Filed pursuant to Rule 253(g)(2)
File No. 024-11462
OFFERING CIRCULAR
IRON BRIDGE MORTGAGE FUND, LLC
9755 SW Barnes Road, Suite 420
Portland, Oregon 97225
(503) 225-0300
Best Efforts Offering of
$45,000,000
SENIOR SECURED DEMAND NOTES
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Iron Bridge Mortgage Fund, LLC (the “Company”), which does business as Iron Bridge Lending, engages in the business of making commercial purpose loans by lending funds to real estate investors to finance the ownership, entitlement, development or rehabilitation of residential and commercial real estate or for real estate-related purposes throughout the United States. The Company is not an investment company as defined under the Investment Company Act of 1940, and investors will not have the protections provided therein. The Company intends to elect to be treated as a real estate investment trust for tax purposes commencing with the year ended December 31, 2022.
This Offering Circular relates to the offer and sale on a best efforts basis of up to an aggregate of $45,000,000 of the Company’s Senior Secured Demand Notes (“Senior Notes”). Each Senior Note will bear simple interest on the unpaid principal amount of the Senior Note at the rate of interest per annum specified in this Offering Circular or the most recent supplement to this Offering Circular (the “Interest Rate”). As of the date of this Offering Circular, the Interest Rate is five percent (5%). The Interest Rate may be changed by the Company at any time, provided that (i) the Interest Rate may not be increased or decreased by more than one-half percent (0.5%) at the time of any change, (ii) the Interest Rate may not be changed more than once during any 90 day period, and (iii) the Interest Rate change is applied to all Senior Notes outstanding. The Company will provide written notice to each Senior Noteholder before making any change in the Interest Rate (“Rate Change Notice”). The effective date of the change in Interest Rate for any Senior Note will be the date that is 90 days after the date of the Rate Change Notice.
The offering will commence as soon as this Offering Circular has been qualified by the United States Securities and Exchange Commission and will remain open until the Company has sold Senior Notes with an aggregate purchase price of $45,000,000, unless earlier terminated in the Company’s sole discretion. As provided in rules promulgated by the Securities and Exchange Commission, the Company may issue pursuant to a qualified offering up to $75,000,000 of Senior Notes in any 12 month period. The Company is offering the Senior Notes on an ongoing basis and the amount of Senior Notes offered pursuant to this Offering Circular has been reduced to reflect Senior Notes sold within the 12 months prior to this Offering Circular. This Offering Circular, once qualified, will supersede the Company’s previous Offering Circular with respect to the Senior Notes which was originally qualified on February 23, 2018 (“Earlier Offering Statement”). This Offering Circular includes any qualified but unsold securities covered by the Earlier Offering Statement.
Senior Notes will be sold at a price equal to the principal amount of such Senior Note, subject to a minimum investment of $50,000; provided that the Company’s Manager, in its sole discretion, may waive this requirement with respect to any investor. See “Description of Senior Notes” on Page 55 and “Plan of Distribution” on Page 60 this Offering Circular.
Generally (if you are not an “accredited investor” as defined for purposes of Regulation D under the Securities Act), no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
Investing in the Senior Notes involves risks and there is no guaranty that you will not suffer a loss on your investment. Before investing in a Senior Note, you should carefully read the discussion of material risks of investing in the Senior Notes in “Risk Factors” beginning on Page 6 of this Offering Circular. This Offering Circular supersedes any prior offering circular with respect to the Senior Notes.
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY NOTES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE NOTES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE NOTES OFFERED ARE EXEMPT FROM REGISTRATION.
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| Price to public |
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| Underwriting discount and commissions (2) |
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| Proceeds to Issuer (3) |
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Per Senior Note |
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| (1 | ) |
| $ | 0 |
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| (1 | ) |
Total Minimum |
| $ | 50,000 |
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| $ | 0 |
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| $ | 50,000 |
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Total Maximum |
| $ | 45,000,000 |
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| $ | 0 |
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| $ | 45,000,000 |
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(1) | The Senior Notes will be issued in a principal amount based on the individual investment. |
(2) | We do not intend to use commissioned sales agents or underwriters. |
(3) | Represents proceeds to the Company. All expenses related to the offering, including legal fees, accounting, printing and distribution expenses are paid by the Company. See “Use of Proceeds” on Page 19. |
The date of this Offering Circular is August 11, 2022
The Company is following the disclosure format prescribed by Part II of Form 1-A.
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6 | |||
19 | |||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 40 | ||
50 | |||
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS | 52 | ||
54 | |||
54 | |||
55 | |||
60 | |||
61 | |||
62 | |||
63 | |||
63 | |||
67 | |||
67 | |||
67 | |||
68 | |||
F-1 |
This summary highlights information contained elsewhere in this Offering Circular. This summary does not contain all of the information you should consider before deciding whether to purchase our Senior Notes. The summary is subject to, and qualified in its entirety by reference to, the detailed provisions of this Offering Circular, and the other agreements associated with this offering. You should carefully read this entire Offering Circular, including the information under the heading “Risk Factors.” References to “we,” “us” or “our” mean Iron Bridge Mortgage Fund, LLC.
THE COMPANY
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THE COMPANY: | Iron Bridge Mortgage Fund, LLC, is an Oregon limited liability company, doing business as Iron Bridge Lending (the “Company”). The Company engages in the business of making commercial purpose loans by lending funds to real estate investors to finance the ownership, entitlement, development or rehabilitation of residential and commercial real estate throughout the United States. More information about the Company can be found at www.ironbridgelending.com. |
MANAGEMENT: | Iron Bridge Management Group, LLC, an Oregon limited liability company, manages the Company as its manager (the “Manager”). The Manager has responsibility for the Company’s investment decisions and selecting, negotiating and administering the Company’s loans. The Manager is owned by Gerard Stascausky and operated by its Managing Directors, Gerard Stascausky and Sarah Gragg Stascausky. The Manager’s principal office is located at 9755 SW Barnes Road, Suite 420, Portland, OR 97225, and its telephone number is 503-225-0300. |
THE OFFERING
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OFFERING: | The Company may issue pursuant to a qualified offering up to $75,000,000 of Senior Notes in any 12 month period. The Company is offering the Senior Notes on an ongoing basis and the amount of Senior Notes offered pursuant to this Offering Circular has been reduced to reflect Senior Notes sold within the 12 months prior to the date of this Offering Circular. As of the effective date of this Offering Circular, the Company is offering up to an aggregate of $45,000,000 in Senior Secured Demand Notes (“Senior Notes”) that represent a secured debt obligation of the Company at a price equal to the principal amount of such Senior Notes. A purchaser of Senior Notes is referred to herein as a “Senior Noteholder.” The minimum principal investment is $50,000; provided that the Manager, in its sole discretion, may waive this requirement with respect to any investor. |
USE OF PROCEEDS: | The Company intends to use the proceeds from this offering to fund loans (“Portfolio Loans”) to borrowers (“Portfolio Borrowers”). The Company does not intend to use the proceeds for the purpose of funding offering or operational expenses, or repurchasing Equity Program interests, Senior Notes or Bank Borrowings, but because of the nature of the Company’s cash flows, some proceeds from time to time may be used for such purposes. |
PERMITTED PURCHASERS: | Investors that are not “accredited investors,” as defined for purposes of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) will not be permitted to purchase more than 10% of the greater of the investor’s annual income or net worth (for natural persons) or revenue or net assets (for entities). |
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THE NOTES
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MATURITY: | Each Senior Note shall have a term commencing on the date of issue (“Issue Date”) and expiring on the Maturity Date. The “Maturity Date” is the date that is 30 days after the date that the Company receives the Senior Noteholder’s written demand for payment; provided that the Manager, in its sole discretion, may extend the Maturity Date by up to three months. |
INTEREST: | Each Senior Note will bear simple interest on the unpaid principal amount of the Senior Note at the rate of interest per annum specified in this Offering Circular or the most recent supplement to this Offering Circular (the “Interest Rate”). The Interest Rate may be changed by the Company at any time, provided that (i) the Interest Rate may not be increased or decreased by more than one-half percent (0.5%) at the time of any change, (ii) the Interest Rate may not be changed more than once during any 90 day period, and (iii) the Interest Rate change is applied to all Senior Notes outstanding. The Company will provide written notice to each Senior Noteholder before making any change in the Interest Rate (“Rate Change Notice”). The effective date of the change in Interest Rate for any Senior Note will be the date that is 90 days after the date of the Rate Change Notice. Accrued interest will be computed daily on the basis of a 365-day year and applied to the actual number of days for which the principal is outstanding. Any change in Interest Rate on outstanding Senior Notes will be effected as an accounting adjustment in the account of the holders of outstanding Senior Notes. The Company will not issue new or replacement Senior Notes to the holders of outstanding Senior Notes.
