UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Year Ended December 31, 2017
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-55601
REDWOOD MORTGAGE INVESTORS IX, LLC
(Exact name of registrant as specified in its charter)
Delaware |
| 26-3541068 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
177 Bovet Road, Suite 520, San Mateo, CA |
| 94402 |
(Address of principal executive offices) |
| (Zip Code) |
(650) 365-5341
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: |
| None |
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Securities registered pursuant to Section 12(g) of the Act: |
| Units of Limited Liability Company Interests |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ YES ☒ NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ YES ☒ NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ YES ☐ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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| Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒ NO
The registrant’s units of limited liability company interests are not publicly traded and therefore have no market value. The registrant is conducting an ongoing public offering of its units pursuant to a Registration Statement on Form S-11 (File No. 333-208315), which are being sold at $1.00 per unit. The registrant had 70,050,626 limited liability company interests outstanding as of February 28, 2018.
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Index to Form 10-K
December 31, 2017
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Certain statements in this Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding the company’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements, which are based on various assumptions (some of which are beyond our control), may be identified by reference to a future period or periods or by use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” “possible” or similar terms or variations on those terms or the negative of those terms. Forward-looking statements include statements regarding trends in the California real estate market, future interest rates and economic conditions and their effect on the company and its assets, estimates as to the allowance for loan losses, estimates of future redemptions of units, future funding of loans and possibly loan sales to third parties by the company, reductions in financial support by the manager, fluctuations in the distribution rate, and beliefs relating to how the company will be affected by current economic conditions and trends in the financial and credit markets. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following:
| • | changes in economic conditions, interest rates, and/or changes in California real estate markets; |
| • | the impact of competition and competitive pricing for mortgage loans; |
| • | our ability to grow our mortgage lending business; |
| • | the manager’s ability to make and arrange for loans that fit our investment criteria; |
| • | the volume and timing of loan sales to third parties or if we are able to sell loans at all; |
| • | the concentration of credit risks to which we are exposed; |
| • | increases in payment delinquencies and defaults on our mortgage loans; and |
| • | changes in government regulation and legislative actions affecting our business. |
All forward-looking statements and reasons why results may differ included in this Form 10-K are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.
Redwood Mortgage Investors IX, LLC (we, RMI IX or the company) is a Delaware limited liability company formed in October 2008 to engage in business as a mortgage lender and investor by making and holding-for-investment loans secured by California real estate, primarily through first and second deeds of trust.
The ongoing sources of funds for loans are the proceeds (net of redemption of members’ capital) from
| • | sale of members’ units (net of reimbursement to RMC of organization and offering expenses (O&O expenses)), including units sold by reinvestment of distributions; |
| • | loan payoffs; |
| • | borrowers’ monthly principal and interest payments; and |
| • | to a lesser degree and, if obtained, a line of credit. |
Profits and losses are allocated among the members according to their respective capital accounts monthly after one percent (1%) of the profits and losses are allocated to the manager. The monthly results are subject to subsequent adjustment as a result of quarterly and year-end accounting and reporting. Investors should not expect the company to provide tax benefits of the type commonly associated with limited liability company tax shelter investments. Federal and state income taxes are the obligation of the members, if and when taxes apply, other than the annual California franchise tax and any California limited liability company cash receipts taxes paid by the company.
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We are externally managed by Redwood Mortgage Corp. (or RMC or the manager). The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. RMC provides the personnel and services necessary for us to conduct our business as we have no employees of our own. The mortgage loans the company funds and/or invests in are arranged and generally are serviced by RMC. The manager is required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members.
The rights, duties and powers of the members and manager of the company are governed by the company’s operating agreement, the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act. Members should refer to our operating agreement for complete disclosure of its provisions. Members representing a majority of the outstanding units may, without the concurrence of the manager, vote to:
| • | dissolve the company; |
| • | amend the operating agreement, subject to certain limitations; |
| • | approve or disapprove the sale of all or substantially all of the assets of the company; or |
| • | remove or replace the manager. |
Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
Distribution policy
Cash available for distribution at the end of each calendar month is allocated ninety-nine percent (99%) to the members and one percent (1%) to the manager. Cash available for distribution means cash flow from operations (excluding repayments for loan principal and other capital transaction proceeds) less amounts set aside for creation or restoration of reserves. The manager may withhold from cash available for distribution otherwise distributable to the members, with respect to any period, the respective amounts of organization and offering expenses allocated to the members for the applicable period pursuant to our reimbursement and allocation of organization and offering expenses policy. Per the terms of the company’s operating agreement, cash available for distribution allocated to the members is allocated among the members in proportion to their percentage interests (except with respect to differences in the amounts of organization and offering expenses allocated to the respective members during the applicable period) and in proportion to the number of days during the applicable month that they owned such percentage interests.
Cash available for distributions allocable to members, other than those participating in the distribution reinvestment plan (DRIP) and the manager, is distributed at the end of each calendar month. Cash available for distribution allocable to members who participate in the DRIP is used to purchase additional units at the end of each calendar month. The manager’s allocable share of cash available for distribution is also distributed not more frequently than with cash distributions to members.
To determine the amount of cash to be distributed in any specific month, we rely in part on our annual forecast of profits, which takes into account the difference between the forecasted and actual results in the prior year, the requirement to maintain a cash reserve, and in periods through March 31, 2018, financial support from RMC. Going forward, this support will be reduced and RMC expects support will ultimately cease, as discussed below.
Commencing with the March 2018 distribution, we will reduce the net distribution rate to 6.0% from the previous 6.5% net distribution rate. Commencing in April 2018, RMC will no longer pay for our direct expenses, and intends, by the fourth quarter of 2018, to begin reducing fee waivers and commence collecting reimbursable expenses, so that by July 2019 we will be paying RMC the fees it is entitled to under the operating agreement and reimbursing RMC for expenses attributable to us. The distribution rate could decrease once RMC decreases and ultimately ceases providing financial support. See Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Performance Overview.”
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Distribution reinvestment plan
The DRIP provision of the operating agreement permits members to elect to have all or a portion of their monthly distributions reinvested in additional units. Members may withdraw from the DRIP with written notice.
Liquidity and unit redemption program
Because there are substantial restrictions on transferability of units, there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, our operating agreement includes a unit redemption program, whereby beginning one year from the date of purchase of the units, a member may redeem all or part of their units, subject to certain limitations.
The price paid for redeemed units is based on the lesser of the purchase price paid by the redeeming member or the member’s capital account balance as of the date of each redemption payment. Redemption value is calculated based on the period from date of purchase as follows:
| • | after one year, 92% of the purchase price or of the capital account balance, whichever is less; |
| • | after two years, 94% of the purchase price or of the capital account balance, whichever is less; |
| • | after three years, 96% of the purchase price or of the capital account balance, whichever is less; |
| • | after four years, 98% of the purchase price or of the capital account balance, whichever is less; |
| • | after five years, 100% of the purchase price or of the capital account balance, whichever is less. |
We redeem units quarterly, subject to certain limitations as provided for in the operating agreement. The number of units that may be redeemed per quarter per individual member is subject to a maximum of the greater of 100,000 units or 25% of the member’s units outstanding. For redemption requests requiring more than one quarter to fully redeem, the percentage discount amount that, if any, applies when the redemption payments begin continues to apply throughout the redemption period and applies to all units covered by such redemption request regardless of when the final redemption payment is made.
We have not established a cash reserve from which to fund redemptions. Our capacity to redeem units upon request is limited by the availability of cash and the company’s cash flow. We will not, in any calendar year, redeem more than five percent (5%) of the weighted average number of units outstanding during the twelve-month period immediately prior to the date of the redemption.
Lending and investment guidelines, objectives and criteria
Our loans generally have shorter maturity terms than typical mortgages. In the event a borrower is unable to repay in full the principal owing on the loan at maturity, we may consider extending the term through a loan modification or may foreclose and take back the property for sale.
Generally, interest rates on our mortgage loans are not affected directly by market movements in interest rates. If, as expected, we continue to make and invest in fixed rate loans primarily, and interest rates were to rise, a possible result would be lower prepayments of the company’s loans. This increase in the duration of time loans are on the books may reduce overall liquidity, which itself may reduce our investment into new loans at higher interest rates. Conversely, if interest rates were to decline, we could see a significant increase in borrower prepayments. If we then invest in new loans at lower rates of interest, a lower yield to members may possibly result.
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Our primary investment objectives are to:
| • | yield a favorable rate of return from our business of making and/or investing in loans; |
| • | preserve and protect our capital by making and/or investing in loans secured by California real estate, preferably income-producing properties geographically situated in the San Francisco Bay Area and the coastal metropolitan regions of Southern California; and |
| • | generate and distribute cash flow from these mortgage lending and investing activities. |
Loans are arranged and generally are serviced by RMC. We generally funds loans at fixed interest rates that provide for:
| • | monthly payments of either (i) interest only with a balloon payment at maturity or (ii) principal and interest based on a 30-year amortization schedule with a balloon payment at maturity; and |
| • | having maturities of 5 years or less. |
The cash flow and the income generated by the real property securing the loan factor into the credit decisions, as does the general creditworthiness, experience and reputation of the borrower. However, for loans secured by real property, other than owner-occupied personal residences, such considerations are subordinate to a determination that the value of the real property is sufficient, in and of itself, as a source of repayment. The amount of the loan combined with the outstanding debt and claims secured by a senior deed of trust on the real property generally will not exceed a specified percentage of the appraised value of the property (the “loan-to-value ratio”, or LTV) as determined by an independent written appraisal at the time the loan is made. The LTV generally will not exceed 80% for residential properties (including multi-family), 75% for commercial properties, and 50% for land. The excess of the value of the collateral securing the loan over our debt and any senior debt owing on the property is the “protective equity.”
We believe our LTV policy gives us more potential protective equity than competing lenders who fund loans with a higher LTV. However, we may be viewed as an “asset” lender based on our emphasis on LTV in our underwriting process. Being an “asset” lender may increase the likelihood of payment defaults by borrowers. Accordingly, the company may have a higher level of payment delinquency and loans designated as impaired for financial reporting purposes than that of lenders, such as banks and other financial institutions subject to federal and state banking regulations, which are typically viewed as “credit” lenders.
See Note 4 (Loans) to the financial statements included in Part II, Item 8 of this report for a detailed presentation on the secured loan portfolio, which presentation is incorporated by this reference into this Item 1.
Competition
The San Francisco Bay Area, including the South Bay/Silicon Valley, and the Los Angeles metropolitan area are our most significant locations of lending activity and the economic vitality of these regions – as well as the stability of the national economy and the financial markets – is of primary importance in determining the availability of new lending opportunities and the performance of previously made loans.
The mortgage-lending business is highly competitive, and we compete with numerous established entities, some of which have more financial resources and experience in the mortgage lending business than our manager. We will encounter significant competition from banks, insurance companies, savings and loan associations, mortgage bankers, real estate investment trusts and other lenders with objectives similar in whole or in part to ours.
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We are engaged in business as a mortgage lender and investor by making and holding-for-investment loans secured by California real estate, primarily through first and second deeds of trust. We and RMC, which arranges and generally services our loans, are heavily regulated by laws governing lending practices at the federal, state and local levels. In addition, proposals for further regulation of the financial services industry continually are being introduced. The laws and regulations to which we and RMC are subject include rules and restrictions pertaining to:
| • | the conduct of a mortgage lending business by a licensed California real estate broker under state and federal law; |
| • | real estate settlement procedures; |
| • | fair lending; |
| • | truth in lending; |
| • | federal and state loan disclosure requirements; |
| • | the establishment of maximum interest rates, finance charges and other charges; |
| • | loan-servicing procedures; |
| • | secured transactions and foreclosure proceedings; |
| • | privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers; and |
| • | with respect to the company and the offering of member units, required filings with the Securities and Exchange Commission (“SEC”) pursuant to federal securities laws, including periodic reports such as Form 10-K and Form 10-Q, and with the States’ securities agencies. |
Key federal and state laws, regulations, and rules relating to the conduct of our business include the following:
| • | California Real Estate Law. |
The California Real Estate Law, codified in California Business and Professions Code Sections 10000 et seq., together with the Real Estate Commissioner’s rules thereunder, govern the licensing, administration and activities of licensed real estate brokers (including mortgage loans brokers) in the State of California, including rules relating to, among other things, licensing, borrower and investor disclosures, compensation and fees, disciplinary action, and transactions involving trust deeds and real property sale contracts generally. We are not a licensed real estate broker but our manager, RMC, is so licensed and will be subject to those laws and regulations.
RMC’s loan files and other books and records are subject to examination by the California Bureau of Real Estate. Such examinations, as well as new regulations that may be issued in the future, could ultimately increase RMC’s and our administrative burdens and costs.
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This federal law passed in 2010 imposes significant regulatory restrictions on the origination of residential mortgage loans, under sections concerning “Mortgage Reform and Anti-Predatory Lending.” For example, when a consumer loan is made, the lender is required to make a reasonable and good faith determination, based on verified and documented information concerning the consumer’s financial situation, as to whether the consumer has a reasonable ability to repay a residential mortgage loan before extending the loan. The act calls for regulations prohibiting a creditor from extending credit to a consumer secured by a high-cost mortgage without first receiving certification from an independent counselor approved by a government agency. The act also adds new provisions prohibiting balloon payments for defined high-cost mortgages. The act established the Consumer Financial Protection Bureau (CFPB), giving it regulatory authority over most federal consumer-lending laws, including those relating to residential mortgage lending, and oversight over companies that provide consumer financial products or services, including us. Many of the federal regulations governing mortgage lending have been significantly amended and expanded through the passage of the Dodd Frank Act.
The act also enhanced regulatory requirements on banking entities and other organizations considered significant to U.S. financial markets and provides for reform of the asset-backed securitization market. We do not expect these particular regulatory changes will have a material direct effect on our business or operations.
| • | Real Estate Settlement Procedures Act (“RESPA”). |
RESPA is a federal law passed in 1974 with the purpose of establishing settlement procedures for consumer real estate purchase and refinance transactions on residential (1-4 unit) properties. It establishes rules relating to affiliated business relationships, escrow accounts for property taxes and hazard insurance and loan servicing, among other things. It prohibits unearned referral fees from being charged in a covered transaction. RESPA also governs the format of the Loan Estimate and the Closing Disclosure forms provided to consumers in real estate transactions.
| • | Truth in Lending Act (“TILA”). |
TILA is a federal law passed in 1968 for the purpose of regulating consumer financing. For real estate lenders, TILA requires, among other things, advance disclosure of certain loan terms, calculation of the costs of the loan as demonstrated through an annual percentage rate, and the right of a consumer in a refinance transaction on their primary residence to rescind their loan within three days following signing of the loan document.
| • | Home Ownership and Equity Protection Act (“HOEPA”) and California Covered Loan Law. |
HOEPA is a federal law passed in 1994 to provide additional disclosures for certain closed-end home mortgages. These “high-cost” closed-end home mortgages are loans with interest rates and fees in excess of certain percentage or amount thresholds. These regulations primarily focus on additional disclosure with respect to the terms of the loan to the borrower, the timing of such disclosures, and the prohibition of certain loan terms, including balloon payments and negative amortization. Failure to comply with the regulations will render the loan rescindable for up to three years. Lenders can be held liable for attorneys’ fees, finance charges and fees paid by the borrower and certain other money damages. Similarly, in California, Financial Code Section 4970, et. seq., became effective in 2002. It provides for state regulation of “high-cost” consumer residential mortgage loans (also called “covered loans”) secured by liens on real property. Section 4970 defines covered loans as consumer loans in which the original principal balance of the loan does not exceed the most current conforming loan limit for a single-family first mortgage loan established by the Federal National Mortgage Association, with interest rates and/or fees exceeding one of the statutorily defined percentage or amount thresholds. The law prohibits certain lending practices with respect to high-cost loans, including the making of a loan without regard to the borrower’s income or obligations. When making such loans, lenders must provide borrowers with a consumer disclosure and provide for an additional rescission period prior to closing the loan.
