Members |
Segments |
Income Taxes |
Reclassifications |
F-13
Number | Weighted | |||||||||||||||||||
of | Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | Loans | Balance(1) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 4 | $ | 7,272,000 | 8.49 | % | 10.82 | % | 71.05 | % | |||||||||||
Bridge(3) | 5 | 7,063,000 | 10.16 | % | 10.52 | % | 50.78 | % | ||||||||||||
Commercial | 10 | 31,376,000 | 9.99 | % | 46.73 | % | 67.17 | % | ||||||||||||
Construction | 3 | 3,712,000 | 9.40 | % | 5.53 | % | 69.94 | % | ||||||||||||
Land | 7 | 17,725,000 | 12.89 | % | 26.40 | % | 61.67 | % | ||||||||||||
29 | $ | 67,148,000 | 10.58 | % | 100.00 | % | 64.56 | % | ||||||||||||
Number | Weighted | |||||||||||||||||||
of | Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | Loans | Balance(1) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 10 | $ | 18,810,000 | 9.71 | % | 32.02 | % | 63.01 | % | |||||||||||
Bridge(3) | 9 | 8,687,000 | 10.65 | % | 14.79 | % | 49.98 | % | ||||||||||||
Commercial | 8 | 12,932,000 | 12.22 | % | 22.01 | % | 77.19 | % | ||||||||||||
Construction | 4 | 12,182,000 | 7.64 | % | 20.74 | % | 76.81 | % | ||||||||||||
Land | 4 | 6,134,000 | 12.65 | % | 10.44 | % | 71.42 | % | ||||||||||||
35 | $ | 58,745,000 | 10.28 | % | 100.00 | % | 67.94 | % | ||||||||||||
(1) | The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Balance Sheet. The contra accounts represent the amount of real estate held for sale sold to third parties where we provided financing. GAAP requires the borrower to have a certain percentage equity ownership (typically 20%) to allow us to record the sale of a property. In addition, the borrower must maintain a minimum commitment in the property on a continuing basis. Therefore, until the borrower meets these requirements, the investment in the new loan is reduced by the amount originally invested in the real estate held for sale. |
June 30, 2005 | September 30, 2004 | |||||||
Balance | Balance | |||||||
Balance per loan portfolio | $ | 67,148,000 | $ | 58,745,000 | ||||
Less: | ||||||||
Seller financed loans included in real estate held for sale | (10,374,000 | ) | (10,801,000 | ) | ||||
Allowance for loan losses | (1,896,000 | ) | (600,000 | ) | ||||
Balance per accompanying Balance Sheet | $ | 54,878,000 | $ | 47,344,000 | ||||
F-14
(2) | Loan to value ratios are based on appraisals obtained at the time of loan origination and may not reflect subsequent changes in value estimates. Such appraisals, which may be commissioned by the borrower and also may precede the placement of the loans with us, are generally dated no greater than 12 months prior to the date of loan origination. The appraisals may be for the current estimate of the “as-if developed” value of the property, which approximates the post-construction value of the collateralized property assuming that such property is developed. “As-if developed” values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, and successful development by the purchaser; upon which development is dependent on availability of financing. As most of the appraisals will be prepared on an “as-if developed” basis, if a loan goes into default prior to any development of a project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of the loan. |
(3) | Bridge loans are a subcategory of commercial loans in which we provide interim financing for borrowers seeking long-term, permanent financing. Going forward, we expect to report bridge loans within the commercial category. |
June 30, | September 30, | |||||||||||||||
2005 | Portfolio | 2004 | Portfolio | |||||||||||||
Loan Type | Balance* | Percentage | Balance* | Percentage | ||||||||||||
First trust deeds | $ | 66,645,000 | 99.25 | % | $ | 57,830,000 | 98.44 | % | ||||||||
Second trust deeds** | 503,000 | 0.75 | % | 915,000 | 1.56 | % | ||||||||||
$ | 67,148,000 | 100.00 | % | $ | 58,745,000 | 100.00 | % | |||||||||
* | See note (1) above |
** | Generally, our Second trust deeds are junior to a first trust deed position held by either us or our Manager. |
2005 | $ | 27,377,000 | ||
2006 | 31,201,000 | |||
2007 | 8,570,000 | |||
$ | 67,148,000 | |||
F-15
June 30, | September 30, | |||||||||||||||
2005 | Portfolio | 2004 | Portfolio | |||||||||||||
Balance* | Percentage | Balance* | Percentage | |||||||||||||
Arizona | $ | 13,063,000 | 19.45 | % | $ | 11,682,000 | 19.89 | % | ||||||||
California | 19,794,000 | 29.48 | % | 11,475,000 | 19.53 | % | ||||||||||
Hawaii | 4,139,000 | 6.16 | % | 4,139,000 | 7.05 | % | ||||||||||
Nevada | 24,428,000 | 36.38 | % | 23,236,000 | 39.56 | % | ||||||||||
New York | 3,320,000 | 4.94 | % | 3,320,000 | 5.65 | % | ||||||||||
North Carolina | — | — | 90,000 | 0.15 | % | |||||||||||
Oklahoma | 1,237,000 | 1.84 | % | 996,000 | 1.70 | % | ||||||||||
Texas | 1,167,000 | 1.75 | % | 1,728,000 | 2.94 | % | ||||||||||
Utah | — | — | 1,503,000 | 2.56 | % | |||||||||||
Washington | — | — | 576,000 | 0.97 | % | |||||||||||
$ | 67,148,000 | 100.00 | % | $ | 58,745,000 | 100.00 | % | |||||||||
* | See note (1) above |
Balance | Number of | Percentage of | ||||||||||||||
June 30, | Months Non- | Total Loan | ||||||||||||||
Description of Collateral | 2005 | Maturity Date | Performing | Balance | ||||||||||||
4 cemeteries and 8 mortuaries in Hawaii | $ | 4,139,000 | 03/31/2004 | 15 | 12.17 | % | ||||||||||
Racetrack and hotel in Vernon, NY | 3,320,000 | 06/30/2005 | 10 | 12.77 | % | |||||||||||
25 acres tentatively mapped for 104 single family residential lots in Palm Springs, California | 66,000 | 01/23/2006 | 8 | 5.11 | % | |||||||||||
4 separate commercial parcels in Rancho Cucamonga, Palm Springs, and Cathedral City, CA | 51,000 | 04/16/2005 | 3 | 0.72 | % | |||||||||||
Development of 400 single and multi-family residential lots in Cathedral City, California | 503,000 | 04/20/2005 | 8 | 7.74 | % | |||||||||||
$ | 8,079,000 | |||||||||||||||
F-16
Balance | Balance | |||||||||||||||
September 30, | June 30, | |||||||||||||||
Description | 2004 | Provisions | Deductions | 2005 | ||||||||||||
General Valuation Allowance | $ | 600,000 | $ | 71,000 | $ | — | $ | 671,000 | ||||||||
Specific allowance | — | 1,225,000 | — | 1,225,000 | ||||||||||||
Total | $ | 600,000 | $ | 1,296,000 | $ | — | $ | 1,896,000 | ||||||||
Asset Quality and Loan Reserves |
F-17
• | prevailing economic conditions; | |
• | historical experience; | |
• | the nature and volume of the loan portfolio; | |
• | the borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay; | |
• | evaluation of industry trends; and | |
• | estimated net realizable value of any underlying collateral in relation to the loan amount. |
Transactions with Management and Others |
F-18
Transactions with the Funds |
Transactions with other related parties |
F-19
Gain | Write Down | |||||||||||||||||||||||||||||||
Percentage | Balance | (Loss) on | on Real | Balance | ||||||||||||||||||||||||||||
Date | of | September 30, | Proceed | Sale of | Estate Held | June 30, | ||||||||||||||||||||||||||
Description | Acquired | Ownership | 2004 | Acquisitions | from Sales | Real Estate | for Sale | 2005 | ||||||||||||||||||||||||
Custom residential property located in Santa Fe, New Mexico(2) | 3/4/2003 | 93 | % | $ | 1,052,000 | $ | — | $ | (798,000 | ) | $ | 24,000 | $ | (278,000 | ) | $ | — | |||||||||||||||
Land containing 166 residential lots in Henderson, Nevada(2) | 2/28/2003 | 66 | % | 5,412,000 | — | — | — | (354,000 | ) | 5,058,000 | ||||||||||||||||||||||
30 unit condominium complex in Las Vegas, Nevada(2) | 2/4/2003 | 17 | % | 216,000 | — | (216,000 | ) | — | — | — | ||||||||||||||||||||||
126 unit, (207 bed) assisted living facility in Phoenix, Arizona(2) | 9/8/2004 | 10 | % | 1,526,000 | — | — | — | (640,000 | ) | 886,000 | ||||||||||||||||||||||
460 acre residential sub-division in Lake Travis, Texas | 8/3/2004 | 34 | % | 1,784,000 | 29,000 | — | — | — | 1,813,000 | |||||||||||||||||||||||
140 unit/224 bed senior facility in Mesa, Arizona(2) | 5/26/2004 | 14 | % | 1,020,000 | — | (1,009,000 | ) | (11,000 | ) | — | — | |||||||||||||||||||||
28 acres of raw land in Mesquite, Nevada(2) | 11/27/2002 | 58 | % | 2,159,000 | — | (3,208,000 | ) | 1,049,000 | — | — | ||||||||||||||||||||||
Hotel/ Casino in Las Vegas, Nevada | 2/2/2004 | 27 | % | 2,118,000 | — | (2,118,000 | ) | — | — | — | ||||||||||||||||||||||
126 unit Hotel in Mesquite, Nevada(1)(2) | 10/4/2004 | 32 | % | — | 2,153,000 | (1,764,000 | ) | (389,000 | ) | — | — | |||||||||||||||||||||
Total | $ | 15,287,000 | $ | 2,182,000 | $ | (9,113,000 | ) | $ | 673,000 | $ | (1,272,000 | ) | $ | 7,757,000 | ||||||||||||||||||
During October 2004, we took title to 32% of a 126 unit hotel in Mesquite, Nevada. Vestin Fund II owns the other 68%. In January 2005, we and Fund II entered into an agreement to sell the property for $5.5 million, as noted below in (2). In addition, during June 2005, we entered into a settlement agreement with the guarantors of the loan in the amount of $2,000,000 in exchange for a release of their personal guarantees of which our share was approximately $1,350,000. The balance is secured by a second trust deed and is payable in a first installment of $100,000 due in July 2005 and interest only payments of 5% on $1,100,000 from July 2005 through July 2008, at which time the entire balance is due. The guarantors are entitled to a discount of $782,000 from the principal balance in the event the entire balance is paid by December 2006. The first installment was received and recognized as income in July 2005. Our portion was $32,000. Payments will be recognized as revenue when received. |
During March 2005, the custom residential property located in Santa Fe, New Mexico was sold for $860,000 of which our proceeds were approximately $798,000. During the quarter ended December 31, 2004, we wrote down the carrying value of this property by approximately $278,000 based on our estimate of the net realizable value of the property. Consequently, as a result of completion of the sale we recorded a gain of approximately $24,000. |
F-20
During March 2005, the 126 unit hotel in Mesquite, Nevada was sold for $5.5 million of which our share of the proceeds was approximately $1.8 million which resulted in a loss upon sale of approximately $389,000. | |
During September 2004 we entered into an agreement to sell the remaining 28 acres of raw land in Mesquite, Nevada for $6.2 million, of which our portion was approximately $3.2 million. During the prior quarter, $150,000 was released from escrow representing an early release of funds. The transaction was finalized during December 2004 and resulted in a gain of $1.0 million. | |
During July 2003, we and Fund II entered into an agreement for the sale of a portion of our interest in 40 acres of land containing 354 residential lots in Henderson, Nevada. The agreement requires the buyer to purchase 138 lots for cash and gives the buyer an option to purchase the remaining 216 lots over the next three years at a predetermined price, which may be adjusted for potential value increases. Through June 30, 2005, the buyer has purchased 188 lots of the 354 lots. We and Fund II recorded a valuation adjustment for the transition period ended June 30, 2005 of $354,000 and $180,000, respectively, to write down the carrying value of our respective interest in the parcel to the amount corresponding to the negotiated sale and option price. During July 2005, the buyer exercised its option to purchase an additional 84 lots for approximately $3.85 million, of which we received approximately $2.6 million, resulting in no further gain or loss. | |
During transition period ended June 30, 2005, sold our portion of the 30-unit condominium complex in Las Vegas, Nevada for $215,000. The transaction did not result in any gains or losses. | |