At the time the Company issues any Rate Change Notice, it will file with the SEC and distribute to prospective investors a supplement to this Offering Circular that will fully disclose the material terms of the prospective interest rate change. Prior to the effective date of any pending interest rate change, the Company will file with the SEC a post-qualification amendment to the Offering Statement or a supplement to the Offering Circular that will disclose the new interest rate and will be distributed with the Offering Circular beginning on the effective date of the Interest Rate Change.
The Interest Rate as of the date of this Offering Circular is five percent (5%).
The Company monitors the interest rate environment and market conditions and considers whether changes in the Interest Rate are appropriate on an ongoing basis. Subject to the procedures and limitations described above, the Company may make additional changes to the Interest Rate at any time. |
PAYMENT TERMS: | The Company will make monthly payments of accrued interest only on each Senior Note. Principal and accrued interest may be prepaid in whole or in part at any time without penalty. All payments shall be allocated first to payment of unpaid accrued interest, if any, then to unpaid principal. All unpaid accrued interest and unpaid principal will be due and payable on the Maturity Date.
In the event there are insufficient funds available to pay accrued interest and principal in full as they become due and payable, the Company will direct payment of such interest and principal pro rata among Senior Noteholders in accordance with the relative amounts of unpaid accrued interest and principal on the then-outstanding Senior Notes.
In the event that the Company is in default with respect to its Bank Borrowings, the Company may be precluded from making payments under the Senior Notes until the default has been cured. |
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SECURITY INTEREST: | Senior Noteholders will be creditors of the Company and will maintain a security interest in all assets of the Company that is senior to any class of equity interests in the Company (the “Equity Program”).
The Senior Notes will be secured by all of the assets of the Company, including but not limited to bank accounts, Portfolio Loans, and personal property of the Company, whether tangible or intangible, either now owned or hereafter acquired (the “Collateral”) pursuant to the Security Agreement for the benefit of the Senior Noteholders between the Company and Carr Butterfield, LLC, as Collateral Agent (the “Security Agreement”). The Company has limited fixed, tangible assets and its primary assets are Portfolio Loans.
Other bank lenders may obtain a senior security interest in some or all of the Company’s assets as discussed below; however, total debt outstanding, including debt held by Senior Noteholders and other bank lenders, may not exceed eighty percent (80%) of total assets. In the event that the Company is in default with respect to its bank lenders, the Company may be precluded from making payments under the Senior Notes until the default has been cured. |
SUBORDINATION TO BANK BORROWINGS: | The Company has a $50 million line of credit with Umpqua Bank, which is senior in security interest in all of the Company’s assets, including Senior Notes, as evidenced by that certain Subordination Agreement (the “Umpqua Subordination Agreement”), by and among Umpqua Bank, the Company, and Carr Butterfield, LLC, as collateral agent for the holders of the Senior Notes. Under the Umpqua Subordination Agreement, the Senior Notes will continue to be entitled to receive and collect regularly scheduled payments of interest and principal, as well as any other prepayment of principal, so long as no event of default under the Umpqua line of credit has occurred or is continuing. The line of credit with Umpqua was entered into effective May 7, 2021, and replaced a similar line of credit with Western Alliance Bank.
The Company targets a line of credit utilization rate of 50-80%, which allows the Company to meet unanticipated loan requests from borrowers or unanticipated withdrawal requests from investors. Similarly, if the Company’s Portfolio Loans pay off faster than anticipated or if new loan originations do not match the rate of loan payoffs, the line of credit can be paid down while keeping investor capital fully utilized.
From time to time the Company may replace or enter into other secured or unsecured revolving lines of credit or other borrowings with bank lenders for the purpose of providing the Company with additional funds to manage daily Portfolio Loan funding and payoffs, or for other liquidity purposes (a “Bank Borrowing”). Senior Noteholders are agreeing that a secured Bank Borrowing may have a security interest in all or some of the collateral securing a Senior Note that is senior in priority as to either or both its payment or exercise of remedies to the security interest of the Senior Noteholders under the Security Agreement. The Company is authorized by the Senior Noteholders to enter into such agreements and instruments with the lender of a Bank Borrowing on terms as required by the Company to effect the priority of the security interest and conditions to the enforcement rights of the senior lender under the Bank Borrowing with respect to the Collateral. |
TRANSFER RESTRICTIONS; LIQUIDITY: | Investors will not be permitted to sell, assign, transfer, pledge, or otherwise dispose of all or any part of their Senior Notes in the Company, without the prior written consent of the Manager, which may be given or withheld in its sole discretion.