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This federal law enacted in 2008, regulates the timing and delivery of loan disclosures for all mortgage loan transactions governed under the Real Estate Settlement Procedures Act.
| • | Home Mortgage Disclosure Act (“HMDA”). |
This federal law enacted in 1975 provides for public access to information on a lender’s loan activity. It requires lenders to report to their federal regulator certain information about mortgage loan applications it receives, such as the race and gender of its customers, the disposition of the mortgage application, income of the borrowers and interest rate (i.e., APR) information. Amendments to HMDA became effective on January 1, 2018. Under the amended regulation lenders will be required to report 40 additional data points on their loan applications, including borrower age and credit data, lender fees, debt-to-income ratios and loan-to-value ratios.
| • | Red Flags Rule. |
This federal rule was issued in 2007 under Section 114 of the Fair and Accurate Credit Transactions Act of 2003 and amended by the Red Flag Program Clarification Act of 2010. It requires lenders and creditors to implement an identity theft prevention program to identify and respond to account activity in which the misuse of a consumer’s personal identification may be suspected.
| • | Gramm-Leach-Bliley Act (aka Financial Services Modernization Act of 1999). |
This federal act passed in 1999 requires all businesses that have access to consumers’ personal identification information to implement a plan providing for security measures to protect that information. As part of this program, we provide applicants and borrowers with a copy of our privacy policy.
| • | The California Homeowner Bill of Rights (“HOBR”). |
This series of state laws, which became effective January 1, 2013, is intended to ensure fair lending and borrowing practices for California homeowners by guaranteeing basic fairness and transparency during the foreclosure process. Key provisions include restrictions on dual-track foreclosures, a guaranteed single point of contact, civil penalties for lenders filing unverified documents, and protections for tenants of foreclosed properties. HOBR also provides borrowers with the authority to seek redress of material violations of its rules, such as by an injunction (prior to foreclosure sale) or recovery of damages (after foreclosure sale).
In addition, key federal and state laws, regulations, and rules are applicable as a result of the offering of our units.
| • | Federal Securities Laws: The Securities Act of 1933 and The Exchange Act of 1944 |
Because our offering of units has been registered under the Securities Act and we have registered the units pursuant to Section 12(g) of the Exchange Act, we are a public reporting company. As a public reporting company, we are required to file annual, quarterly and other periodic reports with the SEC and comply with applicable provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the related rules and regulations promulgated by the SEC. However, as discussed in Item 9.A. of this report, the company is externally managed by RMC and many of the requirements of Sarbanes-Oxley are not directly applicable to us since we do not have a board of directors, including an independent board member. The registration of our units pursuant to Section 12(g) of the Exchange Act, along with the satisfaction of certain other requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”), enables the units to qualify as “publicly-offered securities” for purposes of ERISA and regulations issued thereunder. See Section 9.A. of this report.
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RMC, as our manager, is responsible for establishing and maintaining adequate internal control over financial reporting with respect to us as required by Section 404 of Sarbanes-Oxley and rules and regulations of the SEC thereunder. RMC is required to review and evaluate on an annual basis our internal control over financial reporting, and on a quarterly basis, to evaluate changes in our internal control over financial reporting.
| • | Financial Industry Regulatory Authority Regulatory Notice 15-02 |
In 2015 the SEC approved amendments to rules of the Financial Industry Regulatory Authority (“FINRA”) applicable to securities of direct participation programs, such as our units and to non-listed real estate investment trusts. The amendments, which became effective on April 11, 2016, provide, among other things, that (i) FINRA members distributing our units must include in customer account statements our per unit estimated value that must be developed using a methodology reasonably designed to ensure our per unit estimated value’s reliability; and (ii) our per unit estimated value disclosed from and after 150 days following the second anniversary of the admission of investors in our public offering must be based on an appraised valuation methodology developed by, or with the material assistance of, a third-party expert and updated on at least an annual basis. The rule changes also provide that the account statements must include additional disclosure regarding the sources of our distributions to unit holders.
| • | Blue Sky Laws |
We are subject to the state securities laws (“blue sky laws”) of the states in which we intend to offer for sale our units. Under these blue sky laws, we have to register the offering of units being made pursuant to the prospectus before we can begin to sell in a state. Also, many of the states have adopted or apply the Mortgage Program Guidelines adopted by the North American Securities Administrators Association (“NASAA”). The NASAA Mortgage Program Guidelines require us to include certain offering terms and conditions that we might not have included if we were not subject to the state blue sky laws. Provisions imposed by the NASAA Mortgage Program Guidelines include restrictions on:
| • | the requirements of sponsors (i.e., the manager), such as the required experience and net worth of the sponsor; |
| • | the fiduciary duty obligations of the sponsor; |
| • | the suitability of the investors, including the economic suitability, the factors that must be reviewed in determining that the investor is suitable and the representations that can be required of the investor in the subscription agreement for the investment; |
| • | the fees and compensation that can be charged and paid to the sponsor as well as the expenses that can be reimbursed to the sponsor; |
| • | the handling of certain conflicts of interest between us and the sponsor; and |
| • | investment restrictions on our activities and restrictions on the sponsor related to our activities. |
Term of the company
The term of the company will continue until October 2028, unless sooner terminated as provided in the operating agreement.
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered, in addition to the other information presented elsewhere in this report, in evaluating us and our business. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business operations. If any of the following risks or additional risks and uncertainties actually occur, our business, operating results, and financial condition could be adversely affected.
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MORTGAGE LENDING AND REAL ESTATE RISKS
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Item 1B – Unresolved Staff Comments
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
We own no real property and have not owned any real property since inception.
In the normal course of business, we may become involved in legal proceedings (such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc.) to collect the debt owed under the promissory notes, to enforce the provisions of the deeds of trust, to protect our interest in the real property subject to the deeds of trust and to resolve disputes with borrowers, lenders, lien holders and mechanics. None of these actions, in and of themselves, typically would be of any material financial impact to the net income or balance sheet of the company. As of the date hereof, we are not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Item 4 – Mine Safety Disclosures
Not Applicable.
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Item 5 – Market for the Registrant’s Units, Related Unitholder Matters and Issuer Purchases of Equity Securities
Because there are substantial restrictions on transferability of units, there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, we have adopted a unit redemption program. See “Liquidity and unit redemptions program” in Part I of this Report. As of February 28, 2018, we had approximately 1,257 unit holders, who held 70,050,626 units.
Recent sales of unregistered securities
All sales of our units within the past three years were registered under the Securities Act.
Ongoing public offerings of units/ SEC registrations
Since October 2009, we have offered and sold units pursuant to registration statements on Form S-11. Our currently effective registration statement on Form S-11 (File No. 333-208315) registered 120,000,000 units ($120,000,000) for offer and sale to the public and 20,000,000 units ($20,000,000) to our members pursuant to our DRIP. As of December 31, 2017 we have sold 70,435,055 units for an aggregate offering price of $70,435,055 under the registration statements.
Proceeds from sales of units from inception (October 2009) through December 31, 2017 are summarized below.
| Proceeds |
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From investors - admitted | $ | 63,913,357 |
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From members under our DRIP |
| 6,232,594 |
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From premiums paid by RMC(1) |
| 289,104 |
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Gross proceeds from unit sales | $ | 70,435,055 |
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| (1) | If a member acquired units through an unsolicited sale (i.e., without a broker/dealer) the member’s capital account is credited with their capital contribution plus a premium paid by RMC equal to the amount of the sales commissions that otherwise would have been paid to a broker-dealer by RMC. This premium is reported in the year paid as taxable income to the member. |
As of December 31, 2017, we had sold approximately 70,435,000 units – 39,407,000 units under our previous registration statements and approximately 31,028,000 units under our current registration statement which was effective on June 6, 2016. Gross proceeds from unit sales (including units issued pursuant to our distribution reinvestment plan) were approximately $70,435,000 - $39,407,000 and $31,028,000, respectively, under our previous registration statements and our current registration statement.
Use of Proceeds from sale of units
We will use the proceeds from the sale of the units to
| • | make additional loans; |
| • | fund working capital reserves; |
| • | pay RMC up to 4.5% of proceeds from the sale of units for organization and offering expenses; and |
| • | fund a formation loan to RMC at up to 7% of proceeds from sale of units. |
36
Commissions for unit sales to be paid to broker-dealers (B-D sales commissions) and premiums paid to certain investors upon the purchase of units are paid by RMC and are not paid directly by us out of offering proceeds. Instead, the company advances to RMC, from offering proceeds, amounts sufficient to pay the B-D sales commissions and premiums to be paid to investors. Such advances in total may not exceed seven percent (7%) of offering proceeds. The receivable arising from the advances is unsecured and non-interest bearing and is referred to as the “formation loan.” As of December 31, 2017, such advances totaled $4,659,947, of which $3,777,088 remains outstanding. Please refer to the information under “—Unit sales commissions paid to broker-dealers/formation loan” in Note 1 (Organization and General) and “—Reimbursement and allocation of organization and offering expenses” in Note 3 (Manager and Related Parties) to the financial statements included in Part II, Item 8 of this report for a discussion of the formation loan and organization and offering expenses, which discussions are incorporated herein by this reference.
Distributions
Cash distributions totaled $3,596,449 and $2,426,108 in 2017 and 2016, respectively. See “Distribution policy” under Item 1- Business in Part I of this annual report, which discussion is incorporated by reference herein.
Distribution reinvestment plan
The DRIP provision of the operating agreement permits members to elect to have all or a portion of their monthly distributions reinvested in additional units. During 2017 and 2016, 1,987,151 and 1,366,278 units, respectively, were distributed to members under the DRIP.
Liquidity and unit redemption program
Units redeemed in 2017 and 2016 by quarter are presented in the following table.
Units redeemed | 2017 |
|
| 2016 |
| ||
Q1 | $ | 400,310 |
|
| $ | 232,208 |
|
Q2 |
| 53,152 |
|
|
| 159,917 |
|
Q3 |
| 346,800 |
|
|
| 208,520 |
|
Q4 |
| 478,884 |
|
|
| 343,972 |
|
Total | $ | 1,279,146 |
|
| $ | 944,617 |
|
All redemptions are made on the last business day of the quarter, and valued at $1 per unit.
Fair market value / unit value
RMC obtained information regarding fair market valuations and unit value as of December 31, 2017, for RMI IX in compliance with FINRA Rule 2310 concerning direct-participation-program value per unit estimates. The valuation was performed by a qualified, nationally prominent firm in accordance with the objective, scope, and approach established by RMC, and is the sole responsibility of RMC. Industry standard valuation approaches, including the Income, Discounted Cash Flow, Market and Cost Approach were utilized in deriving the fair values, as appropriate. There is no assurance that this estimated value is or will remain accurate, and it does not determine the amount that a member is entitled to receive upon redemption of units.
The fair value of a unit of RMI IX was determined to be $0.97, after consideration of the fair values of the net assets held and the restrictions in the unit redemption program and the restrictions on transferability of units.
The fair value of the portfolio of secured loans, per the analysis, is approximately $56.8 million, representing a premium of approximately $2.0 million over the book value.
The portfolio of secured loans was valued based on the appropriate application of the income, discounted cash flow, market, and cost approaches. Although all the approaches are considered in a comprehensive valuation analysis, the nature of the asset and the availability of data will dictate which approaches are ultimately utilized to derive each asset’s value.
37
Discounted Cash Flow Approach – The discounted cash flow method is comprised of four steps:
| • | project future cash flows for a certain discrete projection period; |
| • | discount these cash flows to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money; |
| • | estimate the residual value of cash flows subsequent to the discrete projection period; and |
| • | combine the present value of the residual cash flows with the discrete projection period cash flows to indicate the fair market value. |
Income Approach - The income approach is a valuation technique that provides an estimation of the fair value of an asset, such as RMI IX’s loans, based on the cash flows that an asset can be expected to generate over its estimated remaining economic term. This approach begins with an estimation of the annual cash flows a prudent investor would expect the subject asset to generate over a discrete projection period. The estimated cash flows for each of the years in the discrete projection period are then converted to their present value equivalent using a rate of return appropriate for the risk of achieving the asset’s projected cash flows. The present value of the estimated cash flows is then added to the present value equivalent of the residual value of the asset at the end of the discrete projection period to arrive at an estimate of fair value.
Market Approach - The market approach measures value based on what other purchasers in the market have paid for assets that can be considered reasonably similar to those being valued. When the market approach is utilized, data are collected on the prices paid for reasonably comparable assets. Adjustments are made to the comparable assets to compensate for differences between those assets and the asset being valued. In the case of real estate for example, adjustments might be made for location, quality or construction, and/or building amenities. The application of the market approach results in an estimate of the price reasonably expected to be realized from the sale of the property.
Cost Approach - The cost approach is based on the premise that a prudent investor would pay no more for an asset than its replacement or reproduction costs. The cost to replace the asset would include the cost of constructing a similar asset of equivalent economic utility at prices applicable at the time of the valuation analysis. To arrive at an estimate of the fair value using the cost approach, the replacement cost new is determined and reduced for depreciation of the asset. In this context, depreciation has three components:
| • | physical depreciation; |
| • | functional obsolescence; and |
| • | economic obsolescence. |
Physical deterioration is impairment to the condition of the asset brought about by wear and tear, disintegration, use in service, and the action of the elements. Functional obsolescence is the impairment in the efficiency of the asset brought about by such factors as overcapacity, inadequacy or a change in technology that affect the asset. Economic obsolescence is the impairment in the desirability of the asset arising from external economic forces, legislative enactment, or changes in supply and demand relationships.
Item 6 – Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the audited financial statements and notes thereto, which are included in Part II, Item 8 of this report.
38
Manager and Other Related Parties
See Notes 1 (Organization and General) and 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed presentation of the company activities for which related parties are compensated and related transactions, including the formation loan to RMC, which presentation is incorporated by this reference into this Item 7.
Critical Accounting Policies
See Note 2 (Summary of Significant Accounting Policies) to the financial statements included in Part II, Item 8 of this report for a detailed presentation of critical accounting policies, which presentation is incorporated by this reference into this Item 7.
39
General economic conditions – California
All of our mortgage loans are secured by California real estate. Our secured-loan investment activity and the value of the real estate securing our loans is dependent significantly on economic activity and employment conditions in the California. Wells Fargo’s Economics Group periodically provides timely, relevant information and analysis in its reports and commentary regarding California’s employment and economic conditions. Highlights from a recently issued report from Wells Fargo Securities Economics Group is presented below.
In the publication “California Gets a Jump on 2018” dated March 9, 2018:
“Employers in the Golden State added 35,500 jobs in January, and the annual benchmarking process revised 2017 job gains higher. California’s jobless rate ticked 0.1 percentage point lower to 4.4 percent in January.”
“California’s 35,500-job gain continued the momentum built in 2017, which was actually stronger than first reported. California’s annual benchmark revision to payrolls revealed that employers actually added about 30,000 more jobs by the end of 2017 than originally estimated. Job growth accelerated further in January to a year-over-year increase of 2.2 percent, on a three month average basis, which represented a gain of 362,300 net new jobs. California’s payroll growth is on an upward trend and among the fastest in the nation, according to the September 2017 QCEW data, which inputs into the annual revisions. Only other states in the west added jobs faster than California.” …
“All of California’s main employment sectors are adding jobs, underscoring the broadening of the expansion beyond the tech and energy-driven growth that was the hallmark of the first half of the decade. That employers in all of California’s major metro areas added to payrolls over the past year is further evidence that more of the state is taking part in the economic expansion. Construction job growth is being driven by strong demand for new homes, particularly on the more affordable end of the spectrum. We expect construction payrolls to continue to grow rapidly, as long as workers can be found. California is in serious need of more housing stock. Similarly, health care workers are in high demand, which has propelled the sector to one of California’s fastest growing. The tech sector remains a potent job driver, and strength in that area offset losses elsewhere in the information sector over the past year. Information payrolls rose 6,100 jobs despite a 10,300-job loss in the motion picture industry and a 2,800-job loss in telecommunication. Manufacturing is another sector that endured a rough patch in recent years, and the newly revised data show the sector rebounding slightly earlier and stronger than first thought.” …
“California’s labor force grew slightly faster than its population but not enough for a meaningful improvement in the labor force participation rate, which still trails the nation. California’s labor market apparently has more slack to absorb, particularly if its strong job growth entices more workers into the labor force from the sidelines. Labor market slack is an increasingly rare commodity among states, as labor shortages seep into more regions and sectors. Even though California’s labor force has more slack than much of the nation, it is now the tightest it has been since the series began in 1976 and is drifting lower. Employment growth exceeded the labor force again in January to push the jobless rate down 0.1 percentage points to 4.4 percent. The national jobless rate has been stuck at 4.1 percent since October.”