During November 2004, we and Fund II sold the 140 Unit/224 bed senior facility in Mesa, Arizona of which our consideration received totaled $1,009,000. We received cash of $160,000 and held back a promissory note and first deed of trust totaling $905,000. This transaction resulted in a loss of $11,000. The promissory note is payable in interest only payments of 8% on the principal balance outstanding. Commencing June 25, 2005 through May 25, 2006, monthly payments shall increase to $15,000 and be applied to principal and accrued interest. Beginning June 25, 2006 through May 25, 2009 payments are to increase to $20,000 monthly. Due to uncertainty of collectibility, we have provided a valuation allowance for the entire balance of the promissory note. Payments will be recognized when received as a decrease to the value of the real estate held for sale. |
Transactions subsequent to June 30, 2005: |
F-21
Principal | ||||||||||||||||||||||||||||
Payments | ||||||||||||||||||||||||||||
Percentage | Balance at | Received | Valuation/ | |||||||||||||||||||||||||
Date | of | September 30, | from | Other | Balance at | |||||||||||||||||||||||
Description | Acquired | Ownership | 2004 | Acquisitions | Borrower | Adjustments | June 30, 2005 | |||||||||||||||||||||
An approximate 200-unit apartment complex located in Las Vegas, Nevada | 1/27/2003 | 5 | % | $ | 171,000 | $ | — | $ | — | $ | — | $ | 171,000 | |||||||||||||||
A completed golf course and raw land in Mesquite, Nevada | 11/6/2002 | 55 | % | 1,475,000 | — | — | — | 1,475,000 | ||||||||||||||||||||
36 acres of raw land in Mesquite, Nevada | 11/27/2002 | 48 | % | 334,000 | — | — | — | 334,000 | ||||||||||||||||||||
Assisted living facility in Las Vegas, Nevada | 9/23/2004 | 52 | % | 7,910,000 | — | (121,000 | ) | — | 7,789,000 | |||||||||||||||||||
Raw land in Mesquite, Nevada | 11/27/2002 | 53 | % | 911,000 | — | (306,000 | ) | — | 605,000 | |||||||||||||||||||
$ | 10,801,000 | $ | — | $ | (427,000 | ) | $ | — | $ | 10,374,000 | ||||||||||||||||||
F-22
F-23
F-24
F-25
First | Second | Third | Transition | |||||||||||||
Quarter | Quarter | Quarter | Period | |||||||||||||
Revenues | $ | 2,310,000 | $ | 2,154,000 | $ | 1,605,000 | $ | 6,069,000 | ||||||||
Expenses | 736,000 | 2,002,000 | 2,203,000 | 4,941,000 | ||||||||||||
Net income (loss) | $ | 1,574,000 | $ | 152,000 | $ | (598,000 | ) | $ | 1,128,000 | |||||||
Net income (loss) allocated to members per weighted average membership units | $ | 0.19 | $ | 0.02 | $ | (0.08 | ) | $ | 0.14 | |||||||
Weighted average membership units | 8,332,817 | 7,738,967 | 7,919,354 | 7,919,354 | ||||||||||||
First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
Revenues | $ | 2,048,000 | $ | 6,831,000 | $ | 1,966,000 | $ | 1,821,000 | $ | 12,666,000 | ||||||||||
Expenses | 1,260,000 | 954,000 | 719,000 | 1,166,000 | 4,099,000 | |||||||||||||||
Net income | $ | 788,000 | $ | 5,877,000 | $ | 1,247,000 | $ | 655,000 | $ | 8,567,000 | ||||||||||
Net income allocated to members per weighted average membership units | $ | 0.09 | $ | 0.68 | $ | 0.15 | $ | 0.08 | $ | 1.03 | ||||||||||
Weighted average membership units | 9,110,711 | 8,664,702 | 8,311,724 | 8,385,189 | 8,339,404 | |||||||||||||||
F-26
F-27
Balance, September 30, 2002 | $ | 91,191,000 | ||||
Additions during the period | ||||||
New mortgage loans | 36,815,000 | |||||
Mortgage loans bought | 21,360,000 | |||||
Mortgage loans transferred | 4,149,000 | |||||
Deductions during the period | ||||||
Collections of principal | 35,079,000 | |||||
Foreclosed loans (Real estate held for sale) | 32,960,000 | |||||
Mortgage loans sold | 33,281,000 | |||||
(38,996,000 | ) | |||||
Balance, September 30, 2003 | $ | 52,195,000 | ||||
Additions during the period | ||||||
New mortgage loans | 53,535,000 | |||||
Mortgage loans bought | 2,848,000 | |||||
Deductions during the period | ||||||
Collections of principal | 38,342,000 | |||||
Foreclosed loans (Real estate held for sale) | 5,963,000 | |||||
Mortgage loans sold | 5,528,000 | |||||
(6,550,000 | ) | |||||
Balance, September 30, 2004 | $ | 58,745,000 | ||||
Additions during the period | ||||||
New mortgage loans | 20,566,000 | |||||
Mortgage loans bought | 600,000 | |||||
Deductions during the period | ||||||
Collections of principal | 11,490,000 | |||||
Foreclosed loans (Real estate held for sale) | 1,273,000 | |||||
Mortgage loans sold | — | |||||
(8,402,000 | ) | |||||
Balance, June 30, 2005 | $ | 67,148,000 | ||||
F-28
Amount | ||||||||||||||||||||
Face Amount of | Carrying | Maturity | Subject to | |||||||||||||||||
Type of Property | Interest Rate | Loan | Amount of Loan | Date | Delinquency | |||||||||||||||
Acquisition and Development | 8%-12% | $ | 79,162,000 | $ | 7,272,000 | 4/05-2/06 | $ | 503,000 | ||||||||||||
Construction | 8%-12% | $ | 25,550,000 | $ | 3,712,000 | 8/05-7/06 | $ | — | ||||||||||||
Commercial | 5%-14% | $ | 130,828,000 | $ | 31,376,000 | 3/04-10/07 | $ | 7,459,000 | ||||||||||||
Land | 10%-14% | $ | 102,579,000 | $ | 17,725,000 | 7/05-4/06 | $ | — | ||||||||||||
Bridge | 10%-14% | $ | 29,800,000 | $ | 7,063,000 | 4/05-4/06 | $ | 117,000 |
Amount | ||||||||||||||||||||
Face Amount of | Carrying | Maturity | Subject to | |||||||||||||||||
Type of Property | Interest Rate | Loan | Amount of Loan | Date | Delinquency | |||||||||||||||
Acquisition and Development | 8%-14% | $ | 159,191,000 | $ | 18,810,000 | 2/02-3/06 | $ | 1,503,000 | ||||||||||||
Construction | 5%-14% | $ | 31,529,000 | $ | 12,182,000 | 6/03-9/07 | $ | 2,140,000 | ||||||||||||
Commercial | 10%-14% | $ | 82,535,000 | $ | 12,932,000 | 3/04-7/05 | $ | 7,459,000 | ||||||||||||
Land | 12%-14% | $ | 34,379,000 | $ | 6,134,000 | 3/05-7/05 | $ | — | ||||||||||||
Bridge | 10%-13% | $ | 36,131,000 | $ | 8,687,000 | 6/04-4/06 | $ | 68,000 |
F-29
Amount | ||||||||||||||||||||
Face Amount | Interest | Carrying | Maturity | Subject to | ||||||||||||||||
Lien Position | of Loan | Rate | Amount of Loan | Date | Delinquency | |||||||||||||||
1st | $ | 361,419,000 | 5.0%-14 | % | $ | 66,645,000 | 3/04-10/07 | $ | 7,576,000 | |||||||||||
2nd | $ | 6,500,000 | 10.0% | $ | 503,000 | 4/05 | $ | 503,000 |
Amount | ||||||||||||||||||||
Face Amount | Interest | Carrying | Maturity | Subject to | ||||||||||||||||
Lien Position | of Loan | Rate | Amount of Loan | Date | Delinquency | |||||||||||||||
1st | $ | 340,940,000 | 5.0%-14% | $ | 57,831,000 | 10/04-9/04 | $ | 11,170,000 | ||||||||||||
2nd | $ | 2,825,000 | 10.0%-13.0% | $ | 915,000 | 12/04-3/05 | $ | — |
F-30
Interest | Maturity | Lien | Face Amount | Carrying | Amount Subject | |||||||||||||||||||
Description of Loan | Rate | Date | Position | of Loan | Amount of Loan | to Delinquency | ||||||||||||||||||
Land | 13.00% | 8/18/05 | 1st | $ | 7,620,000 | $ | 2,165,000 | $ | — | |||||||||||||||
Construction | 8.00% | 8/15/05 | 1st | $ | 9,500,000 | $ | 2,414,000 | $ | — | |||||||||||||||
Acquisition and Development | 9.00% | 7/13/05 | 1st | $ | 30,000,000 | $ | 2,426,000 | $ | — | |||||||||||||||
Bridge | 11.00% | 6/30/05 | 1st | $ | 26,000,000 | $ | 3,320,000 | $ | 3,320,000 | |||||||||||||||
Commercial | 11.00% | 7/14/05 | 1st | $ | 12,500,000 | $ | 3,324,000 | $ | — | |||||||||||||||
Land | 14.00% | 4/15/06 | 1st | $ | 6,526,000 | $ | 3,400,000 | $ | — | |||||||||||||||
Land | 10.00% | 3/30/06 | 1st | $ | 35,000,000 | $ | 3,672,000 | $ | — | |||||||||||||||
Bridge | 14.00% | 3/31/04 | 1st | $ | 34,000,000 | $ | 4,139,000 | $ | 4,139,000 | |||||||||||||||
Land | 14.00% | 2/15/06 | 1st | $ | 21,632,000 | $ | 4,181,000 | $ | — | |||||||||||||||
Acquisition and Development | 8.00% | 1/25/06 | 1st | $ | 35,000,000 | $ | 4,305,000 | $ | — | |||||||||||||||
Commercial | 12.00% | 2/8/06 | 1st | $ | 6,000,000 | $ | 5,989,000 | $ | — | |||||||||||||||
Bridge | 10.00% | 4/30/06 | 1st | $ | 15,000,000 | $ | 6,684,000 | $ | — | |||||||||||||||
Commercial | 5.00% | 9/21/07 | 1st | $ | 15,334,000 | $ | 7,789,000 | $ | — |
Interest | Maturity | Lien | Face Amount | Carrying | Amount Subject | |||||||||||||||||||
Description of Loan | Rate | Date | Position | of Loan | Amount of Loan | to Delinquency | ||||||||||||||||||
Land | 14.00% | 7/21/05 | 1st | $ | 8,645,000 | $ | 1,500,000 | $ | — | |||||||||||||||
Acquisition and Development | 14.00% | 2/1/02 | 1st | $ | 7,000,000 | $ | 1,503,000 | $ | 1,503,000 | |||||||||||||||
Acquisition and Development | 13.00% | 4/22/05 | 1st | $ | 20,000,000 | $ | 1,782,000 | $ | — | |||||||||||||||
Construction | 11.00% | 5/21/05 | 1st | $ | 6,000,000 | $ | 2,000,000 | $ | — | |||||||||||||||
Construction | 14.00% | 6/18/03 | 1st | $ | 6,705,000 | $ | 2,140,000 | $ | 2,140,000 | |||||||||||||||
Acquisition and Development | 9.00% | 1/13/05 | 1st | $ | 30,000,000 | $ | 2,232,000 | $ | — | |||||||||||||||
Land | 12.00% | 3/18/05 | 1st | $ | 12,360,000 | $ | 2,308,000 | $ | — | |||||||||||||||
Acquisition and Development | 8.00% | 8/15/05 | 1st | $ | 9,500,000 | $ | 2,720,000 | $ | — | |||||||||||||||
Commercial | 11.00% | 7/14/05 | 1st | $ | 12,500,000 | $ | 3,000,000 | $ | — | |||||||||||||||
Commercial | 11.00% | 6/30/05 | 1st | $ | 26,000,000 | $ | 3,320,000 | $ | 3,320,000 | |||||||||||||||
Acquisition and Development | 10.00% | 3/30/06 | 1st | $ | 35,000,000 | $ | 3,672,000 | $ | — | |||||||||||||||
Acquisition and Development | 8.00% | 1/25/06 | 1st | $ | 35,000,000 | $ | 4,106,000 | $ | — | |||||||||||||||
Commercial | 14.00% | 3/31/04 | 1st | $ | 34,000,000 | $ | 4,139,000 | $ | 4,139,000 | |||||||||||||||
Bridge | 10.00% | 4/30/06 | 1st | $ | 15,000,000 | $ | 6,684,000 | $ | — | |||||||||||||||
Commercial | 5.00% | 9/21/07 | 1st | $ | 15,334,000 | $ | 7,910,000 | $ | — |
F-31
September 30, 2005 | June 30, 2005 | |||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Cash | $ | 5,430,000 | $ | 2,862,000 | ||||||
Certificates of deposit | 300,000 | 300,000 | ||||||||
Interest and other receivables | 1,181,000 | 682,000 | ||||||||
Due from Fund Manager | 48,000 | — | ||||||||
Note receivable, net of allowance of $692,000 at September 30, 2005 and $706,000 at June 30, 2005 | 119,000 | 119,000 | ||||||||
Real estate held for sale | 4,310,000 | 7,757,000 | ||||||||
Real estate held for sale — seller financed | 8,634,000 | 10,374,000 | ||||||||
Investment in real estate loans, net of allowance for loan losses of $1,896,000 at September 30, 2005 and June 30, 2005 | 56,437,000 | 54,878,000 | ||||||||
Assets under secured borrowings | 1,643,000 | 11,391,000 | ||||||||
Total assets | $ | 78,102,000 | $ | 88,363,000 | ||||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||||
Liabilities | ||||||||||
Accounts payable and accrued liabilities | $ | 464,000 | $ | 443,000 | ||||||
Due to Fund Manager | — | 922,000 | ||||||||
Due to Vestin Group | — | 2,000 | ||||||||
Due to Vestin Fund II | 1,595,000 | 1,560,000 | ||||||||
Due to Vestin Fund III | 6,000 | 6,000 | ||||||||
Secured borrowings | 1,643,000 | 11,391,000 | ||||||||
Deferred income | 542,000 | 768,000 | ||||||||
Total liabilities | 4,250,000 | 15,092,000 | ||||||||
Members’ equity — authorized 10,000,000 units, 7,668,851 units and 7,686,323 units issued at $10 per unit and outstanding at September 30, 2005 and June 30, 2005, respectively | 73,852,000 | 73,271,000 | ||||||||
Total members’ equity | 73,852,000 | 73,271,000 | ||||||||
Total liabilities and members’ equity | $ | 78,102,000 | $ | 88,363,000 | ||||||
F-32
For the Three Months | For the Three Months | |||||||||
Period Ended | Period Ended | |||||||||
September 30, 2005 | September 30, 2004 | |||||||||
(Unaudited) | ||||||||||
Revenues | ||||||||||
Interest income from investment in real estate loans | $ | 1,853,000 | $ | 1,738,000 | ||||||
Loan fees | 25,000 | 72,000 | ||||||||
Other income | 336,000 | 11,000 | ||||||||
Total revenues | 2,214,000 | 1,821,000 | ||||||||
Operating expenses | ||||||||||
Management fees | 69,000 | 64,000 | ||||||||
Interest expense | 50,000 | 308,000 | ||||||||
Loss on sale of real estate held for sale | — | 463,000 | ||||||||