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REINVESTMENT PROGRAM: | In lieu of receiving payment of interest monthly, a Senior Noteholder may request reinvestment of interest payments at the time of the subscription for its Senior Note or in writing upon 30 days’ prior notice, subject to the investor suitability requirements discussed above. Upon acceptance of the request, in the sole discretion of the Company, monthly interest payments may be added to principal of the outstanding Senior Note as and when they come due (“Roll-over Interest”). Senior Noteholders who elect to have their monthly interest payments reinvested will benefit from monthly compounding. |
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EVENTS OF DEFAULT: | An “Event of Default” will be deemed to have occurred under the Senior Notes upon the Company’s failure to pay interest or principal when due, any default under indebtedness that results in acceleration of the maturity of a material amount of indebtedness of the Company, any breach in any material respects of any material covenant or obligation of the Company under the Senior Notes or the related agreements, any representation or warranty made by the Company in the Senior Notes or the related agreements proving to be false in any material respect, or certain events involving bankruptcy or the appointment of a receiver. Upon an Event of Default, all unpaid principal and accrued interest, if any, shall become immediately due and payable either automatically in the event of a default because of events involving bankruptcy or the appointment of a receiver, or at the option of Senior Noteholders holding a majority of the principal of the outstanding Senior Notes (“Majority of Interest”). Individual Senior Noteholders, unless a Majority of Interest, will not be able to accelerate payment under the Senior Notes in the event of a default. |
AMENDMENTS TO SENIOR NOTEHOLDER AGREEMENTS: | No modification or waiver of any provision of the purchase agreement for the Senior Notes (the “Senior Note Purchase Agreement”), the Senior Notes or the Security Agreement or consent to departure therefrom shall be effective unless in writing and approved by the Company and a Majority of Interest of Senior Noteholders. |
ACCOUNTING AND REPORTS TO SENIOR NOTEHOLDERS: | Annual audited financials concerning the Company’s business affairs will be provided to Senior Noteholders. Each Senior Noteholder will receive a copy of the Company’s income statement, balance sheet and statement of cash flows prepared by an Independent Certified Public Accountant, along with the Senior Noteholder’s respective 1099-INT.
The Company will also provide Senior Noteholders with (i) monthly interest statements related to their investment accounts, and (ii) quarterly financial reports, including management’s discussion and analysis, portfolio metrics and unaudited financial statements.
The Company’s books and records are maintained on the accrual basis for accounting purposes and for reporting income and losses for federal income tax purposes.
In connection with this offering, the Company will also be required to file with the SEC annual, semiannual, and current event reports for at least the fiscal year in which this Offering Circular was qualified and for so long as offers and sales made in reliance on this Offering Circular are ongoing. |
COVENANTS | Among other covenants provided to Senior Noteholders, the Company has agreed that the aggregate amount of Bank Borrowings and debt provided by the Senior Notes issued by the Company, if any, may not exceed eighty percent (80%) of total assets (the “Maximum Debt Covenant”). In addition, the Company has agreed to (a) perfect the security interest of the Senior Noteholders; (b) to make all payments ratably among the outstanding Senior Notes in proportion to the aggregate principal and interest amount payable under each such Senior Note, subject to the Company’s discretion to prepay all or a portion of certain Senior Notes; (c) require the Managing Directors to devote such amount of their business time to the operations of the Company and the Manager as is reasonably necessary to effectively manage the affairs of the Company and the Manager; (d) keep the Company books in accordance with GAAP and have such books audited at the end of each fiscal year; (e) transmit tax reporting information and certain financial statements to the Senior Noteholders; (f) use commercially reasonable efforts to prevent the structure of any co-lending activity from constituting an investment in a fractionalized mortgage, interest in a mortgage pool, tenancy in common, or other security; (g) make all mortgage loans in the United States and it territories; and (h) to perform its obligations under the Senior Notes, the Security Agreement, the Senior Note Subscription Agreement and the Senior Note Purchase Agreement. The Company also agrees not to amend the Operating Agreement in a manner that materially and adversely affects the Senior Noteholders, except to the extent approved by a Majority of Interest. |
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RECAPITALIZATION | As of January 31, 2021, the Company had one class of equity, and in addition to the Bank Borrowings, had two forms of debt outstanding: the Junior Notes and the Senior Notes.
Effective February 1, 2021, the Company adopted a Second Amended and Restated Operating Agreement (“Second Amended Operating Agreement” or “Operating Agreement”), which among other changes, created four classes of equity securities consisting of Class A, Class B, Class C and Class D Units (collectively “Units”): | ||
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| · | The Class A Units were issued to employees of the Company’s Manager, and/or their tax-advantaged accounts. The return on these Class A Units is intended to replace the right of the Manager to receive “Performance Fees” under the Company’s first Amended and Restated Operating Agreement. |
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| · | The former membership interests of the Company (“Former Equity”) were exchanged for Class B Units. |
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| · | The Company’s Junior Notes were, at the election of the holders, converted into Class C Units of the Company. |
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| · | A new Class D Unit was created. As of the date of this Offering Circular, no Class D Units are outstanding. The Company reserves the right to issue Class D Units in the future. |
The Company may unilaterally redeem the Units, and any member has the right to require the redemption of their Units, subject to certain limitations, including that the Company is prohibited from redeeming any Class A Units or Class B Units when the unreturned capital contributions of the Class A Units and Class B Units on an aggregate basis equal less than 20% of the total assets of the Company.
At any meeting of members, each member has one vote for each Unit held by such member. Unless a greater vote is required by the Oregon Limited Liability Company Act, as amended from time to time, or the Operating Agreement, any action approved by members with more than one-half of the issued and outstanding Units of all Members is the act of the members.
References herein to the Junior Notes refer to the historical Junior Notes, and effective February 1, 2021, no Junior Notes remain outstanding. | |||
LOAN UNDERWRITING GUIDELINES
| The Company has established the following underwriting guidelines to try to minimize risk and maximize the preservation of capital for investors: (a) All of the Company’s Portfolio Loans are secured by first lien deeds of trust or mortgages on real property; (b) The Company does not lend more than 70% of the estimated after-repair value of the real estate collateral; (c) The Company does not lend without assessing the borrower’s ability (e.g. cash reserves, income, liquidity events) and willingness to pay (e.g., credit report, background check), and; (d) The Company does not lend unless the borrower has a clearly defined exit strategy. | ||
DEFENSIVE ATTRIBUTE OF BUSINESS MODEL | The following is a list of defensive business model attributes that we believe have contributed to the Company’s performance between 2009 and the date of this Offering Circular: (a) The Company does not rely on increases or decreases in real estate prices; (b) The Company generally makes short term loans of 12 months or less that enable both the Company and its Portfolio Borrowers to adapt quickly to changing economic conditions; (c) Changes in interest rates do not require the Company to reprice its Portfolio Loans, minimizing interest rate risk; (d) The Company’s Portfolio Borrowers are more price setters than price takers; (e) The Company’s loan portfolio is primarily secured by residential real estate, which we believe to be a more defensive asset class relative to assets correlated to other sectors of the economy; (f) The Company’s business model generates strong and stable monthly recurring revenues, which means the Company is well positioned to cover interest payments; (g) Investor capital is further protected by the value of the underlying real estate collateral, and; (h) Senior Noteholders are further secured by approximately $46 million in subordinate (at risk first) investor capital. See “Defensive Attribute of Business Model” on Page 21, “Analysis of Interest Coverage” on Page 36, and “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 36 for additional details. | ||
AGREEMENT TO ELECTRONIC COMMUNICATION
| Senior Noteholders consent and agree that all communications may be delivered by the Company by posting such communications to your online account or by sending such communications to your designated email address. Email communications may include attachments or embedded links. Communications that you agree to accept electronically would include, without limitation, all subscription documents, deposit and withdrawal forms, monthly account statements, tax forms, rate change notices, disclosures, and other information. However, Senior Noteholder may send communication to the Company by regular mail.
Your consent also permits the Company to obtain your electronic signature if you choose to sign certain communications electronically. If you do sign electronically, your electronic signature will bind you to the terms and conditions to the same extent as if you signed the Communications on paper with an ink signature.