40
Key performance indicators are presented in the following table for 2017 and 2016.
|
| 2017 |
|
| 2016 |
|
| ||
Secured loans – end of period balance |
| $ | 54,768,689 |
|
| $ | 40,123,393 |
|
|
Secured loans – average daily balance |
| $ | 47,410,000 |
|
| $ | 31,725,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loans, gross |
| $ | 4,031,706 |
|
| $ | 2,719,075 |
|
|
Portfolio interest rate(1) |
|
| 8.5 | % |
|
| 8.6 | % |
|
Effective yield rate(2) |
|
| 8.5 | % |
|
| 8.6 | % |
|
|
|
|
|
|
|
|
|
|
|
Amortization of loan administrative fees, net |
| $ | — |
|
| $ | 35,071 |
|
|
Percent of average daily balance(2) |
|
| 0.0 | % |
|
| 0.1 | % |
|
|
|
|
|
|
|
|
|
|
|
Interest on loans, net |
| $ | 4,031,706 |
|
| $ | 2,684,004 |
|
|
Percent of average daily balance(2) |
|
| 8.5 | % |
|
| 8.5 | % |
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| — |
|
|
| — |
|
|
Percent of average daily balance(2) |
|
| 0.0 | % |
|
| 0.0 | % |
|
|
|
|
|
|
|
|
|
|
|
Total operations expense(7) |
| $ | 185,599 |
|
| $ | 90,552 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 3,869,045 |
|
| $ | 2,608,480 |
|
|
Percent of average members’ capital(3)(4) |
|
| 7.0 | % |
|
| 6.9 | % |
|
|
|
|
|
|
|
|
|
|
|
Member Distributions |
| $ | 3,596,449 |
|
| $ | 2,426,108 |
|
|
Percent of average members’ capital(3)(4)(5) |
|
| 6.5 | % |
|
| 6.5 | % |
|
|
|
|
|
|
|
|
|
|
|
Members’ capital, gross – end of period balance |
| $ | 66,450,424 |
|
| $ | 45,405,776 |
|
|
Members’ capital, gross – average daily balance |
| $ | 55,007,000 |
|
| $ | 37,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Member Redemptions(6) |
| $ | 1,279,146 |
|
| $ | 944,617 |
|
|
(1) | Stated note interest rate, weighted daily average |
(2) | Percent of secured loans – average daily balance |
(3) | Percent of members’ capital, gross – average daily balance |
(4) | Percent based on the net income available to members (excluding 1% allocated to the manager) |
(5) | Members Capital Distributed during 2017 is net of O&O costs allocated to members during the year. |
(6) | Scheduled member redemptions as of December 31, 2017 were $584,149, payable between 2018 and 2021. Scheduled member redemptions as of December 31, 2016 were $437,623. |
(7) See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees waived and costs absorbed by the manager, which presentation is incorporated by this reference into this Item 7.
41
The secured loan balance at December 31, 2017 of $54,768,689 was an increase of approximately 36.5% ($14.6 million) over 2016’s $40,123,393.The increased balance of the secured loan portfolio is due to the 1) increased balance of members’ capital which provides additional capital for funding loans, and 2) the favorable economic environment generally and to increased investment in California real estate markets specifically, both of which expand the opportunity for new loans. Secured loans as a percent of member’s capital (based on average balances) was 86.2% and 85.5% for 2017 and 2016, respectively.
Loans generally are funded at a fixed interest rate with a loan term of up to five years. Loans acquired are generally done so within the first six months of origination, and purchased at the current par value, which approximates fair value. As of December 31, 2017, 86 of the company’s 93 loans (representing 97% of the aggregate principal of the company’s loan portfolio) had a loan term of five years or less from loan inception. The remaining loans had terms longer than five years. Substantially all loans are written without a prepayment-penalty provision. As of December 31, 2017, 73 loans outstanding (representing 72% of the aggregate principal balance of the company’s loan portfolio) provide for monthly payments of interest only, with the principal due in full at maturity. The remaining loans require monthly payments of principal and interest, typically calculated on a 30 year amortization, with the remaining principal balance due at maturity.
We have sought to exercise strong discipline in underwriting loan applications and lending against collateral at amounts that create a mortgage portfolio that has substantial protective equity (i.e., safety margins to outstanding debt) as indicated by the overall conservative weighted average loan-to-value ratio (LTV) which at December 31, 2017 was approximately 53.5%. Thus, per the appraisal-based valuations at the time of loan inception, borrowers have, in the aggregate, equity of 46.5% in the property, and we as lenders have lent in the aggregate 53.5% (including other senior liens on the property) against the properties we hold as collateral for the repayment of our loans.
See Note 4 (Loans) to the financial statements included in Part II, Item 8 of this report for detailed presentations on the secured loan portfolio and on the allowance for loan losses, which presentations are incorporated by this reference into this Item 7.
Performance overview
Revenue from the interest on loans, net in 2017 increased by approximately $1,348,000, over 2016, due to the increased average loan balance of the secured loan portfolio. Operations expense for 2017 increased by approximately $95,000, over 2016 due primarily to a reduction in professional services reimbursed by the manager, and an increase in mortgage servicing fees due to an increased loan portfolio. In all periods presented, the manager, at its sole discretion, provided financial support that improved net income and the return to investors.
At times, to enhance the company’s earnings, RMC has taken several actions, including:
| • | charging less than the maximum allowable fees; |
| • | has not requested reimbursement of qualifying expenses; and/or |
| • | paying company expenses, such as professional fees, that could have been obligations of the company. |
Such fee waivers and cost actions were not made for the purpose of providing the company with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the company has no such required level of distributions. Any decision to waive fees and/or to absorb costs, and the amount (if any) to be waived or absorbed, is made by RMC in its sole discretion. Total support provided, as detailed below, was approximately $1,748,000 and $1,309,000 for 2017 and 2016, respectively. Going forward, this support will be reduced and RMC expects support will ultimately cease, as discussed below. See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees waived and costs absorbed by the manager, which presentation is incorporated by this reference into this Item 7.
42
Commencing with the March 2018 distribution, we will reduce the net distribution rate to 6.0% from the previous 6.5% net distribution rate. Commencing in April 2018, RMC will no longer pay for our direct our expenses, and intends, by the fourth quarter of 2018, to begin reducing fee waivers and commence collecting reimbursable expenses, so that by July 2019 we will be paying RMC the fees it is entitled to under the operating agreement and reimbursing RMC for expenses attributable to us. The distribution rate could decrease once RMC decreases and ultimately ceases providing financial support.
In addition, the company, along with RMC, is working with a nationally renowned professional services firm to commence selling loans, which the company believes it will be able to sell at a premium (i.e. profit to par). Any gain on loan sales would generate additional revenue for the company and may allow the company to pay fees and expenses owed to RMC without further reducing the distribution rate. Potential additional revenue from premiums generated through loan sales would provide a buffer to the expenses the company will absorb after RMC decreases and eventually ceases providing financial support. The company cannot estimate the extent of loan sales it may achieve, in number or value, or if the company will sell any loans at all. The company’s distribution rate will fluctuate and could decrease depending on:
| • | loan origination volumes; |
| • | the timing and gains received from loan sales; and |
| • | the effects of future interest rates negotiated with borrowers. |
Notwithstanding potential loan sales, the company will attempt to be fully invested in loans in the future but it cannot guarantee that it will be able do to so.
Analysis and discussion of income from operations 2017 v. 2016
Significant changes to revenue and expenses during 2017 and 2016 are summarized in the following table.
|
| Interest on loans, net |
|
| Provision For Loan Losses |
|
| Operations Expense |
|
| Net Income |
| ||||
For the Years Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| $ | 4,031,706 |
|
|
| — |
|
|
| 185,599 |
|
|
| 3,869,045 |
|
2016 |
|
| 2,684,004 |
|
|
| — |
|
|
| 90,552 |
|
|
| 2,608,480 |
|
Change |
| $ | 1,347,702 |
|
|
| — |
|
|
| 95,047 |
|
|
| 1,260,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balance Increase |
| $ | 1,369,482 |
|
|
| — |
|
|
| 38,441 |
|
|
| 1,331,041 |
|
Loan Portfolio Effective Yield Rate |
|
| (21,780 | ) |
|
| — |
|
|
| — |
|
|
| (21,780 | ) |
Late Fees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,910 |
|
Capital Balance Increase |
|
| — |
|
|
| — |
|
|
| 398,604 |
|
|
| (398,604 | ) |
Manager's Fees/Costs Waived |
|
| — |
|
|
| — |
|
|
| (398,604 | ) |
|
| 398,604 |
|
Manager Reimbursements |
|
| — |
|
|
| — |
|
|
| 58,553 |
|
|
| (58,553 | ) |
Other |
|
| — |
|
|
| — |
|
|
| (1,947 | ) |
|
| 1,947 |
|
Change |
| $ | 1,347,702 |
|
|
| — |
|
|
| 95,047 |
|
|
| 1,260,565 |
|
The table above displays only significant changes to net income for the period, and is not intended to cross foot.
43
Interest on loans increased by $1,347,702 due to growth of the secured loan portfolio. The portfolio has a strong payment history, with one loan currently designated as impaired. The Secured loans – average daily balance at December 31, 2017 increased approximately $15.7 million, or approximately 49.4%, over the average daily balance at December 31, 2016.
Provision for loan losses
At December 31, 2017 and 2016, the company had not recorded an allowance for loan losses as all loans had protective equity such that at December 31, 2017 and 2016, collection was deemed probable for amounts owing. Total principal amounts past due more than 90 days at December 31, 2017 and 2016 were $139,643 and $890,470, respectively.
Operations expense
Operations expense as a percent of interest on loans, net was approximately 4.6% and 3.4% during 2017, and 2016, respectively, as RMC provided, at its sole discretion, financial support by fee waiver, paying company expenses (such as professional fees) that could have been obligations of the company, and by not passing on expenses that qualified as reimbursable to RMC. Going forward, this support will be reduced and RMC expects support will ultimately cease. As discussed above, beginning in April 2018, RMC will no longer pay for our direct expenses, and intends, by the fourth quarter of 2018, to begin reducing fee waivers and commence collecting reimbursable expenses, so that by July 2019 we will be paying RMC the fees it is entitled to under the operating agreement and reimbursing RMC for expenses attributable to us.
Significant changes to operations expense during 2017 and 2016, are summarized in the following table.
|
| Mortgage Servicing Fees |
|
| Asset Management Fees, net |
|
| Costs From RMC, net |
|
| Professional Services, net |
|
| Other |
|
| Total |
| ||||||
For the Years Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| $ | 116,289 |
|
|
| — |
|
|
| — |
|
|
| 63,053 |
|
|
| 6,257 |
|
|
| 185,599 |
|
2016 |
|
| 77,848 |
|
|
| — |
|
|
| — |
|
|
| 4,500 |
|
|
| 8,204 |
|
|
| 90,552 |
|
Change |
| $ | 38,441 |
|
|
| — |
|
|
| — |
|
|
| 58,553 |
|
|
| (1,947 | ) |
|
| 95,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balance Increase |
| $ | 38,441 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 38,441 |
|
Capital Balance Increase |
|
| — |
|
|
| 132,885 |
|
|
| 265,719 |
|
|
| — |
|
|
| — |
|
|
| 398,604 |
|
Manager's Fees/Costs Waived |
|
| — |
|
|
| (132,885 | ) |
|
| (265,719 | ) |
|
| — |
|
|
| — |
|
|
| (398,604 | ) |
Manager Reimbursements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 58,553 |
|
|
| — |
|
|
| 58,553 |
|
Other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,947 | ) |
|
| (1,947 | ) |
Change |
| $ | 38,441 |
|
|
| — |
|
|
| — |
|
|
| 58,553 |
|
|
| (1,947 | ) |
|
| 95,047 |
|
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a detailed discussion on fees waived and costs absorbed by the manager, which presentation is incorporated by this reference into this Item 7. See “Performance Overview” for a discussion of RMC’s plans to reduce and eventually eliminate fee waivers and cost absorptions.
| • | Mortgage servicing fees |
The increase in mortgage servicing fees of $38,441 was consistent with the increase in the average daily secured loan portfolio to $47,410,000, noted above in Key Performance Indicators, at the annual rate of 0.25%.
44
The total amount of asset management fees chargeable were $408,535 and $275,650 for 2017 and 2016, respectively. Of the total amount chargeable, RMC, at its sole discretion, waived all asset management fees during 2017 and 2016.
| • | Costs through RMC |
Costs incurred by RMC, for which reimbursement could have been requested were $541,686 and $275,967, for 2017 and 2016, respectively. Of the total amount chargeable, RMC at its sole discretion, waived all reimbursements for which reimbursement could have been requested 2017 and 2016, respectively.
| • | Professional services |
Professional services consist primarily of legal, audit and tax compliance expenses. The increase in professional services for 2017, was due primarily to a reduction in professional services reimbursed by the manager ($335,303 during 2017, and $387,749 during 2016).
Summary comparison – 4th quarter v. 3rd quarter
Significant changes to income or expense items for the three-month period ended December 31, 2017 compared to the three-month period ended September 30, 2017 is summarized in the following table.
|
| Interest on loans, net |
|
| Provision For Loan Losses |
|
| Operations Expense |
|
| Net Income |
|
| ||||
For the three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
| $ | 1,180,923 |
|
|
| — |
|
|
| 49,750 |
|
|
| 1,134,958 |
|
|
September 30, 2017 |
|
| 1,074,539 |
|
|
| — |
|
|
| 78,192 |
|
|
| 1,007,673 |
|
|
Change |
| $ | 106,384 |
|
|
| — |
|
|
| (28,442 | ) |
|
| 127,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balance Increase |
| $ | 106,384 |
|
|
| — |
|
|
| 3,867 |
|
|
| 102,517 |
|
|
Late Fees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,541 | ) |
|
Capital Balance Increase |
|
| — |
|
|
| — |
|
|
| 43,765 |
|
|
| (43,765 | ) |
|
Manager's Fees/Costs Waived |
|
| — |
|
|
| — |
|
|
| (43,765 | ) |
|
| 43,765 |
|
|
Manager Reimbursements |
|
| — |
|
|
| — |
|
|
| (30,899 | ) |
|
| 30,899 |
|
|
Other |
|
| — |
|
|
| — |
|
|
| (1,410 | ) |
|
| 1,410 |
|
|
Change |
| $ | 106,384 |
|
|
| — |
|
|
| (28,442 | ) |
|
| 127,285 |
|
|
The table above displays only significant changes to net income for the period, and is not intended to cross foot.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ capital, cash flows and liquidity
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows by business activity are presented in the following table for 2017 and 2016.
|
|
|
|
| |||||
|
|
| 2017 |
|
| 2016 |
| ||
Members’ capital |
|
|
|
|
|
|
|
|
|
Gross subscription proceeds |
|
| $ | 22,214,654 |
|
| $ | 13,976,288 |
|
Organization and offering costs, net |
|
|
| (876,620 | ) |
|
| (572,259 | ) |
Formation loan, net |
|
|
| (1,274,451 | ) |
|
| (778,060 | ) |
Distributions and redemptions, net |
|
|
| (2,914,528 | ) |
|
| (2,022,018 | ) |
Cash – members’ capital, net |
|
|
| 17,149,055 |
|
|
| 10,603,951 |
|
Loan principal/advances/interest |
|
|
|
|
|
|
|
|
|
Principal collected |
|
| $ | 27,081,592 |
|
| $ | 19,737,102 |
|
Loans sold to Affiliates |
|
|
| 999,995 |
|
|
| - |
|
Interest received, net |
|
|
| 3,930,881 |
|
|
| 2,629,562 |
|
Other loan income |
|
|
| 23,038 |
|
|
| 15,178 |
|
Loan funding & advances made, collected |
|
|
| (42,716,323 | ) |
|
| (32,502,176 | ) |
Cash – loans, net |
|
|
| (10,680,817 | ) |
|
| (10,120,334 | ) |
|
|
|
|
|
|
|
|
|
|
Operations expense |
|
|
| (155,640 | ) |
|
| (92,602 | ) |
|
|
|
|
|
|
|
|
|
|
Deposit on line of credit |
|
|
| 2,400 |
|
|
| (5,000 | ) |
|
|
|
|
|
|
|
|
|
|
Net change in cash |
|
| $ | 6,314,998 |
|
| $ | 386,015 |
|
Distributions breakout by type are presented in the following table for 2017 and 2016.
|
| 2017 |
|
| 2016 |
| ||
DRIP |
| $ | 1,987,151 |
|
| $ | 1,366,278 |
|
Cash |
|
| 1,609,298 |
|
|
| 1,059,830 |
|
Total |
| $ | 3,596,449 |
|
| $ | 2,426,108 |
|
Percent of members’ capital, electing cash distribution |
|
| 45 | % |
|
| 44 | % |
Unit redemptions subject to penalty are presented in the following table for 2017 and 2016.
|
| 2017 |
|
| 2016 |
| ||
Capital redemptions-without penalty |
| $ | 747,234 |
|
| $ | 934,829 |
|
Capital redemptions-subject to penalty |
|
| 531,912 |
|
|
| 9,788 |
|
Total |
| $ | 1,279,146 |
|
| $ | 944,617 |
|
Scheduled redemptions at December 31, 2017 were $584,149, to be paid between 2018 and 2021.