Write down on real estate held for sale | — | 14,000 | ||||||||
Expenses related to real estate held for sale | 75,000 | 229,000 | ||||||||
Professional Fees | 110,000 | 86,000 | ||||||||
Other | 1,000 | 2,000 | ||||||||
Total operating expenses | 305,000 | 1,166,000 | ||||||||
NET INCOME | $ | 1,909,000 | $ | 655,000 | ||||||
Net income allocated to members | $ | 1,909,000 | $ | 655,000 | ||||||
Net income allocated to members per weighted average membership units | $ | 0.25 | $ | 0.08 | ||||||
Weighted average membership units | 7,667,852 | 8,385,189 | ||||||||
F-33
Units | Amount | ||||||||
Members’ equity at June 30, 2005 | 7,686,323 | $ | 73,271,000 | ||||||
Distributions | (1,160,000 | ) | |||||||
Reinvestments of distributions | 10,414 | 104,000 | |||||||
Members’ redemptions | (27,886 | ) | (272,000 | ) | |||||
Net income | 1,909,000 | ||||||||
Members’ equity at September 30, 2005 (Unaudited) | 7,668,851 | $ | 73,852,000 | ||||||
F-34
For the Three Months Ended | |||||||||||
September 30, 2005 | September 30, 2004 | ||||||||||
(Unaudited) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 1,909,000 | $ | 655,000 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Write down of real estate held for sale | — | 14,000 | |||||||||
Recovery of losses on sale of real estate held for sale | (5,000 | ) | — | ||||||||
Loss on sale of real estate held for sale | — | 463,000 | |||||||||
Change in operating assets and liabilities: | |||||||||||
Interest and other receivables | 16,000 | (61,000 | ) | ||||||||
Due to Manager | (970,000 | ) | 162,000 | ||||||||
Due to Vestin Group | (2,000 | ) | (191,000 | ) | |||||||
Due to Fund II | 35,000 | 2,062,000 | |||||||||
Accounts payable and accrued liabilities | 21,000 | 344,000 | |||||||||
Note receivable | 5,000 | — | |||||||||
Deferred income | (369,000 | ) | 72,000 | ||||||||
Net cash provided by operating activities | 640,000 | 3,520,000 | |||||||||
Cash flows from investing activities: | |||||||||||
Investments in real estate loans | (12,350,000 | ) | (5,627,000 | ) | |||||||
Purchase of investments in real estate loans | — | (1,000,000 | ) | ||||||||
Purchase of investments in real estate loans including interest receivable of $515,000 | (5,408,000 | ) | — | ||||||||
Proceeds from loan payoff | 15,827,000 | 9,755,067 | |||||||||
Principal payments on real estate held for sale-seller financed | 2,626,000 | 506,933 | |||||||||
Sale of investments in real estate loans | — | 155,000 | |||||||||
Proceeds from sale of investment in real estate | 2,561,000 | 1,650,000 | |||||||||
Cash outlays for real estate held for sale | — | (2,251,000 | ) | ||||||||
Net cash provided by investing activities | 3,256,000 | 3,189,000 | |||||||||
Cash flows from financing activities: | |||||||||||
Payment on note payable | — | (2,000,000 | ) | ||||||||
Members’ distributions, net of reinvestments | (1,160,000 | ) | (1,184,000 | ) | |||||||
Members’ withdrawals | (168,000 | ) | (267,000 | ) | |||||||
Net cash used in financing activities | (1,328,000 | ) | (3,451,000 | ) | |||||||
NET CHANGE IN CASH | 2,568,000 | 3,258,000 | |||||||||
Cash, beginning of period | 2,862,000 | 6,571,000 | |||||||||
Cash, end of period | $ | 5,430,000 | $ | 9,829,000 | |||||||
Supplemental disclosures of cash flows information: | |||||||||||
Non-cash investing and financing activities: | |||||||||||
Change in loans funded through secured borrowing | $ | 9,748,000 | $ | 12,871,000 | |||||||
Real estate held for sale acquired through foreclosure | $ | — | $ | 3,309,000 | |||||||
Deferred gain on sale of real estate where we provided the financing | $ | 144,000 | $ | — | |||||||
Transfer of pro-rata interest in real property to Fund II | $ | — | $ | 4,278,000 | |||||||
Note receivable from guarantor in exchange for release of guarantee | $ | — | $ | 119,000 | |||||||
Sale of real estate held for sale where we provide the financing | $ | 886,000 | $ | 7,910,000 | |||||||
F-35
F-36
F-37
• | Declines in real estate market conditions which can cause a decrease in expected market value. | |
• | Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes. | |
• | Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. |
F-38
After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances. |
• | Management commits to a plan to sell the properties; | |
• | The property is available for immediate sale in its present condition subject only to terms that are usual and customary; | |
• | An active program to locate a buyer and other actions required to complete a sale have been initiated; | |
• | The sale of the property is probable; | |
• | The property is being actively marketed for sale at a reasonable price; and | |
• | Withdrawal or significant modification of the sale is not likely. |
F-39
(a) Certificate of Deposits and Short-Term Investments: The carrying amount of these instruments are at amortized cost, which approximates fair value. | |
(b) Investment in Real Estate Loans: The carrying value of these instruments, net of the allowance for loan losses, approximates the fair value due to their short-term maturities. Fair values for loans, which are delinquent and/or in foreclosure are indeterminable at this time as no ready market exists for these loans, but fair value may be significantly below the current carrying value. | |
(c) Assets Under Secured Borrowing: The carrying amount of these instruments approximate fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. |
F-40
F-41
Weighted | ||||||||||||||||||||
Number | Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | of Loans | Balance(3) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 2 | $ | 4,343,000 | 8.04 | % | 6.49 | % | 79.28 | % | |||||||||||
Commercial(1) | 16 | 47,073,000 | 9.57 | % | 70.29 | % | 66.90 | % | ||||||||||||
Construction | 3 | 2,298,000 | 12.00 | % | 3.43 | % | 62.32 | % | ||||||||||||
Land | 5 | 13,253,000 | 12.74 | % | 19.79 | % | 58.44 | % | ||||||||||||
Total | 26 | $ | 66,967,000 | 10.18 | % | 100.00 | % | 65.87 | % | |||||||||||
Weighted | ||||||||||||||||||||
Number | Average | Portfolio | Loan to | |||||||||||||||||
Loan Type | of Loans | Balance(3) | Interest Rate | Percentage | Value(2) | |||||||||||||||
Acquisition and development | 4 | $ | 7,272,000 | 8.49 | % | 10.82 | % | 71.05 | % | |||||||||||
Commercial(1) | 15 | 38,439,000 | 10.02 | % | 57.25 | % | 64.16 | % | ||||||||||||
Construction | 3 | 3,712,000 | 9.40 | % | 5.53 | % | 69.94 | % | ||||||||||||
Land | 7 | 17,725,000 | 12.89 | % | 26.40 | % | 61.67 | % | ||||||||||||
Total | 29 | $ | 67,148,000 | 10.58 | % | 100.00 | % | 64.56 | % | |||||||||||
(1) | Bridge loans are a subcategory of commercial loans in which we provide interim financing for borrowers seeking long-term, permanent financing. |
(2) | Loan to value ratios are based on appraisals obtained at the time of loan origination and may not reflect subsequent changes in value estimates. Such appraisals, which may be commissioned by the borrower and also may precede the placement of the loans with us, are generally dated no greater than 12 months prior to the date of loan origination. The appraisals may be for the current estimate of the “as-if developed” value of the property, which approximates the post-construction value of the collateralized property assuming that such property is developed. “As-if developed” values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, and successful development by the purchaser; upon which development is dependent on availability of financing. As most of the appraisals will be prepared on an “as-if developed” basis, if a loan goes into default prior to any development of a project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of the loan. |
(3) | The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Balance Sheet. The contra accounts represent the amount of real estate held for sale sold to third parties where we provided financing. GAAP requires the borrower to have a certain percentage equity ownership (typically 20%) to allow us to record the sale of a property. In addition, the borrower must maintain a minimum commitment in the property on a continuing basis. Therefore, until the borrower meets these requirements, the investment in the new loan is reduced by the amount originally invested in the real estate held for sale. |
September 30, 2005 | June 30, 2005 | |||||||
Balance | Balance | |||||||
Balance per loan portfolio | $ | 66,967,000 | $ | 67,148,000 | ||||
Less: | ||||||||
Seller financed loans included in real estate held for sale | (8,634,000 | ) | (10,374,000 | ) | ||||
Allowance for loan losses | (1,896,000 | ) | (1,896,000 | ) | ||||
Balance per accompanying Balance Sheet | $ | 56,437,000 | $ | 54,878,000 | ||||
F-42
September 30, 2005 | Portfolio | June 30, 2005 | Portfolio | |||||||||||||
Loan Type | Balance* | Percentage | Balance* | Percentage | ||||||||||||
First trust deeds | $ | 66,967,000 | 100 | % | $ | 66,645,000 | 99.25 | % | ||||||||
Second trust deeds** | — | — | 503,000 | 0.75 | % | |||||||||||
$ | 66,967,000 | 100.00 | % | $ | 67,148,000 | 100.00 | % | |||||||||
* | See note (3) above |
** | Generally, our Second trust deeds are junior to a first trust deed position held by either us or our Manager. |
2005 | $ | 14,705,000 | ||
2006 | 43,515,000 | |||
2007 | 8,747,000 | |||
$ | 66,967,000 | |||
September 30, 2005 | Portfolio | June 30, 2005 | Portfolio | |||||||||||||
Balance* | Percentage | Balance* | Percentage | |||||||||||||
Arizona | $ | 11,386,000 | 17.00 | % | $ | 13,063,000 | 19.45 | % | ||||||||
California | 13,574,000 | 20.27 | % | 19,794,000 | 29.48 | % | ||||||||||
Hawaii | 9,031,000 | 13.49 | % | 4,139,000 | 6.16 | % | ||||||||||
Nevada | 17,623,000 | 26.32 | % | 24,428,000 | 36.38 | % | ||||||||||
New York | 3,249,000 | 4.85 | % | 3,320,000 | 4.94 | % | ||||||||||
North Carolina | 1,000,000 | 1.49 | % | — | — | |||||||||||
Oklahoma | 1,237,000 | 1.85 | % | 1,237,000 | 1.84 | % | ||||||||||
Oregon | 3,200,000 | 4.78 | % | — | — | |||||||||||
Texas | 2,167,000 | 3.23 | % | 1,167,000 | 1.75 | % | ||||||||||
Washington | 2,500,000 | 3.73 | % | — | — | |||||||||||
Wisconsin | 2,000,000 | 2.99 | % | — | — | |||||||||||
$ | 66,967,000 | 100.00 | % | $ | 67,148,000 | 100.00 | % | |||||||||
* | See note (3) above |
F-43
Number of | ||||||||||||||||
Balance | Months | Percentage of Total | ||||||||||||||
Description of Collateral | September 30, 2005 | Maturity Date | Non-Performing | Loan Balance | ||||||||||||
4 cemeteries and 8 mortuaries in Hawaii Part I | $ | 4,139,000 | 03/31/2004 | 18 | 21.00% of Part I | |||||||||||
4 cemeteries and 8 mortuaries in Hawaii Part II | 4,893,000 | 03/31/2004 | 18 | 35.00% of Part II | ||||||||||||
Racetrack and hotel in Vernon, NY | 3,249,000 | 06/30/2005 | 14 | 12.50% | ||||||||||||
$ | 12,281,000 | |||||||||||||||
Balance | Balance | |||||||||||||||
Description | June 30, 2005 | Provisions | Deductions | September 30, 2005 | ||||||||||||
General Valuation Allowance | $ | 671,000 | $ | — | $ | — | $ | 671,000 | ||||||||
Specific Allowance | 1,225,000 | — | — | 1,225,000 | ||||||||||||
Total | $ | 1,896,000 | $ | — | $ | — | $ | 1,896,000 | ||||||||
F-44
• | Prevailing economic conditions; | |
• | Historical experience; | |
• | The nature and volume of the loan portfolio; | |
• | The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay; | |
• | Evaluation of industry trends; and | |
• | Estimated net realizable value of any underlying collateral in relation to the loan amount. |
F-45
Deferred | ||||||||||||||||||||||||||||
Gain | ||||||||||||||||||||||||||||
Balance | Seller | (Loss) on | Balance | |||||||||||||||||||||||||
Date | Percentage of | June 30, | Financed | Proceed From | Sale of | September 30, | ||||||||||||||||||||||
Description | Acquired | Ownership | 2005 | Sales | Sales | Real Estate | 2005 | |||||||||||||||||||||