SENIOR NOTEHOLDERS ARE STRONGLY ADVISED TO NEVER WIRE FUNDS TO THE COMPANY PRIOR TO CONFIRMING THE COMPANY’S WIRE INSTRUCTIONS OVER THE PHONE. YOU SHOULD CALL THE COMPANY’S PHONE NUMBER AT 503-225-0300 TO CONFIRM WIRE INSTRUCTIONS. |
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Investing in the Senior Notes involves risks and there is no guaranty that you will not suffer a loss on your investment. You should carefully consider the following risk factors together with all of the other information included in this Offering Circular in evaluating an investment in the Company’s Senior Notes. If any of the following risks were to occur, the Company’s business, financial condition, results of operations, cash flows and ability to make cash distributions could be materially adversely affected, and you could experience a loss on your investment. Where applicable, we have provided references to additional information within this Offering Circular to help you determine if these risks are acceptable.
Risks Related to the Offering and the Senior Notes
The Senior Notes are not insured or guaranteed by the FDIC or any third party, so repayment of the Senior Notes depends upon the collateral securing our Portfolio Loans and our ability to manage our business so as to generate adequate cash flows to repay the Senior Notes.
The Senior Notes are not certificates of deposit or similar obligations or guaranteed by any depository institution and are not insured by the FDIC or any governmental or private insurance fund, or any other entity. Therefore, you are dependent upon our ability to manage our business so as to generate adequate cash flows to repay the Senior Notes.
There will not be any market for the Senior Notes, so you should only purchase them if you do not have any need for your money prior to the maturity of the Senior Note.
The Senior Notes are not listed on a national securities exchange or authorized for quotation on the NASDAQ Stock Market or any securities exchange. Accordingly, there will be no trading market for the Senior Notes. Except as described elsewhere in this Offering Circular, you have no right to require early redemption of the Senior Notes prior to the Maturity Date. You should only purchase these Senior Notes if you do not have the need for your money prior to the maturity of the Senior Note.
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We may not generate sufficient distributable cash flow to support the interest payments required by the Senior Notes.
We must generate a certain amount of revenue each month in order to make the interest payments we are obligated to make under the Senior Notes. The amount of cash we can pay on our Senior Notes principally depends upon the amount of cash we generate from our Portfolio Loans and rental properties, which will fluctuate from month to month based on, among other things:
| · | the interest payments received on our Portfolio Loans; |
| · | the rents and other income received; |
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| · | the fees and expenses of the Company; |
| · | the fees and expenses of the Manager and its affiliates that we may be required to reimburse; |
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| · | the amount of cash reserves established by our Manager; and |
| · | other business risks affecting our cash levels. |
In addition, the actual amount of cash flow that we generate will depend on other factors, some of which are beyond our control, including:
| · | overall domestic and global economic and industry conditions; |
| · | the price and availability of alternative lending sources for our Portfolio Borrowers; |
| · | the rate of Portfolio Loan payoffs; and |
| · | the impact of governmental laws and regulations. |
From Company inception (April 2009) through the effective date of this Offering Circular, all investors in any investment program sponsored by the Company, its Manager or its principals have received interest payments and the return of investment capital when or before due. However, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s interest coverage ratios, cash flow from Portfolio Loan payoffs and credit line availability, loan to value ratios and asset coverage ratios are sufficiently adequate to repay your Senior Note. See “Analysis of Interest Coverage” on Page 37, “Portfolio Roll Forward Analysis” on Page 35, “Bank Borrowings” on Page 47 and “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
The Senior Notes are and will be subordinated to Bank Borrowings.
The Senior Notes are senior to the Company’s existing Equity Program interests, and subordinate to the Company’s Bank Borrowings or any replacement or addition to such borrowings. See “Financial Statements” beginning on Page F-1 and “Liquidity and Capital Resources” Page 47 for information regarding Senior Notes, Equity Program and Bank Borrowings. The Senior Note Purchase Agreement that governs the terms of the Senior Notes does not have any restrictions on our ability to incur senior, secured Bank Borrowings other than the Maximum Debt Covenant. Consequently, in the event of our bankruptcy, liquidation, dissolution, reorganization or similar proceeding, the holders of Bank Borrowings will be entitled to proceed against the collateral that secures such indebtedness and such collateral will not be initially available for satisfaction of any amounts owed under the Senior Notes, and the Bank Borrowings will be entitled to be paid in full prior to any right of Senior Noteholders to receive payment. The Senior Notes may similarly be subordinated to statutorily protected interests, such as liens in connection with unpaid taxes and construction liens.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s interest coverage ratios, cash flow from Portfolio Loan payoffs and credit line availability, loan to value ratios and asset coverage ratios are sufficiently adequate to repay your Senior Note. See “Analysis of Interest Coverage” on Page 37, “Portfolio Roll Forward Analysis” on Page 35, “Bank Borrowings” on Page 47, and “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
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We may be unable to repay the Senior Notes at maturity or upon default.
On the Maturity Date of a Senior Note, or in the event of a default under the Senior Note Purchase Agreement, Senior Notes or Security Agreement, the Company may not have sufficient funds available at such time to make the required repayment of the principal and accrued and unpaid interest on the Senior Notes. We do not contribute funds to a separate account, commonly known as a sinking fund, to repay the Senior Notes upon maturity. Because funds are not set aside periodically for the repayment of the Senior Notes over their respective terms, you must rely on our consolidated cash flows from operations, investing and financing activities. To the extent cash flows from operations and other sources are not sufficient to repay the Senior Notes, the Company may have insufficient funds available to pay amounts owed pursuant to the Senior Notes.
In addition, the loan agreements for our Bank Borrowings contain, and any future credit agreements or other agreements relating to our Bank Borrowings may provide that a designated event constitutes an event of default under that agreement. At maturity, the Manager, in its sole discretion, may extend the Maturity Date of a Senior Note by up to three months. If the Company extends the Maturity Date, payment of the Senior Notes would be delayed until that date. If the Company receives demands for payment from Senior Noteholders collectively holding more than thirty percent (30%) of the unpaid principal amounts of all outstanding Senior Notes, the Company may elect to extend the Maturity Date for all Senior Notes while the Company liquidates and winds up its Portfolio Loans. If any agreement governing the Company’s Bank Borrowings prohibits the Company from repaying the Senior Notes when obligated to do so, the Company could seek the consent of the holders of Bank Borrowings to repay the Senior Notes or attempt to refinance the Bank Borrowings. If the Company does not obtain such consent to repay the Senior Notes, the Company would not be permitted to repay the Senior Notes until the prohibitions imposed by the Bank Borrowings have been lifted. The Company’s failure to repay Senior Notes would constitute an Event of Default, which might constitute a default under the terms of our other indebtedness.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s interest coverage ratios, cash flow from Portfolio Loan payoffs and credit line availability, loan to value ratios and asset coverage ratios are sufficiently adequate to repay your Senior Note and the Bank Borrowings. See “Analysis of Interest Coverage” on Page 37, “Portfolio Roll Forward Analysis” on Page 35, “Bank Borrowings” on Page 47 and “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
A Majority of Interest is necessary to accelerate payments under the Senior Notes.