The ongoing sources of funds for loans are the proceeds (net of redemption of members’ capital) from:
| • | sale of members’ units (net of reimbursement to RMC of organization and offering expenses), including units sold by reinvestment of distributions; |
| • | loan payoffs; |
| • | borrowers’ monthly principal and interest payments; and |
| • | to a lesser degree and, if obtained, a line of credit. |
46
The company’s loans generally have shorter maturity terms than typical mortgages. As a result, constraints on the ability of our borrowers to refinance their loans at maturity possibly would have a negative impact on their ability to repay their loans. In the event a borrower is unable to repay at maturity, the company may consider extending the term through a loan modification or foreclosing on the property. A reduction in loan repayments would reduce the company’s cash flows and restrict the company’s ability to invest in new loans and/or, if ongoing for an extended period, provide earnings distributions and redemptions of members’ capital.
Generally, within a broad range, the company’s rates on mortgage loans is not affected by market movements in interest rates. If, as expected, we continue to make and invest in fixed rate loans primarily, and interest rates were to rise, a possible result would be lower prepayments of the company’s loans. This increase in the duration of time loans are on the books may reduce overall liquidity, which itself may reduce the company’s investment into new loans at higher interest rates. Conversely, if interest rates were to decline, we could see a significant increase in borrower prepayments. If we then invest in new loans at lower rates of interest, a lower yield to members may possibly result.
|
|
|
|
|
|
|
|
|
Contractual obligations
The company had two contractual obligations at December 31, 2017:
| • | to reimburse RMC for O&O expenses (as of December 31, 2017, approximately $3,182,696 was to be reimbursed to RMC) contingent upon future sales of units; and |
| • | Redemptions of members’ capital scheduled as of December 31, 2017, of $584,149, to be paid between 2018 and 2021. |
See Note 3 (Manager and Other Related Parties) and Note 5 (Commitments and Contingencies, Other Than Loan Commitments) to the financial statements included in Part II, Item 8 of this report for a detailed presentation on commitments and contingencies, which presentation is incorporated by this reference into this Item 7.
At December 31, 2017 the company had no construction or rehabilitation loans outstanding.
The Company has no off-balance sheet arrangements as such arrangements are not permitted by the operating agreement.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 8 – Financial Statements and Supplementary Data
A – Financial Statements
The following financial statements of Redwood Mortgage Investors IX, LLC are included in Item 8:
B – Financial Statement Schedules
None.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Redwood Mortgage Investors IX, LLC
San Mateo, California
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Redwood Mortgage Investors IX, LLC (a Delaware Limited Liability Company) (the “Company”) as of December 31, 2017 and 2016, the related statements of income, changes in members’ capital, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of a Matter
As discussed in Note 3, in 2017 and 2016 the Manager, at its sole discretion, provided financial support to the Company that improved net income and the return to investors in the form of waived fees, and by the decision not to seek reimbursement for operating costs incurred by the Manager for which reimbursement is allowable under the operating agreement. Collectively, these actions increased net income to the Company during the years ended December 31, 2017 and 2016 by approximately $1,747,508 and $1,309,174 respectively.
/S/ BDO USA, LLP
We have served as the Company's auditor since 2015.
San Francisco, California
April 2, 2018
48
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
December 31, 2017 and 2016
|
| 2017 |
|
| 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 8,509,852 |
|
| $ | 2,194,854 |
|
Loans |
|
|
|
|
|
|
|
|
Principal |
|
| 54,768,689 |
|
|
| 40,123,393 |
|
Advances |
|
| 13,989 |
|
|
| 24,550 |
|
Accrued interest |
|
| 409,867 |
|
|
| 287,767 |
|
Loan balances secured by deeds of trust |
|
| 55,192,545 |
|
|
| 40,435,710 |
|
Loan administrative fees, net |
|
| 9,008 |
|
|
| 30,282 |
|
Total loans |
|
| 55,201,553 |
|
|
| 40,465,992 |
|
Other assets |
|
| — |
|
|
| 5,000 |
|
Total assets |
| $ | 63,711,405 |
|
| $ | 42,665,846 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES, INVESTORS IN APPLICANT STATUS, AND MEMBERS’ CAPITAL |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 180 |
|
| $ | 89 |
|
|
|
|
|
|
|
|
|
|
Investors in applicant status |
|
| 3,270,312 |
|
|
| 1,408,185 |
|
|
|
|
|
|
|
|
|
|
Members’ capital, net |
|
| 64,218,001 |
|
|
| 43,777,010 |
|
Receivable from manager (formation loan) |
|
| (3,777,088 | ) |
|
| (2,519,438 | ) |
Members’ capital, net, less formation loan |
|
| 60,440,913 |
|
|
| 41,257,572 |
|
Total liabilities, investors in applicant status and members’ capital |
| $ | 63,711,405 |
|
| $ | 42,665,846 |
|
The accompanying notes are an integral part of these financial statements.
49
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
For the Years Ended December 31, 2017 and 2016
|
|
|
| |||||
Revenues, net |
| 2017 |
|
| 2016 |
| ||
Interest income |
| $ | 4,031,706 |
|
| $ | 2,684,004 |
|
Late fees |
|
| 22,938 |
|
|
| 15,028 |
|
Total revenues |
|
| 4,054,644 |
|
|
| 2,699,032 |
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Operations Expense |
|
|
|
|
|
|
|
|
Mortgage servicing fees |
|
| 116,289 |
|
|
| 77,848 |
|
Asset management fees, net (Note 3) |
|
| — |
|
|
| — |
|
Costs from Redwood Mortgage Corp., net (Note 3) |
|
| — |
|
|
| — |
|
Professional services, net (Note 3) |
|
| 63,053 |
|
|
| 4,500 |
|
Other |
|
| 6,257 |
|
|
| 8,204 |
|
Total operations expense |
|
| 185,599 |
|
|
| 90,552 |
|
Net income |
| $ | 3,869,045 |
|
| $ | 2,608,480 |
|
Members (99%) |
|
| 3,830,355 |
|
|
| 2,582,395 |
|
Manager (1%) |
|
| 38,690 |
|
|
| 26,085 |
|
|
| $ | 3,869,045 |
|
| $ | 2,608,480 |
|
The accompanying notes are an integral part of these financial statements.
50
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Statements of Changes in Members’ Capital
For the Years Ended December 31, 2017 and 2016
|
|
|
|
|
| Members' Capital, net |
| |||||||||||||
|
| Investors In Applicant Status |
|
| Members’ Capital |
|
| Manager’s Capital |
|
| Unallocated Organization and Offering Expenses |
|
| Members’ Capital, net |
| |||||
Balance at December 31, 2016 |
| $ | 1,408,185 |
|
| $ | 45,405,776 |
|
| $ | 69,965 |
|
| $ | (1,698,731 | ) |
| $ | 43,777,010 |
|
Contributions on application |
|
| 22,061,531 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Contributions admitted to members' capital |
|
| (20,204,759 | ) |
|
| 20,204,759 |
|
|
| 20,332 |
|
|
| — |
|
|
| 20,225,091 |
|
Premiums paid on application by RMC |
|
| 132,699 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Premiums admitted to members' capital |
|
| (127,344 | ) |
|
| 127,344 |
|
|
| — |
|
|
| — |
|
|
| 127,344 |
|
Net income |
|
| — |
|
|
| 3,830,355 |
|
|
| 38,690 |
|
|
| — |
|
|
| 3,869,045 |
|
Earnings distributed to members |
|
| — |
|
|
| (3,596,449 | ) |
|
| (26,085 | ) |
|
| — |
|
|
| (3,622,534 | ) |
Earnings distributed used in DRIP |
|
| — |
|
|
| 1,987,151 |
|
|
| — |
|
|
| — |
|
|
| 1,987,151 |
|
Members’ redemptions |
|
| — |
|
|
| (1,279,146 | ) |
|
| — |
|
|
| — |
|
|
| (1,279,146 | ) |
Organization and offering expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (919,870 | ) |
|
| (919,870 | ) |
Organization and offering expenses allocated |
|
| — |
|
|
| (229,366 | ) |
|
| — |
|
|
| 229,366 |
|
|
| — |
|
Manager reimbursement for unallocated organization and offering cost on redemptions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 43,252 |
|
|
| 43,252 |
|
Early withdrawal penalties |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,658 |
|
|
| 10,658 |
|
Balance at December 31, 2017 |
| $ | 3,270,312 |
|
| $ | 66,450,424 |
|
| $ | 102,902 |
|
| $ | (2,335,325 | ) |
| $ | 64,218,001 |
|
|
|
|
|
|
| Members' Capital, net |
| |||||||||||||
|
| Investors In Applicant Status |
|
| Members’ Capital |
|
| Manager’s Capital |
|
| Unallocated Organization and Offering Expenses |
|
| Members’ Capital, net |
| |||||
Balance at December 31, 2015 |
| $ | 1,022,865 |
|
| $ | 31,403,178 |
|
| $ | 47,874 |
|
| $ | (1,279,525 | ) |
| $ | 30,171,527 |
|
Contributions on application |
|
| 13,948,155 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Contributions admitted to members' capital |
|
| (13,564,585 | ) |
|
| 13,564,585 |
|
|
| 13,577 |
|
|
| — |
|
|
| 13,578,162 |
|
Premiums paid on application by RMC |
|
| 14,606 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Premiums admitted to members' capital |
|
| (12,856 | ) |
|
| 12,856 |
|
|
| — |
|
|
| — |
|
|
| 12,856 |
|
Net income |
|
| — |
|
|
| 2,582,395 |
|
|
| 26,085 |
|
|
| — |
|
|
| 2,608,480 |
|
Earnings distributed to members |
|
| — |
|
|
| (2,426,108 | ) |
|
| (17,571 | ) |
|
| — |
|
|
| (2,443,679 | ) |
Earnings distributed used in DRIP |
|
| — |
|
|
| 1,366,278 |
|
|
| — |
|
|
| — |
|
|
| 1,366,278 |
|
Members’ redemptions |
|
| — |
|
|
| (944,617 | ) |
|
| — |
|
|
| — |
|
|
| (944,617 | ) |
Organization and offering expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (610,669 | ) |
|
| (610,669 | ) |
Organization and offering expenses allocated |
|
| — |
|
|
| (152,791 | ) |
|
| — |
|
|
| 152,791 |
|
|
| — |
|
Manager reimbursement for unallocated organization and offering cost on redemptions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 38,410 |
|
|
| 38,410 |
|
Early withdrawal penalties |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 262 |
|
|
| 262 |
|
Balance at December 31, 2016 |
| $ | 1,408,185 |
|
| $ | 45,405,776 |
|
| $ | 69,965 |
|
| $ | (1,698,731 | ) |
| $ | 43,777,010 |
|
The accompanying notes are an integral part of these financial statements.
51
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
For the Years Ended December 31, 2017 and 2016
|
| 2017 |
|
| 2016 |
| ||
Operations |
|
|
|
|
|
|
|
|
Interest received |
| $ | 3,909,607 |
|
| $ | 2,608,518 |
|
Other loan income |
|
| 23,038 |
|
|
| 15,178 |
|
Loan administrative fee reimbursed (paid) |
|
| 21,274 |
|
|
| 21,044 |
|
Operations expense |
|
| (155,640 | ) |
|
| (92,602 | ) |
Total cash provided by (used in) operations |
|
| 3,798,279 |
|
|
| 2,552,138 |
|
Investing – loan principal/advances |
|
|
|
|
|
|
|
|
Principal collected on loans |
|
| 27,081,592 |
|
|
| 19,738,921 |
|
Loans originated |
|
| (42,726,883 | ) |
|
| (32,502,176 | ) |
Loans sold to Affiliates |
|
| 999,995 |
|
|
| — |
|
Advances (made) received on loans |
|
| 10,560 |
|
|
| (1,819 | ) |
Total cash provided by (used in) investing |
|
| (14,634,736 | ) |
|
| (12,765,074 | ) |
Financing – members’ capital |
|
|
|
|
|
|
|
|
Deposit on line of credit |
|
| 2,400 |
|
|
| (5,000 | ) |
Contributions by members, net |
|
|
|
|
|
|
|
|
Contributions by members |
|
| 22,214,654 |
|
|
| 13,976,288 |
|
Organization and offering expenses paid, net |
|
| (876,620 | ) |
|
| (572,259 | ) |
Formation loan funding |
|
| (1,509,594 | ) |
|
| (951,871 | ) |
Formation loan collected |
|
| 235,143 |
|
|
| 173,811 |
|
Total cash provided by members, net |
|
| 20,063,583 |
|
|
| 12,625,969 |
|
Distributions to members |
|
|
|
|
|
|
|
|
Earnings distributed |
|
| (1,635,382 | ) |
|
| (1,077,401 | ) |
Redemptions |
|
| (1,279,146 | ) |
|
| (944,617 | ) |
Cash distributions to members |
|
| (2,914,528 | ) |
|
| (2,022,018 | ) |
Total cash provided by (used in) financing |
|
| 17,151,455 |
|
|
| 10,598,951 |
|
Net increase (decrease) in cash |
|
| 6,314,998 |
|
|
| 386,015 |
|
Cash, beginning of period |
|
| 2,194,854 |
|
|
| 1,808,839 |
|
Cash, end of period |
| $ | 8,509,852 |
|
| $ | 2,194,854 |
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
|
| 2016 |
| ||
Net income |
| $ | 3,869,045 |
|
| $ | 2,608,480 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
Amortization of loan administrative fees |
|
| — |
|
|
| 35,071 |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accrued interest |
|
| (122,101 | ) |
|
| (110,557 | ) |
Receivable from affiliate |
|
| — |
|
|
| — |
|
Loan administrative fees reimbursed (paid) |
|
| 21,274 |
|
|
| 21,044 |
|
Accounts payable |
|
| — |
|
|
| — |
|
Other |
|
| 30,061 |
|
|
| (1,900 | ) |
Total adjustments |
|
| (70,766 | ) |
|
| (56,342 | ) |
Net cash provided by (used in) operations |
| $ | 3,798,279 |
|
| $ | 2,552,138 |
|
The accompanying notes are an integral part of these financial statements.
52
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
December 31, 2017 and 2016
NOTE 1 – ORGANIZATION AND GENERAL
Redwood Mortgage Investors IX, LLC (RMI IX or the company) is a Delaware limited liability company formed in October 2008 to engage in business as a mortgage lender and investor by making and holding-for-investment mortgage loans secured by California real estate, primarily first and second deeds of trust.
The company’s primary investment objectives are to
| • | yield a favorable rate of return from the company’s business of making and/or investing in loans; |
| • | preserve and protect the company’s capital by making and/or investing in loans secured by California real estate, preferably income-producing properties geographically situated in the San Francisco Bay Area and the coastal metropolitan regions of Southern California; and |
| • | generate and distribute cash flow from these mortgage lending and investing activities. |
The ongoing sources of funds for loans are the proceeds (net of redemption of members’ capital) from
| • | sale of members’ units (net of reimbursement to RMC of organization and offering expenses), including units sold by reinvestment of distributions; |
| • | loan payoffs; |
| • | borrowers’ monthly principal and interest payments; and |
| • | to a lesser degree and, if obtained, a line of credit. |
Profits and losses are allocated among the members according to their respective capital accounts monthly after one percent (1%) of the profits and losses are allocated to the manager. The monthly results are subject to subsequent adjustment as a result of quarterly and year-end accounting and reporting. Investors should not expect the company to provide tax benefits of the type commonly associated with limited liability company tax shelter investments. Federal and state income taxes are the obligation of the members, if and when taxes apply, other than the annual California franchise tax and any California LLC cash receipts taxes paid by the company.