Land containing 82 residential lots in Henderson, Nevada(1) | 2/28/2003 | 66 | % | $ | 5,058,000 | $ | — | $ | (2,561,000 | ) | $ | — | $ | 2,497,000 | ||||||||||||||
126 unit, (207 bed) assisted living facility in Phoenix, Arizona(1) | 9/08/2004 | 10 | % | 886,000 | (1,030,000 | ) | — | 144,000 | — | |||||||||||||||||||
460 acre residential sub-division in Lake Travis, Texas | 8/03/2004 | 34 | % | 1,813,000 | — | — | 1,813,000 | |||||||||||||||||||||
Total | $ | 7,757,000 | $ | (1,030,000 | ) | $ | (2,561,000 | ) | $ | 144,000 | $ | 4,310,000 | ||||||||||||||||
F-46
Principal | ||||||||||||||||||||||||
Percentage | Payments | Balance at | ||||||||||||||||||||||
of | Balance at | Received from | September 30, | |||||||||||||||||||||
Description | Date Acquired | Ownership | June 30, 2005 | Acquisitions | Borrower | 2005 | ||||||||||||||||||
An approximately 200-unit apartment complex located in Las Vegas, Nevada | 1/27/2003 | 5 | % | $ | 171,000 | $ | — | $ | (171,000 | ) | $ | — | ||||||||||||
A completed golf course and raw land in Mesquite, Nevada | 11/06/2002 | 55 | % | 1,475,000 | — | (1,475,000 | ) | — | ||||||||||||||||
36 acres of raw land in Mesquite, Nevada | 11/27/2002 | 48 | % | 334,000 | — | (334,000 | ) | — | ||||||||||||||||
Assisted living facility in Las Vegas, Nevada | 9/23/2004 | 52 | % | 7,789,000 | — | (41,000 | ) | 7,748,000 | ||||||||||||||||
126 Unit (207 bed) assisted living facility in Phoenix, AZ | 9/08/2004 | 10 | % | — | 886,000 | — | 886,000 | |||||||||||||||||
Raw land in Mesquite, Nevada | 11/27/2002 | 53 | % | 605,000 | — | (605,000 | ) | — | ||||||||||||||||
$ | 10,374,000 | $ | 886,000 | $ | (2,626,000 | ) | $ | 8,634,000 | ||||||||||||||||
F-47
F-48
F-49
F-50
F-51
A-1
(a) Each unit of limited liability company interest in the Nevada LLC (a “Unit” or “Units”) outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into one share of common stock, par value $.0001 per share (the “Common Stock”), of the Maryland Corporation. | |
(b) Each share of stock of the Maryland Corporation outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and no consideration shall be issued in respect thereof. |
(i) The Registration Statement on Form S-4 of the Maryland Corporation filed with the Securities and Exchange Commission (the “SEC”) in connection with the Merger shall have been declared |
A-2
effective, no stop order suspending its effectiveness may be in effect and no proceeding for suspending its effectiveness may be pending or threatened by the SEC. | |
(ii) Members holding at least a majority of the outstanding Units of the Nevada LLC shall have approved this Agreement and the consummation of the Merger. | |
(iii) The Common Stock of the Maryland Corporation shall have been approved for listing on The Nasdaq Stock Market, Inc. or a national securities exchange acceptable to the Nevada LLC. | |
(iv) The Nevada LLC shall have received from its special tax counsel a legal opinion generally to the effect that (a) the Merger qualifies as a transaction described in Section 351 of the Code and (b) the Maryland Corporation’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for the taxable year 2005 and thereafter. The Nevada LLC’s receipt of the opinion referred to in this Section 4.01(iv) shall not be waivable. | |
(v) Any necessary state and local governmental and third-party consents must have been received. The Manager, acting on behalf of the Nevada LLC, may waive this condition. | |
(vi) The Manager, acting on behalf of the Nevada LLC, shall have determined, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of impairing the ability of the Maryland Corporation to qualify as a REIT. |
(i) a governmental authority has issued a final, non-appealable order, decree or ruling, or taken any other action, that would permanently prohibit the Merger; | |
(ii) members of the Nevada LLC fail to approve the Merger and this Agreement; or | |
(iii) any of the conditions to the obligations of the parties set forth in Section 4.01 above is not satisfied or waived. |
A-3
A-4
VESTIN FUND I, LLC, a Nevada limited liability | |
company | |
By: Vestin Mortgage, Inc., as sole manager |
By: |
Name: Michael V. Shustek | |
Title: Chairman of the Board, President | |
and Chief Executive Officer | |
VESTIN REALTY TRUST I, INC., a Maryland corporation |
By: |
Name: Michael V. Shustek | |
Title: President and Chief Executive Officer | |
A-5
Vestin Realty Trust I, Inc. (the “Corporation”). |
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Fredrick J. Zaffarese Leavitt — Class 1 (term expiring 2006) | |
John W. Alderfer — Class 2 (term expiring 2007) | |
Roland M. Sansone — Class 2 (term expiring 2007) | |
Michael V. Shustek — Class 3 (term expiring 2008) | |
Robert J. Aalberts — Class 3 (term expiring 2008) |
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“Beneficial Ownership”shall mean ownership of Equity Stock by a Person who is or would be treated as an owner of such Equity Stock either actually or constructively through the application of Section 544 of the Code, as modified by Sections 856(h)(1)(B) and 856(h)(3) of the Code. The terms “Beneficial Owner,” “Beneficially Own,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings. | |
“Charitable Beneficiary”shall mean one or more beneficiaries of a Trust, as determined pursuant to Section 7.3.6 of this Article VII. | |
“Code”shall mean the Internal Revenue Code of 1986, as amended. All section references to the Code shall include any successor provisions thereof as may be adopted from time to time. | |
“Common Stock”shall mean that Common Stock that may be issued pursuant to Article VI of these Articles. | |
“Constructive Ownership”shall mean ownership of Equity Stock by a Person who is or would be treated as an owner of such Equity Stock either actually or constructively through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,” “Constructively Own,” “Constructively Owns” and “Constructively Owned” shall have the correlative meanings. | |
“Corporation”shall have the meaning set forth in the Article II of these Articles. | |
“Individual”means an individual, a trust qualified under Section 401(a) or 501(c)(17) of the Code, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, or a private foundation within the meaning of Section 509(a) of the Code, provided that a trust described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code shall be excluded from this definition. | |
“Equity Stock”shall mean stock that is either Common Stock, Preferred Stock or any class of stock that may be issued by the Corporation from time to time. | |
“Initial Date”means the date upon which the Articles of Merger between the Corporation and Vestin Fund I, LLC are filed with the State Department of Assessments and Taxation of Maryland. | |
“IRS”means the United States Internal Revenue Service. | |
“Market Price”means the last reported sales price of the Equity Stock on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which the Equity Stock may be traded, or if the Equity Stock is not then traded over any exchange or quotation system, then the market price of the Equity Stock on the relevant date as determined in good faith by the Board of Directors of the Corporation. | |
“Ownership Limit”shall mean 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding Equity Stock of the Corporation, excluding any such outstanding Equity Stock which is not treated as outstanding for federal income tax purposes, or such other percentage as may be determined by the Board of Directors pursuant to Section 7.9.3. Notwithstanding the foregoing, for purposes of determining the percentage ownership of Equity Stock by any Person, shares of Equity Stock that may be acquired upon conversion, exchange or exercise of any securities of the Corporation directly or constructively held by such Person, but not Equity Stock issuable with respect to the conversion, exchange or exercise of securities of the Corporation held by other Persons, shall be deemed to be outstanding prior to conversion, exchange or exercise. The number and value of shares of |
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outstanding Equity Stock of the Corporation shall be determined by the Board of Directors in good faith, which determination shall be conclusive for all purposes hereof. | |
“Person”shall mean an Individual, corporation, partnership, limited liability company, estate, trust, association, joint stock company or other entity and individual retirement accounts (“IRAs”); but does not include an underwriter acting in a capacity as such in a public offering of shares of Equity Stock provided that the ownership of such shares of Equity Stock by such underwriter would not result in the Corporation being “closely held” within the meaning of Section 856(h) of the Code, or otherwise result in the Corporation failing to qualify as a REIT. | |
“Preferred Stock”shall mean that preferred stock that may be issued pursuant to Article VI of these Articles of Incorporation. | |
“Purported Beneficial Transferee”shall mean, with respect to any purported Transfer (or other event) which results in a transfer to a Trust, as provided in Section 7.2.2 of this Article VII, the Purported Record Transferee, unless the Purported Record Transferee would have acquired or owned shares of Equity Stock for another Person who is the beneficial transferee or owner of such shares, in which case the Purported Beneficial Transferee shall be such Person. | |
“Purported Record Transferee” shall mean, with respect to any purported Transfer (or other event) which results in a transfer to a Trust, as provided in Section 7.2.2 of this Article VII, the record holder of the shares of Equity Stock if such Transfer had been valid under Section 7.2.1 of this Article VII. | |
“REIT”shall mean a real estate investment trust under Sections 856 through 860 of the Code. | |
“Restriction Termination Date”shall mean the first day on which the Board of Directors of the Corporation determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT. | |
“Transfer”shall mean any issuance, sale, transfer, gift, assignment, devise, other disposition of Equity Stock as well as any other event that causes any Person to Beneficially Own or Constructively Own Equity Stock, including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Equity Stock or (ii) the sale, transfer, assignment or other disposition of any securities (or rights convertible into or exchangeable for Equity Stock), whether voluntary or involuntary, whether such transfer has occurred of record or beneficially or Beneficially or Constructively (including but not limited to transfers of interests in other entities which result in changes in Beneficial or Constructive Ownership of Equity Stock), and whether such transfer has occurred by operation of law or otherwise. | |
“Trust”shall mean each of the trusts provided for in Section 7.3 of this Article VII. | |
“Trustee”shall mean any Person unaffiliated with the Corporation, or a Purported Beneficial Transferee, or a Purported Record Transferee, that is appointed by the Corporation to serve as trustee of a Trust. |
(a) except as provided in Section 7.9 of this Article VII, no Person shall Beneficially Own Equity Stock in excess of the Ownership Limit; | |
(b) except as provided in Section 7.9 of this Article VII, no Person shall Constructively Own Equity Stock in excess of the Ownership Limit; and | |
(c) no Person shall Beneficially or Constructively Own Equity Stock to the extent that such Beneficial or Constructive Ownership would result in the Corporation being “closely held” within the meaning of Section 856(h) of the Code, or otherwise failing to qualify as a REIT (including but not limited to ownership that would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the |