If an Event of Default occurs, your remedies as an individual Senior Noteholder may be limited. A Majority of Interest may, on behalf of all Senior Noteholders accelerate payment under the Senior Notes to exercise and enforce their rights, as provided under the Security Agreement. Furthermore a Majority of Interest may elect to waive such rights and remedies in their discretion. A Senior Noteholder, acting alone, will have no recourse to accelerate payment under the Senior Notes, unless they individually hold a Majority of Interest. If an Event of Default occurs and a Majority of Interest of Senior Noteholders waives or otherwise declines to enforce your rights and remedies under your Senior Note, you will be without individual recourse with respect to such Event of Default. A Senior Noteholder may contact the Collateral Agent pursuant to the Security Agreement, to coordinate a Majority of Interest, but there is no guarantee that a Majority of Interest will elect to accelerate payment of the Senior Notes.
The Company is permitted to incur more debt, which may intensify the risks associated with current leverage, including the risk that the Company will be unable to service its debt.
The Senior Note Purchase Agreement does not prohibit the Company from incurring any indebtedness or other liabilities except to the extent borrowings exceed the Maximum Debt Covenant. If the Company incurs additional debt, the risks associated with its leverage, including the risk that the Company will be unable to service its debt, will increase.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s Maximum Debt Covenant, interest coverage ratios, cash flow from Portfolio Loan payoffs and credit line availability, loan to value ratios and asset coverage ratios are sufficiently adequate to repay your Senior Note. See “Leveraging the Portfolio” on Page 36, “Analysis of Interest Coverage” on Page 37, “Portfolio Roll Forward Analysis” on Page 35, “Bank Borrowings” on Page 47 and “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
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The Manager has discretion to redeem Equity Program interests or prepay the Senior Notes in the Company prior to the maturity of the Senior Notes.
Under the terms of the Company’s Operating Agreement and the Senior Notes, the Manager may prepay the Senior Notes under certain circumstances, or redeem Equity Program interests in the Company, provided that it remains in compliance with the Maximum Debt Covenant, and Company’s Class A Units and Class B Units continue to represent a minimum of 20 percent of total assets. If the Manager chooses to use Company cash to redeem Equity Program interests in the Company or prepay any Senior Notes, Senior Noteholders face the risk of the Company having less cash flow available to pay the Senior Notes at maturity, and in the case of a redemption of Equity Program interests, a reduction in Equity Program capital protection for Senior Noteholders. If the Company is unable to continue to generate cash flow or asset values diminish following an Equity Program redemption, or Senior Note prepayment, Senior Noteholders face a greater risk of loss of investment.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether a minimum of 20 percent Equity Program capital, as defined by the Maximum Debt Covenant, combined with the redemption limitations in the Operating Agreement, provides sufficient investment protection. See “Leveraging the Portfolio” on Page 36 for additional details regarding the minimum Equity Program capital required, and “As-Is” Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details regarding the loan-to-value and asset coverage ratios for Senior Noteholders.
The Company may change the rate of interest payable on the Senior Notes with a 90 day notice.
Each Senior Note will bear simple interest on the unpaid principal amount of the Senior Note at the rate of interest per annum specified in this Offering Circular or the most recent supplement to this Offering Circular (the “Interest Rate”). The Company may change the interest rate at any time, provided that (i) the interest rate may not be increased or decreased by more than one-half percent (0.5%) at the time of any change, and (ii) the interest rate change is applied to all Senior Notes outstanding. The Company provides written notice to each Senior Noteholder before making any change in the interest rate and the rate change will not become effective until 90 days after the notice. The Company monitors the interest rate environment and market conditions and considers whether changes in the Interest Rate are appropriate on an ongoing basis. Subject to the procedures and limitations described above, the Company may make additional changes to the Interest Rate at any time. If the Interest Rate is decreased, Senior Noteholders may receive less income from the Senior Notes than they would have had if the Interest Rate stayed the same or increased. In the event the Company changes the Interest Rate, Senior Noteholders may demand payment of their Senior Notes prior to the date when the interest rate change becomes effective. As of the date of this Offering Circular, the Interest Rate is five percent (5.0%).
Senior Noteholders will not have the protection of a trustee, an indenture or the provisions of the Trust Indenture Act of 1939.
Because this offering is being made in reliance on an exemption from registration under the Securities Act, it is not subject to the Trust Indenture Act of 1939. Consequently, purchasers of Senior Notes will not have the protection of an indenture setting forth obligations of the Company for the protection of the Senior Noteholders or a trustee appointed to represent their interests.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to determine if you are adequately secured by the Collateral and Security Agreement. The Senior Notes will be secured by all of the assets of the Company, including but not limited to bank accounts, Portfolio Loans, and personal property of the Company, whether tangible or intangible, either now owned or hereafter acquired (the “Collateral”) pursuant to the Security Agreement for the benefit of the Senior Noteholders between the Company and the law firm Carr Butterfield, LLC, as Collateral Agent (the “Security Agreement”).
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You will not have the benefit of an independent review of the terms of the Senior Notes, the Offering Circular or our Company as is customarily performed in an initial underwritten public offering.
The Senior Notes are being offered by the Company on a “best efforts” basis without an underwriter or placement agent. Therefore, you will not have the benefit of an underwriter or placement agent to perform an independent review of the terms of the Senior Notes, the Offering Circular, or our Company.
For this reason, you should read this Offering Circular and consult your investment, tax, and other professional advisors prior to deciding whether to invest in the Senior Notes.
Risks Related to the Business
Any deterioration in the housing industry or economic conditions could result in a decrease in demand and pricing for new and rehabilitated residential properties, which secure our Portfolio Loans, and could have a negative impact on our business and reduce the likelihood we will be able to generate enough cash to repay the Senior Notes.
The Portfolio Borrowers to whom we make loans use the proceeds of our loans to construct or rehabilitate residential properties. A Portfolio Borrower’s ability to repay our loans is based primarily on the amount of money generated by selling the properties they have constructed or rehabilitated, and thus, the Portfolio Borrowers’ ability to repay our loans is based primarily on the amount of money generated by the sale of such properties.
The housing industry is cyclical and residential real estate values are typically affected by the demand for and supply of properties, which can change due to many national and regional factors, such as:
· | employment level and job growth; | |
· | demographic trends, including population increases and decreases and household formation; | |
· | availability of financing for homebuyers; | |
· | interest rates; | |
· | affordability of residential properties; | |
· | consumer confidence; | |
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| · | Acts of God, including pandemics, earthquakes, hurricanes and other natural disasters, |
· | levels of new and existing residential properties for sale, including foreclosed properties and properties held by investors and speculators; and | |
· | housing demand generally. |
These conditions may occur on a national scale or may affect some of the regions or markets in which we operate more than others.
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To mitigate risk, we generally lend at no more than 70 percent of the estimated after-repair values of the residential properties our Portfolio Borrowers are building or rehabilitating, providing an estimated minimum of 30 percent borrower equity in the projects to secure our Portfolio Loans. However, these values are determined shortly prior to loan funding. If the values of properties in markets in which we lend drop fast enough to cause our Portfolio Borrowers losses that are greater than their equity in the property, we may not be paid back the full amount on our loans. If these loan losses occur across our Portfolio Loans at generally the same time, it may impair our ability to pay interest or principal on the Senior Notes.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s interest coverage ratios, cash flow from Portfolio Loan payoffs and credit line availability, loan to value ratios and asset coverage ratios are sufficiently adequate to repay your Senior Note. See “Analysis of Interest Coverage” on Page 37, “Portfolio Roll Forward Analysis” on Page 35, “Bank Borrowings” on Page 47 and “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
Our historical loan portfolio performance may not be indicative of future performance.