The company is externally managed by Redwood Mortgage Corp. (or RMC or the manager). The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. RMC provides the personnel and services necessary for us to conduct our business as we have no employees of our own. The mortgage loans the company funds and/or invests in are arranged and generally are serviced by RMC. The manager is required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members.
The rights, duties and powers of the members and manager of the company are governed by the company’s operating agreement, the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act. Members should refer to the company’s operating agreement for complete disclosure of its provisions. Members representing a majority of the outstanding units may, without the concurrence of the manager, vote to: (i) dissolve the company, (ii) amend the operating agreement, subject to certain limitations, (iii) approve or disapprove the sale of all or substantially all of the assets of the company or (iv) remove or replace one or all of the manager. Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
53
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Cash available for distribution at the end of each calendar month is allocated ninety-nine percent (99%) to the members and one percent (1%) to the manager. Cash available for distribution means cash flow from operations (excluding repayments for loan principal and other capital transaction proceeds) less amounts set aside for creation or restoration of reserves. The manager may withhold from cash available for distribution otherwise distributable to the members with respect to any period the respective amounts of organization and offering expenses allocated to the members for the applicable period pursuant to the company’s reimbursement and allocation of organization and offering expenses policy. Per the terms of the company’s operating agreement, cash available for distribution allocated to the members is allocated among the members in proportion to their percentage interests (except with respect to differences in the amounts of organization and offering expenses allocated to the respective members during the applicable period) and in proportion to the number of days during the applicable month that they owned such percentage interests.
Cash available for distributions allocable to members, other than those participating in the distribution reinvestment plan (DRIP) and the manager, is distributed at the end of each calendar month. Cash available for distribution allocable to members who participate in the DRIP is used to purchase additional units at the end of each calendar month. The manager’s allocable share of cash available for distribution is also distributed not more frequently than with cash distributions to members.
To determine the amount of cash to be distributed in any specific month, the company relies in part on its annual forecast of profits, which takes into account the difference between the forecasted and actual results in the prior year and RMC financial support and the requirement to maintain a cash reserve.
Distribution reinvestment plan
The DRIP provision of the operating agreement permits members to elect to have all or a portion of their monthly distributions reinvested in additional units. Members may withdraw from the DRIP with written notice.
Liquidity and unit redemption program
Because there are substantial restrictions on transferability of units, there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, the company’s operating agreement includes a unit redemption program, whereby beginning one year from the date of purchase of the units, a member may redeem all or part of their units, subject to certain limitations.
The price paid for redeemed units is based on the lesser of the purchase price paid by the redeeming member or the member’s capital account balance as of the date of each redemption payment. Redemption value is calculated based on the period from date of purchase as follows:
| • | after one year, 92% of the purchase price or of the capital account balance, whichever is less; |
| • | after two years, 94% of the purchase price or of the capital account balance, whichever is less; |
| • | after three years, 96% of the purchase price or of the capital account balance, whichever is less; |
| • | after four years, 98% of the purchase price or of the capital account balance, whichever is less; |
| • | after five years, 100% of the purchase price or of the capital account balance, whichever is less. |
The company redeems units quarterly, subject to certain limitations as provided for in the operating agreement. The number of units that may be redeemed per quarter per individual member is subject to a maximum of the greater of 100,000 units or 25% of the member’s units outstanding. For redemption requests requiring more than one quarter to fully redeem, the percentage discount amount that, if any, applies when the redemption payments begin continues to apply throughout the redemption period and applies to all units covered by such redemption request regardless of when the final redemption payment is made.
54
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
The company has not established a cash reserve from which to fund redemptions. The company’s capacity to redeem units upon request is limited by the availability of cash and the company’s cash flow. The company will not, in any calendar year, redeem more than five percent (5%) of the weighted average number of units outstanding during the twelve-month period immediately prior to the date of the redemption.
Contributed capital
The manager is required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members.
Manager’s interest
If a manager is removed, withdrawn or terminated, the company will pay to the manager all amounts then accrued and owing to the manager. Additionally, the company will terminate the manager’s interest in the company’s profits, losses, distributions and capital by payment of an amount in cash equal to the then-present fair value of such interest. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.
Unit sales commissions paid to broker-dealers/formation loan
Commissions for units sales to be paid to broker-dealers (B/D sales commissions) are paid by RMC and are not paid directly by the company out of offering proceeds. Instead, the company advances to RMC, from offering proceeds, amounts sufficient to pay the B/D sales commissions and premiums to be paid to investors. Such advances in total may not exceed seven percent (7%) of offering proceeds. The receivable arising from the advances is unsecured, and non-interest bearing and is referred to as the “formation loan.” As of December 31, 2017 the company had made advances totaling $4,659,947, of which $3,777,088 remain outstanding on the formation loan.
Term of the company
The term of the company will continue until 2028, unless sooner terminated as provided in the operating agreement.
Ongoing public offering of units/ SEC Registrations
Proceeds from sales of units from inception (October, 2009) through December 31, 2017 are summarized below.
| Proceeds |
|
| |
From investors - admitted | $ | 63,913,357 |
|
|
From members under our DRIP |
| 6,232,594 |
|
|
From premiums paid by RMC(1) |
| 289,104 |
|
|
Gross proceeds from unit sales | $ | 70,435,055 |
|
|
| (1) | If a member acquired units through an unsolicited sale (i.e. without broker/dealer) the member’s capital account is credited with their capital contribution plus a premium paid by RMC equal to the amount of the sales commissions that otherwise would have been paid to a broker-dealer by RMC. This premium is reported in the year paid as taxable income to the member. |
As of December 31, 2017, we had sold approximately 70,435,000 units– 39,407,000 units under our previous registration statements and approximately 31,028,000 units under our current registration statement which was effective on June 6, 2016. Gross proceeds from unit sales (including units issued under our distribution reinvestment plan) were approximately $70,435,000 - $39,407,000 and $31,028,000, respectively, under our previous registration statements and our current registration statement.
55
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Use of Proceeds from sale of units
The proceeds from the sale of the units will be used to
| • | make additional loans; |
| • | fund working capital reserves; |
| • | pay RMC up to 4.5% of proceeds from sale of units for organization and offering expenses; and |
| • | fund a formation loan to RMC at up to 7% of proceeds from sale of units. |
Broker commissions and premiums paid to certain investors upon the purchase of units will be paid by RMC from funds advanced by the company from offering proceeds, which we refer to as the “formation loan”.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Management estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including, when applicable, the valuation of impaired loans (which itself requires determining the fair value of the collateral), and the valuation of real estate held for sale and held as investment, at acquisition and subsequently. Actual results could differ significantly from these estimates.
Fair value estimates
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
56
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Fair values of assets and liabilities are determined based on the fair-value hierarchy established in GAAP. The hierarchy is comprised of three levels of inputs to be used:
| • | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| • | Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly in active markets and quoted prices for identical assets or liabilities that are not active, and inputs other than quoted prices that are observable or inputs derived from or corroborated by market data. |
| • | Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the company’s own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the company’s own data. |
The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions. Appraisals of commercial real property generally present three approaches to estimating value: 1) market comparables or sales approach; 2) cost to replace; and 3) capitalized cash flows or investment approach. These approaches may or may not result in a common, single value. The market-comparables approach may yield several different values depending on certain basic assumptions, such as, determining highest and best use (which may or may not be the current use); determining the condition (e.g. as-is, when-completed or for land when-entitled); and determining the unit of value (e.g. as a series of individual unit sales or as a bulk disposition).
Management has the requisite familiarity with the real estate markets it lends in generally and of the properties lent on specifically to analyze sales-comparables and assess their suitability/applicability. Management is acquainted with market participants – investors, developers, brokers, lenders – that are useful, relevant secondary sources of data and information regarding valuation and valuation variability. These secondary sources may have familiarity with and perspectives on pending transactions, successful strategies to optimize value and the history and details of specific properties – on and off the market – that enhance the process and analysis that is particularly and principally germane to establishing value in distressed markets and/or property types.
Cash and cash equivalents
The company considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, company cash balances in banks exceed federally insured limits.
Loans and interest income
Loans generally are stated at the unpaid principal balance (principal). Management has discretion to pay amounts (advances) to third parties on behalf of borrowers to protect the company’s interest in the loan. Advances include, but are not limited to, the payment of interest and principal on a senior lien to prevent foreclosure by the senior lien holder, property taxes, insurance premiums and attorney fees. Advances generally are stated at the amounts paid out on the borrower’s behalf and any accrued interest on amounts paid out, until repaid by the borrower.
The company may fund a specific loan origination net of an interest reserve (one to two years) to insure timely interest payments at the inception of the loan. As monthly interest payments become due, the company funds the payments into the affiliated trust account. In the event of an early loan payoff, any unapplied interest reserves would be first applied to any accrued but unpaid interest and then as a reduction to the principal.
57
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
If events and or changes in circumstances cause management to have serious doubts about the collectability of the payments of interest and principal in accordance with the loan agreement, a loan may be designated as impaired. Impaired loans are included in management’s periodic analysis of recoverability. Any subsequent payments on impaired loans are applied to late fees, then to the accrued interest, then to advances, and lastly to principal.
From time to time, the company negotiates and enters into loan modifications with borrowers whose loans are delinquent. If the loan modification results in a significant reduction in the cash flow compared to the original note, the modification is deemed a troubled debt restructuring and a loss is recognized. In the normal course of the company’s operations, loans that mature may be renewed at then current market rates and terms for new loans. Such renewals are not designated as impaired, unless the renewed loan was previously designated as impaired.
Interest is accrued daily based on the principal of the loans. Impaired loans continue to recognize interest income as long as the loan is in the process of collection and is considered to be well-secured. Impaired loans are placed on non-accrual status if 180 days delinquent or at the earlier of management’s determination that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (which usually occurs when a notice of sale is filed) or when the loan is no longer considered well-secured. When a loan is placed on non-accrual status, the accrual of interest is discontinued; however, previously recorded interest is not reversed. A loan may return to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement.
Loan administrative fees paid to RMC for loans funded or invested in by the company are capitalized and amortized over the life of the loan on a straight-line method which approximates the effective interest method.
Allowance for loan losses
Loans and the related accrued interest and advances (i.e. the loan balance) are analyzed on a periodic basis for ultimate recoverability. Delinquencies are identified and followed as part of the loan system of record. Collateral fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the arithmetic difference between the fair value of the collateral, net of any senior liens, and the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest thereon. This computation is done for each loan (whether impaired or performing), and while loans secured by collateral of similar property type are grouped, there is enough distinction and variation in the collateral that a loan-by-loan, collateral-by-collateral analysis is appropriate.
For loans designated impaired, a provision is made for loan losses to adjust the allowance for loan losses to an amount such that the net carrying amount (unpaid principal less the specific allowance) is reduced to the lower of the loan balance or the estimated fair value of the related collateral, net of any senior loans and net of any costs to sell in arriving at net realizable value.
Loans determined not to be individually impaired are grouped by the property type of the underlying collateral, and for each loan and for the total by property type, the amount of protective equity or amount of exposure to loss ( i.e., the dollar amount of the deficiency of the fair value of the underlying collateral to the loan balance) is computed.
The company charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.
At foreclosure any excess of the recorded investment in the loan (accounting basis) over the net realizable value is charged against the allowance for loan losses.
58
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Real estate owned, or REO, is property acquired in full or partial settlement of loan obligations generally through foreclosure, and is recorded at acquisition at the lower of the amount owed on the loan (legal basis), plus any senior indebtedness, or at the property’s net realizable value, which is the fair value less estimated costs to sell, as applicable. The fair value estimates are derived from information available in the real estate markets including similar property, and often require the experience and judgment of third parties such as commercial real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves. After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, REO is analyzed periodically for changes in fair values and any subsequent write down is charged to operations expenses. Any recovery in the fair value subsequent to such a write down is recorded and is not to exceed the value recorded at acquisition. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
Recently issued accounting pronouncements
- Accounting and Financial reporting for Expected Credit Losses
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that significantly changes how entities will account for credit losses for most financial assets that are not measured at fair value through net income. The new standard will supersede currently in effect guidance and applies to all entities. Entities will be required to use a current expected credit loss (CECL) model to estimate credit impairment. This estimate will be forward-looking, meaning management will be required to use forecasts about future economic conditions to determine the expected credit loss over the remaining life of an instrument. This will be a significant change from the current incurred credit loss model, and generally may result in allowances being recognized in earlier periods than under the current credit loss model.
RMI IX invests in real estate secured loans made with the expectation of zero credit losses as a result of substantial protective equity provided by the underlying collateral. For a loss to be recognized under the CECL or incurred loss model, if the lending/loan-to-value guidelines are followed effectively, an intervening, subsequent-to-loan-funding, event must negatively impact the value of the underlying collateral of the loan in an amount greater than the amount of protective equity provided by the collateral. Such an event would be either (or both) of:
| • | an uninsured event(s) specifically impacting the collateral or |
| • | a non-temporary decline in values in the applicable real estate market. |
In both of these instances the treatment would be the same in the incurred loss and CECL models of approximately the same amount. Other than in these events, the probable of occurrence criteria of the incurred loss model is not triggered and a loss is not recognized. Further, if the zero-expected-loss lending guideline is preserved and the protective equity provided by the collateral is not expected to be impaired over the life of the loans, then a loss is not required to be recognized under the CECL model.
This convergence between the CECL and incurred loss models as to loss recognition – as an event driven occurrence – in low LTV, real estate secured programs caused RMC to conclude that the CECL model will not materially impact the reported results of operations or financial position as compared to that which would be reported in the incurred loss model. The manager expects to adopt the ASU for interim and annual reporting in 2020.
- Accounting and Financial Reporting for Revenue Recognition
On May 28, 2014, FASB issued a final standard on revenue from contracts with customers. The standard issued as ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from
59
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard is effective January 2018, and will be adopted using the modified retrospective approach.
The goals of the revenue recognition project are to clarify and converge the revenue recognition principles under U.S. GAAP and to develop guidance that would streamline and enhance revenue recognition requirements. A core principle of the standard is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Revenue is recognized when a performance obligation is satisfied by transferring goods or services to a customer. The FASB intentionally used the wording “be entitled” rather than “receive” or “collect” to distinguish collectability risk from other uncertainties that may exist under a contract.
RMC management’s evaluation is that the revenue standard will not have an impact on the company’s current revenue recognition policies. The scope of guidance is not applicable to financial instruments including loans and therefore will not have an impact on interest income or late fees.
NOTE 3 – MANAGER AND OTHER RELATED PARTIES
RMC’s allocated one percent (1%) of the profits and losses was $38,690 and $26,085 for 2017 and 2016, respectively. The manager, at its sole discretion, provided financial support that improved net income and the return to investors in both 2017 and 2016. Total support provided, as detailed below, was approximately $1,748,000 and $1,309,000 for 2017 and 2016, respectively.
At times, to enhance the company’s earnings, RMC has taken several actions, including:
| • | charging less than the maximum allowable fees; |
| • | has not requested reimbursement of qualifying expenses; and/or, |
| • | paying company expenses, such as professional fees, that could have been obligations of the company. |
Such fee waivers and cost actions were not made for the purpose of providing the company with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the company has no such required level of distributions. RMC does not use any specific criteria in determining the exact amount of fees to be waived and/or costs to be absorbed. Any decision to waive fees and/or to absorb costs, and the amount (if any) to be waived or absorbed, is made by RMC in its sole discretion.
Going forward, this support will be reduced and RMC expects support will ultimately cease. Beginning in April 2018, the manager will no longer pay for our direct expenses, and intends, by the fourth quarter of 2018, to begin reducing fee waivers and commence collecting reimbursable expenses, so that by July 2019 the company will be paying RMC the fees it is entitled to under the operating agreement and reimbursing RMC for expenses attributable to the company.