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Corporation (either directly or indirectly through one or more partnerships or limited liability companies) from such tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). |
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Restriction on Ownership and Transfer |
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By: | /s/Ben Chung |
Incorporator |
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(1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the secretary (the “Record Date Request Notice”) by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record Date”). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their agents duly authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such stockholder (or other agent) and shall set forth all information relating to each such stockholder that must be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-11 thereunder. Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within ten days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth day after the first date on which the Record Date Request Notice is received by the secretary. |
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(2) In order for any stockholder to request a special meeting, one or more written requests for a special meeting signed by stockholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast more than ten percent (10%) (the “Special Meeting Percentage”) of all of the votes entitled to be cast at such meeting (the “Special Meeting Request”) shall be delivered to the secretary. In addition, the Special Meeting Request shall set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to the matters set forth in the Record Date Request Notice received by the secretary), shall bear the date of signature of each such stockholder (or other agent) signing the Special Meeting Request, shall set forth the name and address, as they appear in the Corporation’s books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed) and the class, series and number of shares of stock of the Corporation which are owned of record and beneficially by each such stockholder, shall be sent to the secretary by registered mail, return receipt requested, and shall be received by the secretary within 60 days after the Request Record Date. Any requesting stockholder (or agent duly authorized in a writing accompanying the revocation or the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the secretary. | |
(3) The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Section 3(b), the secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of the meeting. | |
(4) Except as provided in the next sentence, any special meeting shall be held at such place, date and time as may be designated by the chairman of the board, chief executive officer or Board of Directors, whoever has called the meeting. In the case of any special meeting called by the secretary upon the request of stockholders (a “Stockholder Requested Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors;provided,however, that the date of any Stockholder Requested Meeting shall be not more than 90 days after the record date for such meeting (the “Meeting Record Date”); andprovided,further that if the Board of Directors fails to designate, within ten days after the date that a valid Special Meeting Request is actually received by the secretary (the “Delivery Date”), a date and time for a Stockholder Requested Meeting, then such meeting shall be held at 2:00 p.m. local time on the 90th day after the Meeting Record Date or, if such 90th day is not a Business Day (as defined below), on the first preceding Business Day; andprovided,further that in the event that the Board of Directors fails to designate a place for a Stockholder Requested Meeting within ten days after the Delivery Date, then such meeting shall be held at the principal executive offices of the Corporation. In fixing a date for any special meeting, the president, the Chairman of the Board, the chief executive officer or Board of Directors may consider such factors as he, she or it deems relevant within the good faith exercise of business judgment, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date, then the close of business on the 30th day after the Delivery Date shall be the Meeting Record Date. The Board of Directors may revoke the notice for any Stockholder Requested Meeting in the event that the requesting stockholders fail to comply with the provisions of paragraph (3) of this subsection 3(b). | |
(5) If written revocations of requests for the special meeting have been delivered to the secretary and the result is that stockholders of record (or their agents duly authorized in writing), as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting to the secretary, the secretary shall: (i) if the notice of meeting has not already been mailed, refrain from mailing the notice of the meeting and send to all requesting stockholders who have not revoked such requests written notice of any revocation of a request for the special meeting, or (ii) if the notice of meeting has been mailed and if the secretary first sends to all requesting stockholders who have not revoked requests for a special meeting written notice of any |
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revocation of a request for the special meeting and written notice of the secretary’s intention to revoke the notice of the meeting, revoke the notice of the meeting at any time before ten days before the commencement of the meeting. Any request for a special meeting received after a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting. | |
(6) The chairman of the Board of Directors, the chief executive officer, the president or the Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the secretary. For the purpose of permitting the inspectors to perform such review, no such purported request shall be deemed to have been delivered to the secretary until the earlier of (i) ten Business Days after receipt by the secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the secretary represent more than ten percent (10%) of the issued and outstanding shares of stock that would be entitled to vote at such meeting. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such ten Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). | |
(7) For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Maryland are authorized or obligated by law or executive order to close. |
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(1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 11(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 11(a). | |
(2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for action by the stockholders. To be timely, a stockholder’s notice shall set forth all information required under this Section 11 and shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the 150th day nor later than 5:00 p.m. Pacific Time on the 120th day prior to the first anniversary of the date of mailing of the notice for the preceding year’s annual meeting (for purposes of the Corporation’s 2006 annual meeting, notice of the prior year’s annual meeting shall be deemed to have been mailed on May 31, 2005);provided,however, that in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year’s annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m. Pacific Time on the later of the 120th day prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of for such meeting is first made. In no event shall the public announcement of a postponement or adjournment of an annual meeting commence a new time period for the giving of a stockholder’s notice as described above. Such stockholder’s notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (A) the name, age, business address and residence address of such person, (B) the class, |
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series and number of any shares of stock of the Corporation that are beneficially owned by such person, (C) the date such shares were acquired and the investment intent of such acquisition, and (D) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a description of the business desired to be brought before the meeting, the reasons for proposing such business at the meeting and any material interest in such business of such stockholder (including any anticipated benefit to the stockholder therefrom) and of each beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and each beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation’s stock ledger and current name and address, if different, and of such beneficial owner, and (y) the class and number of shares of each class of stock of the Corporation which are owned beneficially and of record by such stockholder and owned beneficially by such beneficial owner. | |
(3) Notwithstanding anything in this subsection (a) of this Section 11 to the contrary, in the event the Board of Directors increases the number of directors in accordance with Article III, Section 2 of these Bylaws, and there is no announcement of such action at least 130 days prior to the first anniversary of the date of mailing of the notice of the preceding year’s annual meeting, a stockholder’s notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than 5:00 p.m. Pacific Time, on the tenth day following the day on which such public announcement is first made by the Corporation. |
(1) Only such persons who are nominated in accordance with the procedures set forth in this Section 11 of these Bylaws shall be eligible to serve as directors, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 11. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 11 and, if any proposed nomination or business is not in compliance with this Section 11, to declare that such defective nomination or proposal be disregarded. |
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(2) For purposes of this Section 11, (a) the “date of mailing of the notice” shall mean the date of the proxy statement for the solicitation of proxies for election of directors and (b) “public announcement” shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or (ii) in a document publicly filed by the Corporation with the United States Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act or the Investment Company Act of 1940, as amended. | |
(3) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, nor the right of the Corporation to omit a proposal from, the Corporation’s proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act. |
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1. Produce revenues from the interest income on Mortgage Loans; | |
2. Provide quarterly cash distributions from the net income earned on Mortgage Loans; and | |
3. Reinvest, to the extent permissible, payments of principal and sales (net of expenses). |
(a) Reserve Fund. The Corporation shall establish contingency working capital reserves of at least three percent of the assets of the Corporation. | |
(b) Investments in Mortgage Loans. The Corporation may invest in or purchase Mortgage Loans of such duration and on such real property and with such additional security as the Board of Directors in its sole discretion shall determine, provided that the collateral for the Mortgage Loans is real property located in the United States, an interest in a lease of real property or a promissory note secured by a deed of trust on real property. |
(1) to finance investments in Mortgage Loans, | |
(2) to prevent a default under mortgage loans that are senior to the Corporation’s Mortgage Loans, | |
(3) to discharge senior Mortgage Loans if this becomes necessary to protect the Corporation’s investment in Mortgage Loans, or | |
(4) to operate or develop a property that the Corporation acquired under a defaulted Mortgage Loan. |
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(a) amend Article X (Investment Policy hereof); | |