The Company began making investment loans as Iron Bridge Mortgage Fund, LLC on April 1, 2009. Although the Manager and its Managing Directors may have achieved favorable returns on previous Portfolio Loans, the performance of past investments cannot be relied upon to predict the Company’s success.
If the proceeds from the issuance of Senior Notes exceed the cash flow needed to fund Portfolio Loans, we may not be able to invest all of the funds in a manner that generates sufficient income to pay the interest on the Senior Notes. In such an event, we may return your investment.
There can be no assurance that loans of a suitable nature will be available in the market. It is possible that the Company will be less invested in Portfolio Loans than we expect, if sufficiently attractive loan opportunities are not identified. Our ability to pay interest on our debt, including the Senior Notes, pay our expenses, and cover loan losses is dependent upon interest and fee income we receive from loans extended to our Portfolio Borrowers. If we are not able to lend to a sufficient number of Portfolio Borrowers at high enough interest rates, we may not have enough interest and fee income to meet our obligations, which could impair our ability to pay interest and principal to you. In such an event, the Company may elect to return investor capital, and/or determine not to accept further capital, over holding investor capital in a low yielding bank account.
Our Portfolio Loan investments are determined by the Manager, with no input from Senior Noteholders.
A Senior Noteholder must rely upon the ability of the Manager to identify, structure, and service Portfolio Loans consistent with the Company’s investment objectives. Accordingly, no person should purchase Senior Notes from the Company unless he or she is willing to entrust all aspects of the management, financing, and development of a Project to the Portfolio Borrower, and the management of the Company, valuation of the Projects securing Portfolio Loans and the terms of the Portfolio Loans to the Manager.
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We may be subject to risks resulting from conflicts of interest between the Company and the Manager and its principals and affiliates.
There may be certain conflicts of interest between the Company and the Manager, its principals and their affiliates. These include:
· | Time Demands. The Manager’s primary business activity during the life of the Company is the management of the Company. However, the Manager or its Managing Directors may pursue investment and lending activities away from the Company. Their interests and activities in connection with such other investments may create a conflict in time demands with the Company’s interests. | |
· | Disproportionate Interest of Manager. The Company’s Manager receives management fees that are proportionally greater than the interest payable to Senior Noteholders. Accordingly, the Manager’s risk profile with respect to the use of the Company’s capital may diverge from that of the Senior Noteholders. | |
· | Potential Conflicts of Interest in Selecting Portfolio Loan Investments. The Manager may encounter various potential conflicts of interest in selecting Portfolio Loan investments for the Company in the event that the Manager sponsors other mortgage funds that pursue similar investment strategies as the Company. |
See “Conflicts of Interest” on Page 54 for greater details about these conflicts.
Increased lender competition may decrease our profitability, which would adversely affect our ability to make payments on the Senior Notes.
We may experience increased competition for business from other companies and financial institutions that are willing to extend the same types of loans that we extend at lower interest rates and/or fees. Because we do not offer FDIC insurance, our Senior Notes offer significantly higher rates than bank CDs. As a result, our cost of funds is higher than banks’ cost of funds. This may make it more difficult for us to compete against banks if they become competitive in our niche lending market in large numbers. These competitors also may have substantially greater resources, lower cost of funds, and a better-established market presence. If these companies increase their marketing efforts to our market niche of borrowers, or if additional competitors enter our markets, we may be forced to reduce our interest rates and fees in order to maintain or expand our market share. Any reduction in our interest rates, interest income or fees could have an adverse impact on our profitability and our ability to make payments on the Senior Notes.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate the interest coverage ratios of the Senior Notes and determined if you are comfortable with the interest coverage ratios and associated risk. See “Analysis of Interest Coverage” on Page 37 for additional details.
We are heavily dependent on the Manager and its Managing Directors, the loss of which may have a significant impact on operations.
The Manager will make all management decisions for the Company, including Portfolio Loan selection and servicing. The Company will be relying in large part on the Manager’s loan origination expertise. The Manager may resign at any time without liability to the Company. If the Manager withdraws from the Company, is terminated by the Company’s Equity Program investors for cause or otherwise, or is terminated as Manager by dissolution or bankruptcy, it may be difficult or impossible for the Company to locate a suitable replacement for the Manager. In addition, two of the Manager’s Managing Directors, Gerard Stascausky and Sarah Gragg Stascausky, are considered an integral part of the Company’s investments and operations. If either or both Managing Directors were to leave the Manager, die or become permanently disabled, the Manager’s ability to continue the management of the Company would be materially and adversely affected.
The Company believes that these risks are reduced by the self-liquidating nature of the Portfolio Loans. The Company makes loans with maturities of 12 months or less. If the Company stopped making loans for any reason, its employees or a substituted loan servicer could service the Portfolio Loans through payoff and return investor capital as much as possible.
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The Company has indemnification obligations to the Manager and its affiliates.
The Company is required to indemnify the Manager and certain affiliated persons for liabilities incurred in connection with the affairs of the Company. Such liabilities could be material and have an adverse effect on the Company’s profitability or ability to meet payment obligations. Such indemnification obligations of the Company will be payable from the income and assets of the Company.
The value of the collateral securing a Portfolio Loan may be incorrectly determined by the Manager.
The Manager will develop and utilize a consistent method to estimate the value of the collateral for each Portfolio Loan, in the Manager’s sole discretion. The Manager will use methodologies that it deems reasonable based on various valuation practices commonly used in similar businesses in the industry including comparative market analyses, appraisals, comparable sales of other similar assets, historical data and trends from actual sales, disposition or performance of assets, and other such methodologies generally used and accepted in the market. The determination or estimation of the value of any real estate collateral or other asset is highly subjective and subject to change continuously on an ongoing basis. There is no guarantee that any value as determined by the Manager of any real estate collateral or other asset of the Company will be accurate or represent the true current value of any asset.
To mitigate this risk, the Company relies on in-house real estate valuations when making new loans and continually refines its appraisal process and analyzes real estate market trends within different geographies. We believe that this internal valuation analysis enables the Company to make faster and more informed lending decisions, which we believe help mitigate risk while providing borrowers with a higher quality of service. The Company reports to investors on a quarterly basis the results of its valuation methodology testing. These tests compare the actual loan to sale-price for those loans that were paid off during a given quarter against the Company’s estimated valuation for those same properties at the time the loans were made. This analysis helps the Company to monitor and improve its in-house valuation methodology on an ongoing basis.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s loan-to-value ratios, asset coverage ratios and analysis of comparative loan-to-sale prices are acceptable. See “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
There is no assurance that our current financing arrangements will remain in place.