Fees waived and costs reimbursements during 2017 are presented in the following table.
|
|
|
|
|
| Operating Expenses |
|
|
|
|
| |||||||||||||||||
|
| Loan Admin Fees |
|
| Mortgage Servicing Fee |
|
| Asset Management Fee |
|
| Cost Reimbursements |
|
| Professional Services |
|
| Other |
|
| Total |
| |||||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable/reimbursable |
| $ | 427,269 |
|
| $ | 116,289 |
|
| $ | 408,535 |
|
| $ | 541,686 |
|
| $ | 398,356 |
|
| $ | 40,972 |
|
| $ | 1,933,107 |
|
RMC Support |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waived |
|
| (427,269 | ) |
|
| — |
|
|
| (408,535 | ) |
|
| (541,686 | ) |
|
| — |
|
|
| — |
|
|
| (1,377,490 | ) |
Cost absorbed by RMC |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (335,303 | ) |
|
| (34,715 | ) |
|
| (370,018 | ) |
Total RMC support |
|
| (427,269 | ) |
|
| — |
|
|
| (408,535 | ) |
|
| (541,686 | ) |
|
| (335,303 | ) |
|
| (34,715 | ) |
|
| (1,747,508 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charged |
| $ | — |
|
| $ | 116,289 |
|
| $ | — |
|
| $ | — |
|
| $ | 63,053 |
|
| $ | 6,257 |
|
| $ | 185,599 |
|
60
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Fees waived and costs reimbursements during 2016 are presented in the following table.
|
|
|
|
|
| Operating Expenses |
|
|
|
|
| |||||||||||||||||
|
| Loan Admin Fees |
|
| Mortgage Servicing Fee |
|
| Asset Management Fee |
|
| Cost Reimbursements |
|
| Professional Services |
|
| Other |
|
| Total |
| |||||||
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeable/reimbursable |
| $ | 325,022 |
|
| $ | 77,848 |
|
| $ | 275,650 |
|
| $ | 275,967 |
|
| $ | 392,249 |
|
| $ | 52,990 |
|
| $ | 1,399,726 |
|
RMC Support |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waived |
|
| (325,022 | ) |
|
| — |
|
|
| (275,650 | ) |
|
| (275,967 | ) |
|
| — |
|
|
| — |
|
|
| (876,639 | ) |
Cost absorbed by RMC |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (387,749 | ) |
|
| (44,786 | ) |
|
| (432,535 | ) |
Total RMC support |
|
| (325,022 | ) |
|
| — |
|
|
| (275,650 | ) |
|
| (275,967 | ) |
|
| (387,749 | ) |
|
| (44,786 | ) |
|
| (1,309,174 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charged |
| $ | — |
|
| $ | 77,848 |
|
| $ | — |
|
| $ | — |
|
| $ | 4,500 |
|
| $ | 8,204 |
|
| $ | 90,552 |
|
| • | Loan administrative fees |
RMC is entitled to receive a loan administrative fee in an amount up to one percent (1%) of the principal amount of each new loan originated or acquired on the company’s behalf by RMC for services rendered in connection with the selection and underwriting of potential loans. Such fees are payable by the company upon the closing or acquisition of each loan. Beginning in August 2015, RMC, at its sole discretion, began waiving loan administrative fees.
| • | Mortgage servicing fees |
RMC earns mortgage servicing fees from the company of up to one-quarter of one percent (0.25%) annually of the unpaid principal balance of the loan portfolio or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. RMC is entitled to receive these fees regardless of whether specific mortgage payments are collected. The mortgage servicing fees are accrued monthly on all loans. Remittance to RMC is made monthly unless the loan has been assigned a specific loss reserve, at which point remittance is deferred until the specific loss reserve is no longer required, or the property has been acquired by the company.
An increase or decrease in this fee within the limits set by the operating agreement directly impacts the yield to the members.
| • | Asset management fees |
RMC is entitled to receive a monthly asset management fee for managing the company’s portfolio and operations in an amount up to three-quarters of one percent (0.75%) annually of the portion of the capital originally committed to investment in mortgages, not including leverage, and including up to two percent (2%) of working capital reserves. This amount will be recomputed annually after the second full year of operations by subtracting from the then fair value of the company’s loans plus working capital reserves, an amount equal to the outstanding debt.
RMC, at its sole discretion, has elected to accept less than the maximum amount of the asset management fee. An increase or decrease in this fee within the limits set by the operating agreement directly impacts the yield to the members. RMC intends to begin reducing these fee waivers by the fourth quarter of 2018.
61
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
RMC, per the operating agreement, may request reimbursement by the company for operations expense incurred on behalf of the company, including without limitation, accounting and audit fees, legal fees and expenses, postage and preparation of reports to members and out-of-pocket general and administration expenses. Certain costs (e.g. postage) can be allocated specifically to the company. Other costs are allocated on a pro-rata basis (e.g. by the company’s percentage of total capital of all mortgage funds managed by RMC). Payroll and consulting fees are broken out first based on activity, and then allocated to the company on a pro-rata basis based on percentage of capital to the total capital of all mortgage funds.
RMC, at its sole discretion, has elected to request less than the maximum amount of reimbursement for operating expenses. An increase or decrease in this reimbursement, within the limits set by the operating agreement, directly impacts the yield to the members. RMC intends to initiate collecting qualifying expenses by the fourth quarter of 2018.
| • | Professional Services |
Professional services consist primarily of legal, regulatory (including SEC/FINRA compliance) and audit and tax compliance expenses.
RMC, at its sole discretion, elected to reimburse the company for professional services (primarily audit and tax expense). An increase or decrease in reimbursements by RMC directly impacts the yield to the members. Beginning in April 2018, RMC will no longer provide reimbursements to the company for professional services.
Commissions and fees are paid by the borrowers to RMC.
| • | Brokerage commissions, loan originations |
For fees in connection with the review, selection, evaluation, negotiation and extension of loans, RMC may collect a loan brokerage commission that is expected to range from approximately 1.5% to 5% of the principal amount of each loan made during the year. Total loan brokerage commissions are limited to an amount not to exceed 4% of the total company assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the company.
| • | Other fees |
RMC receives fees for processing, notary, document preparation, credit investigation, reconveyance and other mortgage related fees. The amounts received are customary for comparable services in the geographical area where the property securing the loan is located, payable solely by the borrower and not by the company.
In the ordinary course of business, performing loans may be assigned, in-part or in-full, between the affiliated mortgage funds at par.
62
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Formation loan transactions are presented in the following table.
|
| 2017 |
|
| Since Inception |
| ||
Balance, beginning of period |
| $ | 2,519,438 |
|
| $ | — |
|
Formation loan advances to RMC |
|
| 1,509,594 |
|
|
| 4,659,947 |
|
Payments received from RMC |
|
| (235,143 | ) |
|
| (854,077 | ) |
Early withdrawal penalties applied |
|
| (16,801 | ) |
|
| (28,782 | ) |
Balance, December 31, 2017 |
| $ | 3,777,088 |
|
| $ | 3,777,088 |
|
Subscription proceeds since inception |
|
|
|
|
| $ | 67,176,564 |
|
Formation loan advance rate |
|
|
|
|
|
| 7 | % |
The future minimum payments on the formation loan of December 31, 2017 are presented in the following table.
2018 |
| $ | 377,709 |
|
2019 |
|
| 377,709 |
|
2020 |
|
| 377,709 |
|
2021 |
|
| 377,709 |
|
2022 |
|
| 377,709 |
|
Thereafter |
|
| 1,888,543 |
|
Total |
| $ | 3,777,088 |
|
RMC is required to make annual payments on the formation loan of one tenth of the principal balance outstanding at December 31 of the prior year. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.
Reimbursement and allocation of organization and offering expenses
RMC is reimbursed for, or the company may pay directly, organization and offering expenses (or O&O expenses) incurred in connection with the organization of the company or offering of the units including, without limitation, attorneys’ fees, accounting fees, printing costs and other selling expenses (other than sales commissions) in a total amount not exceeding 4.5% of the original purchase price of all units (other than DRIP units) sold in all offerings (hereafter, the “maximum O&O expenses”), and the manager pays any O&O expenses in excess of the maximum O&O expenses. For each calendar quarter or portion thereof after December 31, 2015, that a member holds units (other than DRIP units) and for a maximum of forty (40) such quarters, a portion of the O&O expenses borne by the company is allocated to and debited from that member’s capital account in an annual amount equal to 0.45% of the member’s original purchase price for those units, in equal quarterly installments of 0.1125% each commencing with the later of the first calendar quarter of 2016 or the first full calendar quarter after a member’s purchase of units, and continuing through the quarter in which such units are redeemed. If at any time the aggregate O&O expenses actually paid or reimbursed by the company since inception are less than the maximum O&O expenses, the company shall first reimburse the manager for any O&O expenses previously borne by it so long as it does not result in the company bearing more than the maximum O&O expenses, and any savings thereafter remaining shall be equitably allocated among (and serve to reduce any subsequent such cost allocations to) those members who have not yet received forty (40) quarterly allocations of O&O expenses, as determined in the good faith judgment of the manager. Any O&O expenses with respect to a member’s units that remain unallocated upon redemption of such units shall be reimbursed to the company by the manager.
63
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Organization and offering expenses (O&O expenses) are summarized in the following table.
|
| 2017 |
|
| Since Inception |
| ||
Balance, beginning of period |
| $ | 1,698,731 |
|
| $ | — |
|
O&O expenses reimbursed to RMC |
|
| 919,870 |
|
|
| 2,894,614 |
|
Early withdrawal penalties applied (1) |
|
| (10,658 | ) |
|
| (18,515 | ) |
O&O expenses allocated |
|
| (229,366 | ) |
|
| (382,157 | ) |
O&O expenses reimbursed by RMC (2) |
|
| (43,252 | ) |
|
| (158,617 | ) |
Balance, end of period (3)(4) |
| $ | 2,335,325 |
|
| $ | 2,335,325 |
|
| (1) | Early withdrawal penalties collected are applied to the next installment of principal due under the formation loan and to reduce the amount owed to RMC for O&O expenses. The amounts credited will be determined by the ratio between the amount of the formation loan and the amount of offering costs incurred by the company. |
| (2) | RMC reimburses the company for any unallocated O&O expenses on units redeemed. |
| (3) | Proceeds from investors admitted to RMI IX were $63,913,357 through December 31, 2017. O&O expenses incurred by RMC and remaining to be reimbursed to RMC by RMI IX were $3,182,696. |
| (4) | Beginning in 2016, O&O expenses reimbursed to RMC by RMI IX are allocated to members’ capital accounts over 40 quarters. |
NOTE 4 – LOANS
Loans generally are funded or acquired at a fixed interest rate with a loan term of up to five years. Loans acquired are generally done so within the first six months of origination, and purchased at the current par value, which approximates fair value. As of December 31, 2017, 86 of the company’s 93 loans (representing 97% of the aggregate principal of the company’s loan portfolio) have a loan term of five years or less from loan inception. The remaining loans have terms longer than five years. Substantially all loans are written without a prepayment penalty. As of December 31, 2017, 73 loans outstanding (representing 72% of the aggregate principal balance of the company’s loan portfolio) provide for monthly payments of principal and interest, typically calculated on a 30-year amortization, with the remaining principal balance due at maturity. The remaining loans provide for monthly payments of interest only, with principal due in full at maturity.
Secured loans unpaid principal balance (principal)
Secured loan transactions are summarized in the following table for 2017 and 2016.
|
| 2017 |
|
| 2016 |
| ||
Principal, beginning of period |
| $ | 40,123,393 |
|
| $ | 27,360,138 |
|
Loans funded |
|
| 40,346,883 |
|
|
| 600,000 |
|
Loans acquired from affiliates |
|
| 2,380,000 |
|
|
| 31,902,176 |
|
Loans sold to affiliates |
|
| (999,995 | ) |
|
| — |
|
Principal payments received |
|
| (27,081,592 | ) |
|
| (19,738,921 | ) |
Principal, end of period |
| $ | 54,768,689 |
|
| $ | 40,123,393 |
|
During 2017 and 2016, the company renewed six and four loans, respectively, at then market terms, with an aggregate principal balance of approximately $1,823,000 and $1,807,000, which are not included in the activity shown in the table above.
64
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Secured loans had the characteristics presented in the following table as of December 31, 2017 and 2016.
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Number of secured loans |
|
| 93 |
|
|
| 89 |
|
Secured loans – principal |
| $ | 54,768,689 |
|
| $ | 40,123,393 |
|
Secured loans – lowest interest rate (fixed) |
|
| 6.9 | % |
|
| 7.0 | % |
Secured loans – highest interest rate (fixed) |
|
| 10.5 | % |
|
| 10.0 | % |
|
|
|
|
|
|
|
|
|
Average secured loan – principal |
| $ | 588,911 |
|
| $ | 450,825 |
|
Average principal as percent of total principal |
|
| 1.1 | % |
|
| 1.1 | % |
Average principal as percent of members’ capital |
|
| 0.9 | % |
|
| 1.0 | % |
Average principal as percent of total assets |
|
| 0.9 | % |
|
| 1.1 | % |
|
|
|
|
|
|
|
|
|
Largest secured loan – principal |
| $ | 3,239,124 |
|
| $ | 1,350,000 |
|
Largest principal as percent of total principal |
|
| 5.9 | % |
|
| 3.4 | % |
Largest principal as percent of members’ capital |
|
| 5.0 | % |
|
| 3.1 | % |
Largest principal as percent of total assets |
|
| 5.1 | % |
|
| 3.2 | % |
|
|
|
|
|
|
|
|
|
Smallest secured loan – principal |
| $ | 52,562 |
|
| $ | 8,651 |
|
Smallest principal as percent of total principal |
|
| 0.1 | % |
|
| 0.1 | % |
Smallest principal as percent of members’ capital |
|
| 0.1 | % |
|
| 0.1 | % |
Smallest principal as percent of total assets |
|
| 0.1 | % |
|
| 0.1 | % |
|
|
|
|
|
|
|
|
|
Number of counties where security is located (all California) |
|
| 16 |
|
|
| 16 |
|
Largest percentage of principal in one county |
|
| 22.6 | % |
|
| 21.3 | % |
|
|
|
|
|
|
|
|
|
Number of secured loans with filed notice of default |
|
| 1 |
|
|
| 2 |
|
Secured loans in foreclosure – principal |
| $ | 139,643 |
|
| $ | 890,470 |
|
|
|
|
|
|
|
|
|
|
Number of secured loans with an interest reserve |
|
| — |
|
|
| — |
|
Interest reserves |
| $ | — |
|
| $ | — |
|
As of December 31, 2017, the company’s largest loan with principal of $3,239,124 represents 5.9% of outstanding secured loans and 5.1% of company assets. The loan is secured by a single family residence (2-4 units) located in San Francisco County, bears an interest rate of 8.99% and matures on June 1, 2019.
As of December 31, 2017, the company had no outstanding construction or rehabilitation loans and no commitments to fund construction, rehabilitation or other loans.
In compliance with California laws and regulations, all borrower receipts are deposited into a bank trust account maintained by RMC and subsequently disbursed to the company after an appropriate holding period. At December 31, 2017, the trust account held a balance relating to the company’s loan portfolio of $40,306, consisting of both interest and principal payments from borrowers, all of which was disbursed to the company on or before January 12, 2018.
65
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Secured loans had the following lien positions and are presented in the following table as of December 31, 2017 and 2016.
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| Loans |
|
| Principal |
|
| Percent |
|
| Loans |
|
| Principal |
|
| Percent |
| ||||||
First trust deeds |
|
| 60 |
|
| $ | 37,032,195 |
|
|
| 68 | % |
|
| 63 |
|
| $ | 30,350,642 |
|
|
| 76 | % |
Second trust deeds |
|
| 33 |
|
|
| 17,736,494 |
|
|
| 32 |
|
|
| 26 |
|
|
| 9,772,751 |
|
|
| 24 |
|
Total secured loans |
|
| 93 |
|
|
| 54,768,689 |
|
|
| 100 | % |
|
| 89 |
|
|
| 40,123,393 |
|
|
| 100 | % |
Liens due other lenders at loan closing |
|
|
|
|
|
| 31,545,806 |
|
|
|
|
|
|
|
|
|
|
| 12,738,126 |
|
|
|
|
|
Total debt |
|
|
|
|
| $ | 86,314,495 |
|
|
|
|
|
|
|
|
|
| $ | 52,861,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraised property value at loan closing |
|
|
|
|
| $ | 181,018,000 |
|
|
|
|
|
|
|
|
|
| $ | 123,709,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total debt to appraised values (LTV) at loan closing(1) |
|
|
|
|
|
| 53.5 | % |
|
|
|
|
|
|
|
|
|
| 51.5 | % |
|
|
|
|
(1) | Based on appraised values and liens due other lenders at loan closing. The weighted-average loan-to-value (LTV) computation above does not take into account subsequent increases or decreases in property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders. |
Property type
Secured loans summarized by property type are presented in the following table as of December 31, 2017 and 2016.