(b) amend Article XI (Compensation to the Management Company); or | |
(c) amend this Article XV (Amendment of Bylaws). |
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By: | |
Name: [ ] | |
Title: [ ] and Secretary | |
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A. The Company intends to invest in Mortgage Assets (defined herein) using the proceeds of borrowings and equity offerings by it and its predecessor and to qualify as a “real estate investment trust” under the Internal Revenue Code of 1986, as amended (the “Code”). | |
B. The Company desires to have the Manager undertake, on the Company’s behalf, the duties and responsibilities set forth in this Agreement, subject to the oversight of the Board of Directors of the Company (the “Board of Directors”) on the terms and conditions set forth in this Agreement. | |
C. The Manager desires to undertake, on the Company’s behalf, the duties and responsibilities set forth in this Agreement, subject to the oversight of the Board of Directors, on the terms and conditions set forth in this Agreement. |
1. Definitions. Capitalized terms used but not defined in this Agreement shall have the respective meanings assigned to them below: |
1.1 “Affiliate” means, for any Person, (a) any Person directly or indirectly controlling, controlled by or under common control with the Person, (b) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of the Person, (c) any officer, director or member of the Person, or (d) if the other Person is an officer, director or manager, any company for which the Person acts in any similar capacity. | |
1.2 “Agreement” means this Management Agreement. | |
1.3 “Board of Directors” has the meaning set forth in Recital B of this Agreement. | |
1.4 “Code” has the meaning set forth in Recital A of this Agreement. | |
1.5 “Company” means Vestin Realty Trust I, Inc., a Maryland corporation, and its successors. | |
1.6 “Compensation” has the meaning set forth in Section 8 of this Agreement. | |
1.7 “Deeds of Trust” means the lien(s) created on the Real Property of borrowers securing their respective obligations to the Company to repay Mortgage Loans, whether in the form of a deed of trust, mortgage or otherwise. | |
1.8 “Exchange Act” means the Securities Exchange Act of 1934, as amended. | |
1.9 “GAAP” means generally accepted accounting principles. | |
1.10 “Governing Instruments” means the articles or certificate of incorporation or charter, as the case may be, and the bylaws of the Company and its subsidiaries. | |
1.11 “Investment Company Act” means the Investment Company Act of 1940, as amended from time to time. | |
1.12 “Manager” means Vestin Mortgage, Inc., a Nevada corporation, and its successors hereunder. |
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1.13 “Mortgage Assets” means the Mortgage Loan(s), an interest in the Mortgage Loans, or foreclosure properties that are held by the Company, directly or through a subsidiary. | |
1.14 “Mortgage Loans” means investments of the Company that are notes, debentures, bonds and other evidence of indebtedness or obligations that are negotiable or non-negotiable, alone or in participation with other lenders, and secured or collateralized by Deeds of Trust on Real Property, an interest in a lease of Real Property, or a promissory note secured by a Deed of Trust on Real Property. Mortgage Loans include, but are not limited to, construction mortgage loans, second mortgage loans, wrap-around all-inclusive loans, commercial property loans, bridge loans, acquisition and development loans and land loans originated by the Manager or unrelated third parties. | |
1.15 “NASAA Guidelines” means the Mortgage Program Guidelines of the North American Securities Administrators Association, Inc. | |
1.16 “Person” means any natural person, partnership, corporation, unincorporated association or other legal entity. | |
1.17 “Real Property” means and includes (a) land and any buildings, structures, and improvements, and (b) all fixtures, whether in the form of equipment or other personal property, that are located on or used as a part of land. Real Property does not include Deeds of Trust, Mortgage Loans or interests therein. | |
1.18 “REIT” means real estate investment trust as defined under Section 856 of the Code. | |
1.19 “REIT Provisions of the Code” means Sections 856 through 860 of the Code. | |
1.20 “Short-Term Investments” means short-term bank certificates of deposit, short-term United States Treasury securities, short-term United States government agency securities, and other similar types of short-term investment instruments, all of which will have maturities or average lives of less than one (1) year. | |
1.21 “Unaffiliated Directors” means a director who meets all of the following requirements: (i) the director has not at any time during the past three years been an employee or officer of the Manager or any Affiliate of the Manager; (ii) no member of the director’s immediate family has, during the past three years, been an executive officer of the Manager or any Affiliate of the Manager; (iii) the director has not at any time during the previous fiscal year accepted any compensation from the Manager or any Affiliate of the Manager in excess of $60,000, other than compensation for board service, benefits under a tax-qualified retirement plan, or non-discretionary compensation; (iv) the director is not partner in, or a controlling stockholder or executive officer of, any for-profit business organization to which the Manager or any Affiliate of the Manager made, or from which the Manager or any Affiliate of the Manager received, payments (other than those solely arising from investments in the securities of the Manager or any Affiliate of the Manager) that exceed 5% of the Manager’s or the business organization’s consolidated gross revenues for that year, or $200,000, whichever is greater, in any of the past three years; (v) the director is not employed as an executive of another entity where any of the executives of the Manager or any Affiliate of the Manager serve on that entity’s compensation committee; and (vi) the director does not have any relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. |
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2.1.1 serving as the Company’s consultant with respect to formulation of investment criteria, interest rate risk management and preparation of policy guidelines by the Board of Directors; | |
2.1.2 advising the Company in developing criteria for Mortgage Asset purchase commitments that are tailored to the Company’s long-term investment objectives, and making available to the Company its knowledge and experience with respect to Mortgage Assets; | |
2.1.3 evaluating, selecting, purchasing and committing to purchase Mortgage Assets meeting the Company’s investment criteria and the maintenance and administration of the Company portfolio of Mortgage Assets; | |
2.1.4 advising and negotiating with respect to the Company’s agreements with third-party lenders to provide borrowings to the Company, encumbering the Company’s assets as security for such borrowings, and entering into such third-party agreements on behalf of the Company; | |
2.1.5 furnishing reports and statistical and economic analysis to the Company regarding the Company’s activities and the services performed for the Company by the Manager; | |
2.1.6 investing or reinvesting any money of the Company in accordance with policies and procedures established from time to time by the Board of Directors, including without limitation, maintaining and investing working capital reserves in cash or Short-Term Investments; | |
2.1.7 providing the executive and administrative personnel, office space and services required in rendering services to the Company; administering the day-to-day operations of the Company; and performing and supervising the performance of such other administrative functions necessary in the management of the Company, which includes authority to contract on behalf of the Company with third parties, to provide various services, including facilities and costs associated therewith, technology, management information systems and other similar operations or administrative services; | |
2.1.8 overseeing the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Board of Directors, including the collection of revenues and payment of the Company’s debts and obligations; | |
2.1.9 counseling the Company in connection with policy decisions made by the Board of Directors; | |
2.1.10 communicating on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; | |
2.1.11 evaluating, advising and selecting what agreements the Company will enter into and whether the Company should enter into joint ventures with other companies to invest in Mortgage Assets, and entering into such agreements and joint ventures on behalf of the Company; | |
2.1.12 advising, negotiating, managing and overseeing the origination, extension, modification, re-financing, evaluation, selection, acquisition, processing, brokerage and servicing of Mortgage Assets; | |
2.1.13 foreclosing upon Real Property on behalf of the Company or any subsidiary of the Company and advising, developing, managing and either holding for investment on behalf of the Company or any subsidiary of the Company, or disposing of Real Property acquired by the Company or any subsidiary of the Company through foreclosure of any secured assets, either directly or through general partnerships, joint ventures or otherwise; | |
2.1.14 counseling the Company regarding the maintenance of its exemption from the Investment Company Act and monitoring compliance with the requirements for maintaining exemption from that Act; |
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2.1.15 counseling the Company regarding the maintenance of its status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set forth in the Code and the income tax regulations promulgated thereunder; | |
2.1.16 qualifying and causing the Company to qualify to do business in all applicable jurisdictions; | |
2.1.17 causing the Company to retain tax experts to assist in developing appropriate procedures and testing systems and to conduct quarterly compliance reviews; | |
2.1.18 providing all actions necessary for compliance by the Company to make required U.S. federal, state and local regulatory requirements applicable to the Company in respect of its business activities, including preparing or causing to be prepared all financial statements under applicable regulations and contractual undertakings and all reports, documents and filings, if any, required under the Exchange Act, and all applicable tax report filings; and | |
2.1.19 performing such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances, including without limitation winding up the affairs of the Company upon dissolution of the Company. |
1. Produce revenues from the interest income on Mortgage Loans; | |
2. Provide quarterly cash distributions from the net income earned on Mortgage Loans; and | |
3. Reinvest, to the extent permissible, payments of principal and sales (net of expenses). |
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3.1 Do any act in contravention of this Agreement; | |
3.2 Do any act which would make it impossible to carry on the ordinary business of the Company; | |
3.3 Confess a judgment against the Company; | |
3.4 Possess Company property or assign the rights of the Company in property for other than a Company purpose; | |
3.5 Sell all or substantial all of the assets of the Company in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of the Unaffiliated Directors; | |
3.6 Grant to any of its Affiliates an exclusive right to sell any Company assets; | |