We will depend on Bank Borrowings to efficiently manage our cash flow, Portfolio Loan funding and reach our target leverage ratio. Accordingly, our ability to achieve our most efficient investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorable terms. Currently, we have entered into a $75 million line of credit with Umpqua Bank through May 7, 2024. There can be no assurance that this agreement will remain in place and, even if in place, that the amount and definitive terms under which we would be able to borrow would be adequate. Adverse developments in the residential and commercial mortgage markets could make it more difficult for us to borrow money to finance our investment activities.
We are subject to significant government regulation, which may affect our ability to operate.
The industry in which the Company is an active participant may be highly regulated at both state and federal levels. The Company will attempt to comply with all applicable regulations affecting the markets in which it operates. However, such regulation may become overly burdensome and therefore may have a negative effect on the Company’s ability to perform. The Company expects to comply with all rules, regulations, advisories and guidelines, however it is extremely difficult to keep up with all changes and proposed changes to all federal and state regulations at all times, and the Company may, on occasion, be delayed in such compliance, requiring the Company to pay penalties, costs, fees, and other charges to regain compliance. Any such penalty, cost, fee, or other charge could have a negative adverse effect on the Company.
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We may become subject to the Investment Company Act, which could interfere with our intended operations.
The Company intends to operate so as to not be regulated as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) based upon certain exemptions thereunder. Specifically, the Company expects to be exempted from registration under the Investment Company Act because the Company will be primarily engaged in purchasing or acquiring mortgages and other liens on, and interests in, real estate as determined under exemptions from the Investment Company Act and rules issued thereunder. Accordingly, the Company does not expect to be subject to the restrictive provisions of the Investment Company Act. However, if the Company fails to qualify for exemption from registration as an investment company, its ability to conduct its business as described herein will be compromised. Any such failure to qualify for such exemption would likely have a material adverse effect on the Company.
Our reliance on certain exclusions from the Investment Company Act may impact certain investment decisions.
The Investment Company Act excludes from the definition of an “investment company” issuers of non-redeemable securities that are primarily engaged in purchasing or otherwise acquiring mortgages and other liens on, and interests in, real estate. The Manager has not sought a no-action letter from the SEC to confirm that the Company is eligible for this exemption. However, the Manager will rely on guidance issued by the SEC stating that so long as (1) qualifying percentages of the Company’s assets consist of mortgages and other liens on or interests in real estate; and (2) the remaining percentage of the Company’s assets consist primarily of real estate related assets, the Company will remain exempt from the Investment Company Act registration requirements. These formulaic requirements may negatively impact the Company’s investment flexibility.
Real estate investing is inherently risky.
The Company is subject to the risks that generally relate to investing in real estate because it principally makes debt investments in real estate assets. Real estate historically has experienced significant fluctuations and cycles in performance that may result in reductions in the value of the collateral securing the Company’s real estate-related investments. The performance and value of its investments once funded depends upon many factors beyond the Company’s control. The ultimate performance and value of the Company’s investments are subject to the varying degrees of risk generally incident to the ownership and rehabilitation or construction of the properties in which the Company invests and which collateralize or support its investments.
Risks Related to the Company’s Portfolio Loans
The Collateral securing a Portfolio Loan may not be sufficient to pay back the principal amount in the event of a default by a Portfolio Borrower.
In the event of default by a Portfolio Loan Borrower, our Portfolio Loan investment is primarily dependent on the real estate collateral securing our Portfolio Loan. Our loan collateral consists primarily of a first lien deed of trust or mortgage on the underlying property. In the event of a default by a Portfolio Borrower, we may not be able to recover the property promptly and the proceeds we receive upon sale of the property may be adversely affected by risks generally related to interests in real property, including changes in general or local economic conditions and/or specific industry segments, declines in real estate values, increases in interest rates, real estate tax rates and other operating expenses including changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, and other factors which are beyond our or our Portfolio Borrower’s control. Current market conditions may reduce the proceeds we are able to receive in the event of a foreclosure on our loan collateral. Our remedies with respect to the loan collateral may not provide us with a recovery adequate to recover our Portfolio Loan investment.
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We will have limited control over our Portfolio Borrowers, which lack of control may affect the repayment of our Portfolio Loans.
Typically a Portfolio Borrower is structured as an entity or venture for the purpose of acquiring, improving, developing or holding the real property (a “Project”) collateralizing a Portfolio Loan. The Portfolio Borrower and the Project is managed exclusively by the principals of the Portfolio Borrower or its co-investors or affiliates.
Investors will have no opportunity to directly affect the management of the Portfolio Borrower or of the Project. The Company is also likely to have little opportunity to influence the management of the Portfolio Borrower or Project, except to the limited extent of imposing conditions to the draw of funds under a Portfolio Loan. Therefore, the successful operation of the Portfolio Borrower, the choice and terms of any junior lien Project financing, the success of the Project, the repayment of a Portfolio Loan, and the ability of the Portfolio Borrower to repay the Portfolio Loan depends greatly upon the skill, experience and efforts of the Portfolio Borrower or its principals in the acquisition, improvement, development, management and sale of the Project and in the management of the Portfolio Borrower. In the event the Project is not successfully completed, in addition to the inability of the Portfolio Borrower to repay such Portfolio Loan, the value of the Portfolio Loan collateral is likely to be impaired.
There is no operating history for the Projects that secure our Portfolio Loans.
Although a Portfolio Borrower or its principals may be experienced real estate investors that have previously purchased, rehabilitated, constructed and sold residential properties, the Project securing our Portfolio Loan will have no operating or financial history. The prior success of Portfolio Borrower or its principals in connection with previous real estate investments are no assurance that the Portfolio Borrower will enjoy comparable success with respect to the Project collateralizing the Portfolio Loan. If a Portfolio Loan or Project collateral is impaired by the poor performance of a Portfolio Borrower, the Company’s ability to realize on that Project may be impaired.
Our borrower credit requirements may be more lenient than the credit requirements of some conventional lenders.
The Company is an asset based lender and primarily relies on the value of the real estate collateral and its borrowers’ liquidity and operational experience to secure its Portfolio Loans. As a result, the Company will invest in Portfolio Loans with borrowers who will not be required to meet the high credit standards of some conventional mortgage lenders, which may be riskier than investing in loans made to borrowers who are required to meet those higher credit standards. In addition, because the Manager approves Portfolio Loans more quickly than some conventional lenders, there may be a risk that the due diligence the Manager performs as part of its underwriting procedures would not reveal the need for additional precautions. If so, the Portfolio Borrower may be more likely to default on the Portfolio Loan, requiring the Company to foreclose on the real estate collateral.
The Projects securing our Portfolio Loans may not be completed as planned, thereby increasing the risk that we will not be repaid in full.
Our Portfolio Loans are made to fund real property Projects that are often the subject of development plans by the Portfolio Borrower. Costs of planned improvements, development or operations of the Project securing the Portfolio Loan may exceed estimates, which may affect the Portfolio Borrower’s ability to complete the Project according to projections and budgets. Similarly, development plans may not be permissible under then-existing laws, ordinances, regulations and building codes. In either case, such events may affect the Portfolio Borrower’s ability to repay our Portfolio Loan.
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We may have delays or additional costs in enforcing our rights as a secured lender.