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| Loans |
|
| Principal |
|
| Percent |
|
| Loans |
|
| Principal |
|
| Percent |
| ||||||
Single family(2) |
|
| 67 |
|
| $ | 37,615,216 |
|
|
| 69 | % |
|
| 63 |
|
| $ | 25,582,833 |
|
|
| 64 | % |
Multi-family |
|
| 5 |
|
|
| 2,164,861 |
|
|
| 4 |
|
|
| 5 |
|
|
| 3,211,380 |
|
|
| 8 |
|
Commercial |
|
| 21 |
|
|
| 14,988,612 |
|
|
| 27 |
|
|
| 21 |
|
|
| 11,329,180 |
|
|
| 28 |
|
Total secured loan balance |
|
| 93 |
|
| $ | 54,768,689 |
|
|
| 100 | % |
|
| 89 |
|
|
| 40,123,393 |
|
|
| 100 | % |
(2) | Single family property type as of December 31, 2017 consists of 10 loans with principal of $6,309,036 that are owner occupied and 57 loans with principal of $31,306,180 that are non-owner occupied. At December 31, 2016, single family property consisted of 9 loans with principal of $3,538,729 that were owner occupied and 54 loans with principal of $22,044,104 that were non-owner occupied. |
66
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Distribution by California counties
The distribution of secured loans by California counties is presented in the following table as of December 31, 2017 and 2016.
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||
|
| Principal |
|
| Percent |
|
| Principal |
|
| Percent |
| ||||
San Francisco Bay Area(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alameda |
| $ | 9,869,036 |
|
|
| 18.0 | % |
| $ | 7,726,853 |
|
|
| 19.3 | % |
San Francisco |
|
| 8,338,720 |
|
|
| 15.1 |
|
|
| 6,913,534 |
|
|
| 17.2 |
|
San Mateo |
|
| 7,800,549 |
|
|
| 14.2 |
|
|
| 4,644,731 |
|
|
| 11.6 |
|
Santa Clara |
|
| 5,461,084 |
|
|
| 10.0 |
|
|
| 4,073,501 |
|
|
| 10.2 |
|
Contra Costa |
|
| 1,511,195 |
|
|
| 2.8 |
|
|
| 989,994 |
|
|
| 2.5 |
|
Marin |
|
| — |
|
|
| — |
|
|
| 377,241 |
|
|
| 0.9 |
|
Solano |
|
| 109,443 |
|
|
| 0.2 |
|
|
| 1,820,336 |
|
|
| 4.5 |
|
Sonoma |
|
| — |
|
|
| — |
|
|
| 8,652 |
|
|
| 0.1 |
|
|
|
| 33,090,027 |
|
|
| 60.3 |
|
|
| 26,554,842 |
|
|
| 66.3 |
|
Other Northern California |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sacramento |
|
| 850,000 |
|
|
| 1.6 |
|
|
| — |
|
|
| — |
|
Monterey |
|
| — |
|
|
| — |
|
|
| 1,840,927 |
|
|
| 4.6 |
|
Placer |
|
| 642,913 |
|
|
| 1.2 |
|
|
| 1,074,437 |
|
|
| 2.7 |
|
Yolo |
|
| 174,758 |
|
|
| 0.3 |
|
|
| 156,810 |
|
|
| 0.4 |
|
San Joaquin |
|
| 157,039 |
|
|
| 0.3 |
|
|
| 158,340 |
|
|
| 0.4 |
|
|
|
| 1,824,710 |
|
|
| 3.4 |
|
|
| 3,230,514 |
|
|
| 8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California Total |
|
| 34,914,737 |
|
|
| 63.7 |
|
|
| 29,785,356 |
|
|
| 74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles & Coastal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles |
|
| 12,357,456 |
|
|
| 22.6 |
|
|
| 8,547,567 |
|
|
| 21.3 |
|
San Diego |
|
| 2,192,746 |
|
|
| 4.0 |
|
|
| 933,571 |
|
|
| 2.3 |
|
Orange |
|
| 1,487,747 |
|
|
| 2.7 |
|
|
| 494,334 |
|
|
| 1.2 |
|
Santa Barbara |
|
| 996,768 |
|
|
| 1.8 |
|
|
| — |
|
|
| — |
|
Ventura |
|
| 350,000 |
|
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
|
| 17,384,717 |
|
|
| 31.7 |
|
|
| 9,975,472 |
|
|
| 24.8 |
|
Other Southern California |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Bernardino |
|
| 2,110,000 |
|
|
| 3.9 |
|
|
| — |
|
|
| — |
|
Riverside |
|
| 359,235 |
|
|
| 0.7 |
|
|
| 362,565 |
|
|
| 0.8 |
|
|
|
| 2,469,235 |
|
|
| 4.6 |
|
|
| 362,565 |
|
|
| 0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern California Total |
|
| 19,853,952 |
|
|
| 36.3 |
|
|
| 10,338,037 |
|
|
| 25.6 |
|
Total Secured Loans |
| $ | 54,768,689 |
|
|
| 100.0 | % |
| $ | 40,123,393 |
|
|
| 100.0 | % |
(3)Includes Silicon Valley
67
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Secured loans are scheduled to mature as presented in the following table as of December 31, 2017.
|
| Loans |
|
| Principal |
|
| Percent |
| |||
2018 |
|
| 23 |
|
| $ | 17,233,659 |
|
|
| 31 | % |
2019 |
|
| 32 |
|
|
| 23,080,445 |
|
|
| 42 |
|
2020 |
|
| 14 |
|
|
| 6,341,137 |
|
|
| 12 |
|
2021 |
|
| 8 |
|
|
| 3,503,114 |
|
|
| 6 |
|
2022 |
|
| 11 |
|
|
| 3,494,516 |
|
|
| 6 |
|
Thereafter |
|
| 3 |
|
|
| 355,853 |
|
|
| 2 |
|
Total future maturities |
|
| 91 |
|
|
| 54,008,724 |
|
|
| 99 |
|
Matured as of December 31, 2017 |
|
| 2 |
|
|
| 759,965 |
|
|
| 1 |
|
Total secured loan balance |
|
| 93 |
|
| $ | 54,768,689 |
|
|
| 100 | % |
Two loans with an aggregate principal balance of $759,965 were past maturity as of December 31, 2017. One loan, with a principal balance of $139,643 was 244 days delinquent and designated as impaired and in non-accrual status as of December 31, 2017. The other loan, with a principal balance of $620,322, matured on December 1, 2017, and management is in the process of extending the maturity with the borrower.
Loans may be repaid or refinanced before, at or after the contractual maturity date. On matured loans, the company may continue to accept payments while pursuing collection of amounts owed from borrowers. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.
Delinquency
Secured loans summarized by payment delinquency are presented in the following table as of December 31, 2017 and 2016.
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||
|
| Loans |
|
| Amount |
|
| Loans |
|
| Amount |
| ||||
Past Due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days |
|
| 3 |
|
| $ | 1,259,100 |
|
|
| 1 |
|
| $ | 377,241 |
|
90-179 days |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| 890,470 |
|
180 or more days |
|
| 1 |
|
|
| 139,643 |
|
|
| — |
|
|
| — |
|
Total past due |
|
| 4 |
|
|
| 1,398,743 |
|
|
| 3 |
|
|
| 1,267,711 |
|
Current |
|
| 89 |
|
|
| 53,369,946 |
|
|
| 86 |
|
|
| 38,855,682 |
|
Total secured loan balance |
|
| 93 |
|
| $ | 54,768,689 |
|
|
| 89 |
|
| $ | 40,123,393 |
|
Interest in the amount of $6,959 and $31,761 was accrued for loans contractually 90 days or more delinquent as to principal or interest payments as of December 31, 2017 and 2016, respectively.
68
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Secured loans in nonaccrual status at December 31, 2017 and 2016, are summarized in the following table.
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Number of loans |
|
| 1 |
|
|
| — |
|
Principal |
| $ | 139,643 |
|
| $ | — |
|
Advances |
|
| 969 |
|
|
| — |
|
Accrued interest |
|
| 11,025 |
|
|
| — |
|
Total recorded investment |
| $ | 151,637 |
|
| $ | — |
|
Foregone interest |
| $ | — |
|
| $ | — |
|
At December 31, 2017, no loans were contractually 90 or more days past due as to principal or interest and not in non-accrual status. At December 31, 2016, 2 loans with a principal balance of $890,470, were contractually 90 days or more delinquent and not in non-accrual status.
Impaired loans/allowance for loan losses
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Principal |
| $ | 139,643 |
|
| $ | 890,470 |
|
Recorded investment(4) |
|
| 151,637 |
|
|
| 922,231 |
|
Impaired loans without allowance |
|
| 151,637 |
|
|
| 922,231 |
|
Impaired loans with allowance |
|
| — |
|
|
| — |
|
Allowance for loan losses, impaired loans |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Number of Loans |
|
| 1 |
|
|
| 2 |
|
(4)Recorded investments is the sum of principal, advances, and interest accrued for financial reporting purposes.
Impaired loans had average balances and interest income recognized and received in cash as presented in the following table as of and for the years ended December 31, 2017, and 2016.
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Average recorded investment |
| $ | 536,935 |
|
| $ | 461,116 |
|
Interest income recognized |
|
| 8,602 |
|
|
| 31,761 |
|
Interest income received in cash |
|
| 4,324 |
|
|
| 82,488 |
|
One and two loans with a principal balance of $139,643 and $890,470, respectively were designated as impaired at December 31, 2017 and 2016, respectively. No allowance for loan losses has been recorded as all loans were deemed to have protective equity (i.e., low loan-to-value ratio) such that collection is reasonably assured for amounts owing.
Modifications and troubled debt restructurings
No loan payment modifications were made during 2017 and 2016, and no modifications were in effect at December 31, 2017 and 2016.
69
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
Commitments/loan disbursements/construction and rehabilitation loans
As of December 31, 2017, the company had no construction loans outstanding. The company may make construction loans that are not fully disbursed at loan inception. Construction loans are determined by the manager to be those loans made to borrowers for the construction of entirely new structures or dwellings, whether residential, commercial or multi-family properties. The company will approve and fund the construction loan up to a maximum loan balance. Disbursements will be made periodically as phases of the construction are completed or at such other times as the loan documents may require. Undisbursed construction funds will be held in escrow pending disbursement. Upon project completion, construction loans are reclassified as permanent loans. Funding of construction loans is limited to 10% of the loan portfolio.
At December 31, 2017, the company had no rehabilitation loans outstanding. The company may also make rehabilitation loans. A rehabilitation loan will be approved up to a maximum principal balance and, at loan inception, will be either fully or partially disbursed. If fully disbursed, a rehabilitation escrow account is established and advanced periodically as phases of the rehabilitation are completed or at such other times as the loan documents may require. If not fully disbursed, the rehabilitation loan will be funded from available cash balances and future cash receipts. The company does not maintain a separate cash reserve to fund undisbursed rehabilitation loan obligations. Rehabilitation loan proceeds are generally used to acquire and remodel single family homes for future sale or rental. Upon project completion, rehabilitation loans are reclassified as permanent loans. Funding of rehabilitation loans is limited to 15% of the loan portfolio.
Fair value
The company does not record its loans at fair value on a recurring basis. The recorded amount of the performing loans (i.e., the loan balance) is deemed to approximate fair value as is the loan balance of loans designated impaired for which a specific reserve has not been recorded (i.e., the loan is well collateralized such that the collection of the amount owed is assured, including foregone interest if any). Loans designated impaired (i.e., that are collateral dependent) are measured at fair value on a non-recurring basis. No assets or liabilities were measured at fair value on a non-recurring basis during the years ended December 31, 2017 and 2016.
• | Secured loans, performing (i.e. not designated as impaired) (Level 2) - Each loan is reviewed quarterly for its delinquency, LTV adjusted for the most recent valuation of the underlying collateral, remaining term to maturity, borrower’s payment history and other factors. Also considered is the limited resale market for the loans. Most companies or individuals making similar loans as the company intend to hold the loans until maturity as the average contractual term of the loans (and the historical experience of the time the loan is outstanding due to pre-payments) is shorter than conventional mortgages. As there are no prepayment penalties to be collected, loan buyers may be hesitant to risk paying above par. Due to these factors, sales of the loans are infrequent, because an active market does not exist. The recorded amount of the performing loans (i.e. the loan balance) is deemed to approximate the fair value, although the intrinsic value of the loans would reflect a premium due to the interest to be received. |
• | Secured loans, designated impaired (Level 2) - Secured loans designated impaired are deemed collateral dependent, and the fair value of the loan is the lesser of the fair value of the collateral or the enforceable amount owing under the note. The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions (Level 2 inputs). |
The following methods and assumptions are used to determine the fair value of the collateral securing a loan.
Single family – Management’s preferred method for determining the fair market value of its single-family residential assets is the sale comparison method. Management primarily obtains sale comps via its subscription to the RealQuest service, but also uses free online services such as Zillow.com and other available resources to supplement this data. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, number of bedrooms and bathrooms, square footage, sale date, condition and year built.
70
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
If applicable sale comps are not available or deemed unreliable, management will seek additional information in the form of brokers’ opinions of value or appraisals.
Multi-family residential – Management’s preferred method for determining the aggregate retail value of its multifamily units is the sale comparison method. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, rental income, number of units, composition of units by the number of bedrooms and bathrooms, square footage, condition, amenities and year built.
Management’s secondary method for valuing its multifamily assets as income-producing rental operations is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to published data from reliable third-party sources such as the CBRE Cap Rate Survey. Management applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing project. When adequate sale comps are not available or reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.
Commercial buildings – Where commercial rental income information is available, management’s preferred method for determining the fair value of its commercial real estate assets is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to reputable third-party sources such as the CBRE Cap Rate Survey. Management then applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing commercial rental project. When adequate sale comps are not available or reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.
Management supplements the direct capitalization method with additional information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.
Commercial land – Commercial land has many variations/uses, thus requiring management to employ a variety of methods depending upon the unique characteristics of the subject land. Management may rely on information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.
NOTE 5 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN COMMITMENTS
Commitments
The company had two contractual obligations as of December 31, 2017:
| • | To reimburse RMC for O&O expenses (as of December 31, 2017, approximately $3,182,696 was to be reimbursed to RMC) contingent upon future sales of units; and |
| • | Redemptions of members' capital scheduled as of December 31, 2017, of $584,149, to be paid between 2018 and 2021. |
Scheduled redemptions as of December 31, 2017 are presented in the following table.
2018 |
| $ | 556,983 |
|
2019 |
|
| 12,000 |
|
2020 |
|
| 12,000 |
|
2021 |
|
| 3,166 |
|
Total |
|
| 584,149 |
|
71
REDWOOD MORTGAGE INVESTORS IX, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2017 and 2016
In the normal course of its business, the company may become involved in legal proceedings (such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc.) to collect the debt owed under the promissory notes, to enforce the provisions of the deeds of trust, to protect its interest in the real property subject to the deeds of trust and to resolve disputes with borrowers, lenders, lien holders and mechanics. None of these actions, in and of themselves, typically would be of any material financial impact to the net income or balance sheet of the company. As of the date hereof, the company is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
NOTE 6 – SUBSEQUENT EVENTS
Commencing with the March 2018 distribution, the company will reduce the net distribution rate to 6.0% from the previous 6.5% net distribution rate. Commencing in April 2018, the manager will no longer pay for our direct expenses, and intends, by the fourth quarter of 2018, to begin reducing fee waivers and commence collecting reimbursable expenses, so that by July 2019 the company will be paying RMC the fees it is entitled to under the operating agreement and reimbursing RMC for expenses attributable to the company. The distribution rate could decrease once RMC decreases and ultimately ceases providing financial support.