3.7 Receive or permit the Manager or any Affiliate of the Manager to receive any insurance brokerage fee or write any insurance policy covering the Company or any Company property; | |
3.8 Receive from the Company a rebate or participate in any reciprocal business arrangement which would enable the Manager or any of its Affiliates to do so; | |
3.9 Commingle the Company’s assets with those of any other Person; | |
3.10 Use or permit another Person to use the Company’s assets in any manner, except for the exclusive benefit of the Company; | |
3.11 Obtain a loan from the Company to the Manager or an Affiliate of the Manager; | |
3.12 Sell any Real Property owned by the Company or any of the Company’s subsidiaries as a result of foreclosure of secured assets by the Company or any of the Company’s subsidiaries to the Manager or an Affiliate of the Manager; | |
3.13 Invest in general partnerships or joint ventures (including entities in limited liability company and limited liability partnership form) with either non-Affiliates or Affiliates that own and operate one or more particular mortgage unless such investment complies with the NASAA Guidelines; and | |
3.14 Invest in “lower tier companies” when the Company is an “upper tier company” unless such investment is in compliance with the NASAA Guidelines. |
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5.3.1 The Manager may acquire a Mortgage Loan in its own name and temporarily hold title thereto for the purpose of facilitating the acquisition of such Mortgage Loan, provided that such Mortgage Loan is purchased by the Company for a price no greater than the cost of such Mortgage Loan to the Manager, except compensation payable in accordance with the Bylaws of the Company and this Agreement, and provided there is no other benefit arising out of such transaction to the Manager apart from compensation otherwise permitted by the NASAA Guidelines or otherwise approved by a majority of the Unaffiliated Directors. Accordingly, all income generated and expenses associated with a Mortgage Loan so acquired shall be treated as belonging to the Company. The Manager shall not sell a Mortgage Loan to the Company pursuant to this Section if the cost of the Mortgage Loan exceeds the funds reasonably anticipated to be available to the Company to purchase the Mortgage Loan; or |
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5.3.2 The purchase is made from a publicly registered affiliate if the investment objectives of the participants are substantially identical, there are no duplicate fees, the sponsors receive substantially identical compensation, the investment of each participant is on substantially the same terms, and the participants have a right of first refusal with regard to the sale of any participant’s interest in such loans. In such a case the purchase price should be no more than fair market value as determined by an independent appraisal. |
5.5.1 The Company does not have sufficient assets available to retain the Mortgage Loan (or contract rights related thereto); | |
5.5.2 The Manager will purchase all Mortgage Loans (or contract rights) that the Company does not have sufficient proceeds to retain; | |
5.5.3 The Manager will pay the Company an amount in cash equal to the cost of the Mortgage Loan (or contract rights) to the Company (including all cash payments and carrying costs related thereto); | |
5.5.4 The Manager assumes all of the Company’s obligations and liabilities incurred in connection with the holding of the Mortgage Loan (or contract rights) by the Company; and | |
5.5.5 The Manager will use the methodology as set forth in the prospectus in determining which Mortgage Loan it will purchase in the event that the Company’s assets are insufficient to retain all Mortgage Loans. |
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8.1.1 Loan Placement Fees for Loan Selection and Brokerage. The Manager shall be entitled to receive a fee of an amount equal to approximately 2%-6% of the principal amount of each loan. The percentage to be received by the Manager shall be a competitive fee, based on local market conditions, and may exceed 6% of the principal amount. |
8.1.2 Loan Evaluation and Processing Fees. The Manager shall be entitled to receive a fee of an amount equal to approximately 5% of each loan, the exact percentage of which may be higher than 5%, but which shall be a competitive fee based on local market conditions. | |
8.1.3 Service Fee for Administering Loans. Subject to regulatory requirements, the Manager shall be entitled to receive, where permitted, mortgage service fees, which when added to all other fees paid in connection with the servicing of a particular mortgage, does not exceed an amount equal to approximately1/4 of one percent (1%) of the principal amount outstanding on such loan. | |
8.1.4 Loan Extension or Modification Fee. The Manager shall be entitled to receive a fee equal to approximately 2%-5% of outstanding principal amount of the loan, as permitted by local law and local market conditions, and may exceed 5% of the outstanding principal amount if permitted by local law and consistent with local market conditions. | |
8.1.5 Loan Assumption and Reconveyance Fees. The Manager will be entitled to receive a fee in connection with the assumption or reconveyance of a loan. The Manager shall be entitled to a $125 fee for each reconveyance of a loan. The Manager also shall be entitled to receive an assumption fee of at least 5% of the original principal balance of the loan for any loan assumption. This fee will be competitive, based on local market conditions. |
9.1.1 employment expenses of the personnel employed by the Manager and/or its Affiliates (including, but not limited to, officers of the Company employed by the Manager and/or its Affiliates), including, but not limited to, salaries, wages, payroll taxes and the cost of employee benefit plans of such personnel; |
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9.1.2 rent, telephone, utilities, office furniture, equipment, machinery, and other office expenses of the Manager and/or its Affiliates required for the Company’s day-to-day operations, including bookkeeping, clerical and back-office services provided by the Manager or its Affiliates; and | |
9.1.3 expenses related to the origination, servicing and subservicing of Mortgage Loans. |
9.2.1 the cost of money borrowed by the Company, including interest; | |
9.2.2 all taxes and license fees applicable to the Company or any subsidiary of the Company, including interest and penalties thereon; | |
9.2.3 legal, audit, accounting, underwriting, brokerage, listing, filing, rating agency, registration and other fees, printing, engraving, clerical, personnel and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the Company’s or any subsidiary’s equity securities or debt securities; | |
9.2.4 fees and expenses paid to advisors and independent contractors, consultants, managers, and other agents engaged directly by the Company or any subsidiary of the Company or by the Manager at the Company’s or such subsidiary’s request for the account of the Company or any subsidiary of the Company (other than the Manager or its Affiliates); | |
9.2.5 expenses connected with the acquisition, disposition, financing and ownership of the Company’s or any subsidiary’s investment assets, including, but not limited to, commitment fees, brokerage fees (other than mortgage fees paid by the borrowers to the Manager and its Affiliates), guaranty fees, ad valorem taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance on property owned by the Company or any subsidiary of the Company; | |
9.2.6 the expenses of organizing, modifying or dissolving the Company or any subsidiary of the Company; | |
9.2.7 all insurance costs incurred by the Company or any subsidiary of the Company, including any costs to obtain liability or other insurance to indemnify the Manager and underwriters of any securities of the Company; | |
9.2.8 expenses connected with payments of dividends or interest or distributions in any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; | |
9.2.9 all expenses of third parties and the Company connected with communications to holders of equity securities or debt securities issued by the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company’s or any subsidiary’s securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party; | |
9.2.10 custodian’s, transfer agent’s and registrar’s fees and charges (excluding custodian fees for IRA’s, which shall be the sole responsibility of the IRA account holder); | |
9.2.11 compensation, fees and expenses paid to trustees or Unaffiliated Directors of the Company or any subsidiary of the Company, the cost of director and officer liability insurance and premiums for errors and omissions insurance; |
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9.2.12 legal, accounting and auditing fees and expenses relating to the Company’s or any subsidiary’s operations; and legal, expert and other fees and expenses relating to any actions, proceedings, lawsuits, demands, causes of action and claims, whether actual or threatened, made by or against the Company, or which the Company is authorized or obligated to pay under applicable law or its Governing Instruments or by the Board of Directors; | |
9.2.13 any judgment rendered against the Company or any subsidiary of the Company, or against any trustee, director or officer of the Company or any subsidiary of the Company in his capacity as such for which the Company or any subsidiary of the Company is required to indemnify such trustee, director, or officer by any court or governmental agency, or settlement of pending or threatened litigation; | |
9.2.14 expenses relating to any office or office facilities maintained by the Company or any subsidiary of the Company exclusive of the office of the Manager and/or its Affiliates; | |
9.2.15 travel and related expenses of directors, officers and employees of the Manager and of directors, officers and employees of the company or any subsidiary of the Company who are also directors, officers or employees of the Manager, incurred in connection with attending meetings of the Board of Directors or holders of securities of the Company or any subsidiary of the Company or performing other business activities that relate to the Company or any subsidiary of the Company, including, where applicable, a proportionate share of such expenses as reasonably determined by Manager where such expenses were not incurred solely for the benefit of the Company; | |
9.2.16 costs associated with computer hardware and software, third party information services and office expenses that relate solely to the business activities of the Company; | |
9.2.17 any extraordinary or non-recurring costs or charges incurred by the Company; and | |
9.2.18 other expenses of the Company or any subsidiary of the Company that are not expenses of the Manager under Section 9.1 of this Agreement. |
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14.1 if a majority of the Unaffiliated Directors determines that the Manager has violated this Agreement in any material respect and, after written notice of such violation, the Manager has failed to cure such violation within 30 days, unless during such 30-day period the Manager has commenced to cure such violation and thereafter diligently prosecutes to cure such violation; or | |
14.2 there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws relating to insolvency; or the Manager (i) ceases, or admits in writing its inability, to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days; provided that in the event the Manager |
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becomes the subject of a case under federal bankruptcy or similar federal or state laws and remains in possession of its property and continues to operate its business (as a debtor in possession or otherwise), the Company shall not have the option to terminate this Agreement unless the Unaffiliated Directors determine in good faith that as a result of such proceeding the Manager cannot reasonably be expected to fulfill its obligations under this Agreement. If any of the events specified in Section 14.2 of this Agreement shall occur, the Manager shall give prompt written notice thereof to the Board of Directors upon the happening of such event. |
15.1 after deducting any accrued Compensation and reimbursement for its expenses to which it is then entitled, pay over to the Company or any subsidiary of the Company all money collected and held for the account of the Company or any subsidiary of the Company pursuant to this Agreement; | |
15.2 deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any subsidiary of the Company; and | |
15.3 deliver to the Board of Directors all property and documents of the Company or any subsidiary of the Company then in the custody of the Manager. |
17.1.1 Due Formation. The Company is duly organized, validly existing and in good standing under the laws of Maryland, has the power to own its assets and to transact the business in which it is now |
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engaged and is duly qualified and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. The Company does not do business under any fictitious business name. | |
17.1.2 Power and Authority. The Company has the power and authority to execute, deliver and perform this Agreement and all obligations required under this Agreement and has taken all necessary action to authorize this Agreement and the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required under this Agreement. Except as shall have been obtained, no consent of any other person, including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required under this Agreement. This Agreement has been, and each instrument or document required under this Agreement will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required under this Agreement when executed and delivered under this Agreement will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. | |
17.1.3 Execution, Delivery and Performance. The execution, delivery and performance of this Agreement and the documents or instruments required under this Agreement will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the Governing Instruments of, or any securities issued by, the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien an any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking (other than the pledge of amounts payable to the Manager under this Agreement to secure the Manager’s obligations to its lenders). |
17.2.1 Due Formation. The Manager is duly organized, validly existing and in good standing under the laws of Nevada, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. | |
17.2.2 Power and Authority. The Manager has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required under this Agreement and has taken all necessary corporate action to authorize this Agreement and the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required under this Agreement. Except as shall have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required under this Agreement. This Agreement has been, and each instrument or document required under this Agreement will be, executed |
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and delivered by a duly authorized officer of the Manager, and this Agreement constitutes, and each instrument or document required under this Agreement when executed and delivered under this Agreement will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. | |
17.2.3 Execution, Delivery and Performance. The execution, delivery and performance of this Agreement and the documents or instruments required under this Agreement will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the governing instruments of, or any securities issued by, the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets, or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage indenture, lease, contract or other agreement, instrument or undertaking. |
8379 West Sunset Road | |
Las Vegas, Nevada 89113 | |
Telecopy: (702) 227-5247 | |
Attention: Chairman of the Audit Committee of the Board of Directors |
8379 West Sunset Road | |
Las Vegas, Nevada 89113 | |
Telecopy: (702) 227-5247 | |
Attention: Michael V. Shustek |
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“COMPANY” | |
VESTIN REALTY TRUST I, INC. | |
a Maryland corporation |
By: |
Name: | |
Title: | |
“MANAGER” | |
VESTIN MORTGAGE, INC. | |
a Nevada corporation |
By: |
Name: | |
Title: |
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LOS ANGELES 15260 Ventura Boulevard Suite 1740 Sherman Oaks, CA 91403 (310) 859-8300 (818) 905-8330 Fax (818) 905-8340 ORANGE COUNTY 650 Town Center Drive Suite 550 Costa Mesa, CA 92626 (714) 668-0272 Fax (714) 668-0137 SAN FRANCISCO 601 California Street Suite 800 San Francisco, CA 94108 (415) 392-0888 Fax (415) 392-7070 SALT LAKE CITY 675 East 2100 South Suite 260 Salt Lake City, UT 84106 (801) 322-3300 Fax (801) 322-3310 DENVER 4949 S. Syracuse Street Suite 300 Denver, CA 80237 (303) 773-0223 Fax (303) 773-2777 CHICAGO 105 West Madison Suite 1500 Chicago, IL 60603 (312) 499-5990 Fax (312) 499-5901 ATLANTA Riverwood Center 3350 Riverwood Parkway, SE Suite 1900 Atlanta, GA 30339 (770) 951-4820 Fax (770) 319-5741 | September 9, 2005 Mr. John Alderfer Chief Financial Officer Vestin Mortgage, Inc. 8379 W. Sunset Road Las Vegas, NV 89113 Mr. John Alderfer: At your request, we have prepared the following independent analysis expressing our conclusions regarding the fair market value, as of June 30, 2005, of the portfolio of assets of Vestin Fund I, LLC (referred to herein as “Fund I” or the “Company”) under a liquidation scenario. We understand that our conclusions will be used as a valuation basis for corporate planning purposes. The term “fair market value”, as used herein, is defined as that value at which a willing buyer and willing seller, neither being compelled to act and both being well informed of the relevant facts and conditions which might be anticipated, would effect a sale of an ownership interest at “arm’s length” on a given date. For purposes of this analysis, the term “liquidation scenario” refers to the sale of assets for the purpose of attaining liquidity as promptly as a prudent person could for distribution to members. Fund I is a Nevada limited liability company operating as an investment fund primarily engaged in the business of investing in loans secured by real estate through deeds of trust and mortgages to owners and developers of real property whose financing needs are not being met by traditional mortgage lenders. The Company is managed by Vestin Mortgage, Inc. Ownership of the Company was represented by 7,686,323 membership units issued and outstanding as of June 30, 2005. In preparing our conclusions, we have conducted various reviews and analyses as outlined herein and have utilized financial and other information provided by the Company, as well as other sources. We have assumed, without independent verification, the accuracy and completeness of all information supplied to us with respect to our analysis. We have further assumed that the financial information provided to us correctly reflects the results of operations for the Company for the time periods covered in accordance with generally accepted accounting principles consistently applied. |
HOULIHAN VALUATION ADVISORS | |
/s/ GLENN GARLICK | |
Glenn Garlick, ASA | |
Principal | |
/s/ JOHN F. LEONARDI III | |
John F. Leonardi III, CFA, ASA | |
Principal |
Item 20. | Indemnification of Directors and Officers. |
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Item 21. | Exhibits and Financial Statement Schedules. |
Item 22. | Undertakings. |
(1) that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form; and | |
(2) that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in |
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the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; | |
(2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof; and | |
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
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VESTIN REALTY TRUST I, INC. |
By | /s/ Michael V. Shustek |
Michael V. Shustek | |
President and Chief Executive Officer |
Signature | Title | Date | ||||
/s/ Michael V. Shustek | President, Chief Executive Officer and Director (Principal Executive Officer) | December 2, 2005 | ||||
** | Chief Financial Officer and Director (Principal Financial and Accounting Officer) | December 2, 2005 | ||||
** | Director | December 2, 2005 | ||||
** | Director | December 2, 2005 | ||||
** | Director | December 2, 2005 | ||||
**By: /s/ Michael V. Shustek (Attorney-in-fact) |
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Exhibit | ||||
Number | Document | |||
2 | .1 | Agreement and Plan of Merger between Vestin Fund I, LLC and the Registrant is included as Annex A to this proxy statement/ prospectus that is part of this Registration Statement. | ||
3 | .1 | Articles of Incorporation of the Registrant is included as Annex B to this proxy statement/ prospectus that is part of this Registration Statement. | ||
3 | .2 | Bylaws of the Registrant is included as Annex D to this proxy statement/ prospectus that is part of this Registration Statement. | ||
3 | .3* | Articles Supplementary of the Registrant is included as Annex C to this proxy statement/ prospectus that is part of this Registration Statement. | ||
4 | .1 | Reference is made to Exhibits 3.1, 3.2 and 3.3 | ||
4 | .2* | Specimen Common Stock Certificate | ||
4 | .3* | Form of Rights Certificate | ||
5 | .1* | Opinion of Venable LLP as to the legality of the common stock | ||
8 | .1* | Opinion of Morrison & Foerster LLP as to certain tax matters | ||
8 | .2* | Opinion of Morrison & Foerster LLP as to qualification of the Registrant as a REIT | ||
10 | .1 | Form of Management Agreement between Vestin Mortgage, Inc. and the Registrant is included as Annex E to this proxy statement/ prospectus that is part of this Registration Statement. | ||
10 | .2* | Rights Agreement between the Registrant and the rights agent | ||
10 | .3** | Assignment Agreement, dated January 23, 2004, by and between Vestin Mortgage, Inc., Vestin Fund I, LLC, Vestin Fund II, LLC, Owens Financial Group, Inc. and Owens Mortgage Investment Fund | ||
10 | .4** | Intercreditor Agreement, dated January 17, 2003, by and among Vestin Mortgage, Inc., Vestin Fund I, LLC, Vestin Fund II, LLC and Western United Life Assurance Company | ||
10 | .5** | Intercreditor Agreement, dated April 22, 2004, by and between Vestin Mortgage, Inc. and Owens Mortgage Investment Fund | ||
10 | .6** | Intercreditor Agreement, dated June 24, 2004, by and between Vestin Mortgage, Inc. and Owens Mortgage Investment Fund | ||
10 | .7** | Participation Agreement, dated May 13, 2004, by and among the Registrant, Vestin Fund I, LLC, Vestin Fund II, LLC and Royal Bank of America | ||
21 | .1* | List of subsidiaries of the Registrant | ||
23 | .1* | Consent of Venable LLP. Reference is made to Exhibit 5.1 | ||
23 | .2* | Consent of Morrison & Foerster LLP. Reference is made to Exhibits 8.1 and 8.2 | ||
23 | .3 | Consent of Moore Stephens Wurth Frazer and Torbet, LLP, Independent Registered Public Accounting Firm | ||
23 | .4** | Consent of SAMCO Financial Services, Inc. | ||
23 | .5** | Consent of Houlihan Valuation Advisors | ||
24 | .1** | Powers of Attorney. | ||
99 | .1** | Form of Proxy Card of Registrant. | ||
99 | .2** | Valuation Analysis of Vestin Fund I, LLC as of June 30, 2005 prepared by Houlihan Valuation Advisors |
* | To be filed by amendment. |
** | Previously filed. |