In addition, the company, along with RMC, is working with a nationally renowned professional services firm to commence selling loans to third parties, which the company believes it will be able to sell at a premium (i.e. profit to par).
72
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The company is externally managed by RMC. The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. RMC provides the personnel and services necessary for us to conduct our business, as we have no employees of our own.
As a limited liability company, we do not have a board of directors, nor, therefore, do we have an audit committee of the board of directors. Thus, there is not conventional independent oversight of the company’s financial reporting process. The manager, however, provides the equivalent functions of a board of directors and of an audit committee for, among other things, the following purposes:
| • | Appointment; compensation, and review and oversight of the work of our independent public accountants; and |
| • | establishing and maintaining internal controls over our financial reporting. |
RMC, as the manager, carried out an evaluation, with the participation of RMC's President (acting as principal executive officer/principal financial officer) of the effectiveness of the design and operation of the manager's controls and procedures over financial reporting and disclosure (as defined in Rule 13a-15 of the Exchange Act) for and as of the end of the period covered by this 2017 Annual Report on Form 10-K. Based upon that evaluation, RMC's principal executive officer/principal financial officer concluded that the manager's disclosure controls and procedures were effective as of December 31, 2017.
Manager’s Report on Internal Control over Financial Reporting
RMC, as the manager, is responsible for establishing and maintaining adequate internal control over financial reporting; as such term is defined in the Exchange Act Rule 13a-15(f). The internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
RMC, with the participation of RMC's principal executive officer/principal financial officer, conducted an evaluation of the effectiveness of the manager's internal control over financial reporting based on the Internal Control - Integrated Framework (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management concluded that its internal control over financial reporting was effective as of December 31, 2017.
Changes to Internal Control Over Financial Reporting
The conclusions that as of the quarters ended March 31, 2017, June 30, 2017, and as of December 31, 2016, that internal controls over financial reporting and disclosure controls and procedures were not effective were based upon then existing material weaknesses. The conclusion by RMC’s management as of December 31, 2016, did not preclude the company’s independent auditors from issuing an unqualified opinion on the 2016 financial statements included in the 2016 Annual Report on Form 10-K.
73
Beginning in 2014 and ongoing, RMC's management undertook a technology upgrade initiative. The objective of this program was to implement available, advanced -and proven - technologies to enable digital imaging and storage; concurrent, shared and remote processing; and more robust data management. These efforts culminated in the successful installation of and conversion to the Microsoft Dynamics general ledger and financial management software as of December 31, 2016. MS Dynamics became the general ledger system of record on January 1, 2017.
Beginning in 2015, the manager enhanced its organizational effectiveness and oversight of its controls and procedures over financial reporting and disclosure by engaging legal and accounting firms with the appropriate financial, securities and/or regulatory expertise and experience to assist RMC’s Board of Directors and management in meeting their oversight and performance duties. These firms include:
| • | the San Francisco office of an international law firm for SEC filings matters; |
| • | a second law firm recognized as expert in FINRA and state-securities law and regulation for securities and corporate governance matters; |
| • | two CPA firms headquartered in California – one for assistance with implementation of the MS Dynamics software and the 2017 internal control documentation, evaluation and testing in accordance with the COSO-2013 framework; the other for federal and California tax compliance; and |
| • | a national advisory firm for assistance in the determination of the fair value of membership unit values and the fair values of the assets and liabilities held by RMC’s affiliated mortgage funds. |
The broad scope of the system and organization changes necessitated a comprehensive re-evaluation of the internal controls for 2017 using the COSO 2013 framework. As previously disclosed, a California- headquartered CPA firm has been assisting in the documentation and the testing of the entity-level and the significant process level controls for internal control over financial reporting. The firm is an experienced, subject-matter expert in both the implementation of the control and processing of MS Dynamics and in the required internal control analysis and testing required by SEC regulation, particularly as to the COSO 2013 framework, including applicable and appropriate consideration of the COBIT guidance.
Based on the completion of the actions described above, the manager concluded the material weaknesses identified at December 31, 2016, were remediated as of September 30, 2017, as summarized below.
| - | Control Environment and Monitoring |
The board of directors of RMC consists of the following officers of RMC:
| • | Mr. Michael R. Burwell, RMC’s President, Secretary, Treasurer (who serves as the principal executive officer and principal financial officer); |
| • | Mr. Thomas R. Burwell, RMC’s Vice President of Investor Sales (the President's brother); and |
| • | Ms. Lorene A. Randich, RMC’s Vice President of Loan Production and Underwriting. |
There is no independent board member with financial background and experience, which increases the risk of management override.
RMC’s management consulted with its securities law firms and other professionals, including a CPA firm with a practice in COSO 2013 documentation and evaluations of internal controls, to determine best practices applicable:
| • | to the structure of RMC’s board given that the affiliated mortgage funds, including the company (and not RMC) are the SEC registrants; and |
| • | to any other changes, appropriate to enhance internal controls for public reporting entities (and/or their sponsors) such as RMI IX and RMC that are not subject to national securities exchange rules or other guidance. |
74
RMC enhanced its organizational effectiveness and oversight of its financial reporting processes by engaging – on an ongoing basis, legal and accounting firms with the appropriate financial, securities and/or regulatory expertise and experience to assist RMC’s Board of Directors and management in meeting their oversight and performance duties. These firms include the San Francisco office of an international law firm for SEC filings matters and a second law firm recognized as expert in FINRA and state-securities law and regulation for securities and corporate governance matters; two CPA firms headquartered in California for assistance with implementation of MS Dynamics and completion of the 2017 COSO-2013 evaluation and testing. One of the CPA firms also provides advice regarding federal and California tax compliance; and we have engage a national advisory firm for assistance in the determination of the fair value of membership unit values and the fair values of the assets and liabilities held by RMC’s affiliated mortgage funds including the company.
| - | Information and Communication |
At December 31, 2016, and for periods prior, access to RMC's then in place general ledger system did not require passwords with appropriate complexity. Further, during 2016 the President had administrator access to the general ledger as well as to RMC's loan servicing system. These weaknesses created a lack of segregation of duties and a risk of management override.
| - | RMC undertook to upgrade its in place processing controls generally, but particularly in accounting/finance, to enhance its capabilities as to internal and external financial reporting, planning and analysis and to better its internal controls and data reliability and integrity. To assist (and in some cases to lead) these efforts, RMC engaged qualified professionals and firms experienced in the successful implementation and utilization of these technologies. These efforts culminated in the successful installation of and conversion to the Microsoft Dynamics general ledger and financial management software suite at the close of business on December 31, 2016, and became the system of record on January 1, 2017. |
| - | With the implementation of MS Dynamics, the deficiencies in control of administrative rights and password complexity were corrected. Additionally, the President’s (and all employees) access rights to the administrative controls of the general ledger (MS Dynamics) and the loan servicing system (TMO) has been assigned to the IT function which is outsourced to a third party information technology contractor. No RMC employee has administrative rights to either TMO or MS Dynamics. |
| - | The analysis and testing of the application controls of the installed MS Dynamics software and the IT general controls were completed in the third quarter of 2017. Management concluded that the IT controls surrounding MS Dynamics software and the IT general control environment are designed properly and operating effectively. |
-Risk Assessment, Monitoring and Control Activities
At December 31, 2016, RMC had not sufficiently documented that its management review controls over financial reporting are performed to a level of precision compliant with COSO 2013 requirements and had similarly not sufficiently documented the process by which variances from expectations are investigated and resolved. Further, the operating effectiveness in 2016 of the activity-level control surrounding quarter-end and year-end cutoff was determined to be not sufficient to ensure revenue and/or expenses were being recorded in the correct period. Management to offset the shortcomings inherent in the general ledger system then in effect had implemented these management review process and controls as an offset to the system shortcomings. It was known that those processes and controls would be re-engineered and re-documented within scope of the MS Dynamics software implementation as of January 1, 2017.
| - | The documentation and analysis of the entity-level and significant process-level controls for internal control over financial reporting was completed in the third quarter of 2017. Certain key entity level controls have been identified and testing began with the quarter-ended June 30, 2017. |
75
None.
76
Item 10 – Directors, Executive Officers and Corporate Governance
The company is externally managed by Redwood Mortgage Corp. (or RMC or the manager). The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. RMC provides the personnel and services necessary for us to conduct our business as we have no employees of our own.
The mortgage loans the company funds and/or invests in are arranged and generally are serviced by RMC. The manager is required to contribute to capital one tenth of one percent (0.1%) of the aggregate capital accounts of the members.
The rights, duties and powers of the members and manager of the company are governed by the company’s operating agreement, the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act. Members should refer to the company’s operating agreement for complete disclosure of its provisions. Members representing a majority of the outstanding units may, without the concurrence of the manager, vote to:
| • | dissolve the company; |
| • | amend the operating agreement, subject to certain limitations; |
| • | approve or disapprove the sale of all or substantially all of the assets of the company; or |
| • | remove or replace the manager. |
Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
The Manager
Redwood Mortgage Corp. Redwood Mortgage Corp. is a licensed real estate broker incorporated in 1978 under the laws of the State of California, and is engaged primarily in the business of arranging and servicing mortgage loans. Redwood Mortgage Corp. will act as the loan broker and servicing agent in connection with loans, as it has done on behalf of several other affiliate of mortgage funds formed by the manager.
Officers and Directors
Michael R. Burwell. Michael R. Burwell, age 61, President, Director, Chief Financial Officer, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-2011); President, Director, Chief Financial Officer and Secretary of Gymno Corporation (1986-September 2011) and, the manager of Gymno LLC, the entity into which Gymno Corporation was converted (September 2011- June 30, 2015); President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-September 2011); past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986). Mr. Burwell is licensed as a real estate sales person. Mr. Burwell was a general partner of each of the RMI, RMI II, RMI III, RMI IV, RMI V, RMI VI, and RMI VII limited partnerships. Mr. Burwell is a general partner of RMI VIII limited partnership. Mr. Burwell attended the University of California, at Davis from 1975-1979, playing NCAA soccer for three seasons.
Lorene A. Randich. Lorene A. Randich, age 60, joined Redwood Mortgage Corp. in 1991, and has served as a Director since November 2011. Ms. Randich has held the real estate broker’s license of record for Redwood Mortgage Corp. since November 2011. Since 2001, she has been Vice President of Loan Production and Underwriting. Ms. Randich has been a licensed real estate broker since 1996. She is a member of the National Association of Realtors, the California Mortgage Bankers Association, the California Association of Mortgage Professionals (Board Member–San Francisco/Peninsula Chapter) and the California Mortgage Association (Board Member and Education Committee Chairperson). Ms. Randich received a BA from UC Berkeley in 1980.
77
Thomas R. Burwell. Thomas R. Burwell, age 50, joined Redwood Mortgage Corp. in 2007 and has served as Marketing and Sales Director since 2012; Loan Officer-Builder Division Wells Fargo Bank, N.A (Westwood, CA 2005-2007); Loan Officer, Wells Fargo Bank, N.A. (Beverly Hills 2004-2005); Loan Officer Wells Fargo Bank, N.A. (New York, NY 2002-2004). Mr. Burwell is a member of the Financial Planning Association, San Francisco, CA. Mr. Burwell received a BA from the University of California at Davis in 1990. Mr. Burwell is a former ATP (Association of Tennis Professionals) world tour professional and was a NCAA Team and Individual Finalist, Team Captain, (Three-time) All-American, #1 Singles and #1 Doubles Player for University of California at Davis. Thomas R Burwell is the brother of Michael R. Burwell.
Financial Oversight by Manager
The company does not have a board of directors or an audit committee. Accordingly, the manager serves the equivalent function of an audit committee for, among other things, the following purposes: appointment, compensation, review and oversight of the work of our independent public accountants, and establishing the enforcing of the Code of Ethics. However, since the company does not have an audit committee and the manager is not independent of the company, the company does not have an “audit committee financial expert.”
Code of Ethics
The manager has adopted a Code of Ethics applicable to the manager and to any agents, employees or independent contractors engaged by the manager to perform the functions of a principal financial officer, principal accounting officer or controller of the company, if any. You may obtain a copy of this Code of Ethics, without charge, upon request by calling our Investor Services Department at (650) 365-5341, option 5.
Item 11 – Executive Compensation
The company does not pay any compensation to the officers and directors of our manager for the services they provide to RMC.
As indicated above in Item 10, the company is externally managed and has no officers or directors. The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters.
RMC is the manager of the company. The mortgage loans the company invests in are arranged and are generally serviced by RMC. Michael R. Burwell is the president and majority shareholder (through his holdings and beneficial interests in certain trusts) of RMC.
Compensation of the Manager
The company’s operating agreement permits certain fees and cost reimbursements to be paid to the manager. See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for a presentation of fees and cost reimbursements to the Manager, which presentation is incorporated herein by reference.
In addition to the fees and reimbursements paid by the company, RMC receives compensation directly from the borrowers, including brokerage commissions on loan originations. In 2017, RMC received brokerage commissions of $810,600 related to loan originations made by the company.
Item 12 – Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
No person or entity owns beneficially more than five percent (5%) of the units. The manager does not own any units, but has, per the provisions of the company’s operating agreement, made capital contributions of one-tenth of one percent (0.1%) of the aggregate capital accounts of the members, and is allocated one percent (1%) of the net income and losses of the company.
78
Item 13 – Certain Relationships and Related Transactions, and Director Independence
See Note 1 (Organization and General) and Note 3 (Manager and Other Related Parties) to the Financial Statements in Part II item 8, which describes certain relationships and related transactions and related party fees.
The company is managed externally and does not have the equivalent of independent directors.
See Note 3 (Manager and Other Related Parties) to the financial statements included in Part II, Item 8 of this report for amounts received by the manager in fiscal years 2017 and 2016. The tables in Note 3 also include certain professional service fees that the manager paid on behalf of the company.
Item 14 – Principal Accountant Fees and Services
Fees for services performed for the company by the principal accountant for 2017 and 2016 are as follows:
Audit Fees. The aggregate fees billed during 2017 and 2016 for professional services rendered for the audit of the company’s annual financial statements included in the company’s Annual Report on Form 10-K, review of financial statements included in the company’s Quarterly Reports on Form 10-Q and for services provided in connection with regulatory filings were approximately $193,600 and $162,000, respectively.
Audit Related Fees. There were no fees billed during 2017 and 2016 for audit-related services.
Tax fees. There were no fees billed during 2017 and 2016 for tax related services
All Other Fees. There were no other fees billed during 2017 and 2016.
All audit and non-audit services are approved by the manager prior to the accountant being engaged by the company.
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Item 15 – Exhibits and Financial Statement Schedules
A. | Documents filed as part of this report are incorporated: |
| 1. | In Part II, Item 8 under A – Financial Statements. |
| 2. | None. |
| 3. | Exhibits. |
Exhibit No. |
| Description of Exhibits |
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3.1 |
| Ninth Amended and Restated Limited Liability Company Operating Agreement* |
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3.2 |
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4.1 |
| Subscription Agreement and Power of Attorney, including Special Notice for California Residents* |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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23.1 |
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31.1 |
| Certification of Manager pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
| Certification of Manager pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS |
| XBRL Instance Document |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* | Incorporated by reference to the item under the corresponding exhibit number in the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2015 (File no. 000-55601). |
** | Incorporated by reference to Exhibit 10.7 in the registrant’s quarterly report on Form 10-Q for the nine months ended September 30, 2016 (File no. 000-55601). |
None.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| REDWOOD MORTGAGE INVESTORS IX, LLC | ||||
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| (Registrant) | ||||
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Date: April 02, 2018 |
| By: |
| Redwood Mortgage Corp., Manager | ||
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| By: |
| /s/ Michael R. Burwell |
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| Name: |
| Michael R. Burwell |
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| Title: |
| President, Secretary/Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity indicated on the 2nd day of April, 2018.
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Signature |
| Title |
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/s/ Michael R. Burwell |
| President, Secretary/Treasurer Redwood Mortgage Corp. |
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Michael R. Burwell |
| (Principal Executive, Financial and Accounting Officer); Director of Redwood Mortgage Corp. |
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/s/ Lorene A. Randich |
| Director of Redwood Mortgage Corp. |
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Lorene A. Randich |
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/s/ Thomas R. Burwell |
| Director of Redwood Mortgage Corp. |
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Thomas R. Burwell |
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