The Company believes that its lending documents will enable it to enforce commercial arrangements with Portfolio Borrowers and other counterparties. However, the rights of Portfolio Borrowers, counterparties, and other secured lenders may limit the Company’s practical realization of those benefits. For example:
· | Judicial foreclosure is subject to the delays of protracted litigation. Although the Company expects non-judicial foreclosure to be generally quicker, the Company’s loan collateral may deteriorate and decrease in value during any delay in foreclosing on it. | |
· | The Portfolio Borrower’s right of redemption during foreclosure proceedings can deter the sale of the loan collateral and can for practical purposes require the Company to manage the property. | |
· | The Company will be making loans in different states, with varying foreclosure laws, procedures and timelines. Depending on which state a Project is located, there may be more or less time, effort and cost associated with foreclosing on Portfolio Loans. | |
· | Unforeseen environmental hazards may subject the Company to unexpected liability and procedural delays in exercising its rights. | |
· | The rights of junior or statutory senior secured parties in the same property can create procedural hurdles for the Company when it forecloses on loan collateral. | |
· | The Company may not be able to pursue deficiency judgments after it forecloses on loan collateral. | |
· | State and federal bankruptcy laws can prevent the Company from pursuing any actions, regardless of the progress in any of these suits or proceedings. | |
· | The courts, particularly the bankruptcy courts, may unilaterally alter the contractual terms of the Company’s assets, including doing so to the detriment of the Company. |
Care is exercised upon creation of the legal documents at the time of origination, or through thorough review of such documents in the event of acquisition, to ensure that as many bases as possible have been covered in the documents. However, in the event of default, it can be very difficult to predict with any certainty how courts will respond.
Our due diligence may not reveal all factors affecting an investment and may not reveal weaknesses in such investments.
There can be no assurance that the Manager’s due diligence processes will uncover all relevant facts that would be material to a lending decision. Before making a Portfolio Loan, the Manager will assess the strength of the underlying properties, borrowers, and any other factors that they believe are material to the performance of the Portfolio Loan. In making the assessment and otherwise conducting customary due diligence, the Manager will rely on the resources available to them and, in some cases, investigations by third parties.
Environmental liabilities may limit our ability to realize repayment of our Portfolio Loans.
The Projects subject to our Portfolio Loans may become subject to liability for costs of cleanup of certain conditions relating to the presence of hazardous or toxic materials on, in or emanating from the Project securing our Portfolio Loan, and any related damages. Liability is often imposed without regard to whether the owner knows of, or was responsible for, the presence of the hazardous or toxic materials. These liabilities may interfere with the economic development of the subject Projects, and may interfere with the repayment of our Portfolio Loans.
The repayment of our Portfolio Loans may be affected by other debt obligations associated with the Project.
The Portfolio Borrower’s financing of a Project may involve additional subordinate loans made by third parties that are unaffiliated with the Company. These subordinate loans can provide Portfolio Borrowers with additional funds to complete a Project and improve the collateral value securing our Portfolio Loan. However as a result of increased leverage utilized by these Portfolio Borrowers, recessions, operating problems and other general business and economic risks may have a more pronounced effect on the profitability or survival of such Portfolio Borrowers than if additional leverage were not employed.
A mechanic’s lien on a Project may impair a Portfolio Loan.
The Project may be subject to a mechanic’s lien, which entitles the holder of such a lien to foreclose on the Project if the holder has not been paid in full for its services, materials or labor. Most state laws provide that any person who supplies services, materials or labor to a real estate Project may impose a lien against the Project securing any amounts owed to such person. Although the Portfolio Borrower may be required by the terms of the Portfolio Loan to utilize procedures to prevent the occurrence of mechanic’s liens (such as requiring mechanic’s lien releases prior to payment and issuing joint-party checks) no assurance can be given that mechanic’s liens will not appear against the Project. If a mechanic’s lien does appear, then it must be negotiated by the Portfolio Borrower in order to obtain its release or the person holding such lien will have the right to bring an action of foreclosure on the Project in order to satisfy the amount due under the lien.
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Eminent domain proceedings on a Project may impair a Portfolio Loan.
The Project or a portion of the Project could become subject to an eminent domain or inverse condemnation action. Although the Company and its Portfolio Borrower may be legally entitled to receive compensation for such governmental actions, the compensation may prove insufficient. Such an action could have a material adverse effect on the operations or marketability of the Project, and, as a consequence, adversely affect the ability of the Portfolio Borrower to repay the Portfolio Loan. In addition, the value of the Project as collateral would be impaired and the Project may have insufficient remaining value to repay accrued interest and principal on foreclosure.
We may have concentration risk related to Portfolio Borrowers or geographic distribution of Portfolio Loans.
The Company’s portfolio may become concentrated in a limited number of Portfolio Loans, increasing the vulnerability of the portfolio as compared with a portfolio that is more diversified in the number and location of Portfolio Loans and Portfolio Borrowers. If the Company is unable to diversify its investments by lending to a variety of Portfolio Borrowers and by diversifying the geographic and type of collateral, the Portfolio Loans will be dependent on the success of a limited number of Portfolio Borrowers and the Company’s assets may be concentrated in specific markets or collateral categories. If one or more Portfolio Borrowers or markets suffer adverse consequences, the Company’s financial condition and results of operations will be adversely affected.
For this reason, you and your financial advisors should read this Offering Circular and the Company’s most recent quarterly report to evaluate whether the Company’s geographic and borrower concentration risk is acceptable. See “Geographic Distribution” on Page 24 and “Borrowers” on Page 27 for additional details.
Our remedies as a lender may be limited to the real estate collateral securing our Portfolio Loans.
Portfolio Loans are secured by first lien deeds of trust or mortgages on property and will generally be personal obligations of the principals of the Portfolio Borrower. In the event of a default under a Portfolio Loan, the Company is entitled to foreclose upon the property securing the Portfolio Loan and may seek a deficiency judgment against the principals, individually. A deficiency judgement may be subject to delays and additional expenses if defenses or counterclaims are interposed, making the pursuit of a deficiency judgement uneconomical.
The Company’s investment may not be sufficiently protected in the event of damage to collateral.
Although the Company requires its Portfolio Borrowers to maintain adequate insurance coverage against liability for personal injury and property damage, such insurance may prove insufficient to cover any liabilities or casualty losses incurred by a Portfolio Borrower. Also certain risks may be uninsurable or may become uninsurable, or may become insurable only at prohibitive cost, such as the risk of property damage and general liability from earthquakes, floods, damage from terrorist activities, or certain environmental hazards. In addition, such risks may be insurable only in amounts that are less than the full market value or replacement cost of the relevant collateral. In addition to the unintentional loss of the collateral, the Portfolio Borrower may permit uninsured waste or other damage to the collateral by tenants, licensees or invitees. In the event of the occurrence of such risk or waste, the collateral may be substantially impaired or destroyed, and the potential loss to the Company in the event the applicable Portfolio Loan does not perform could be material.
The Company may become subject to penalties for usury.
The structure of the Company’s Portfolio Loans is expected to comply with state usury laws and the laws of other relevant jurisdictions. However, usury laws and their exemptions are complex and may change. If, despite the Company’s reasonable efforts in reliance on qualified advisors to avoid such result, a Portfolio Loan made by the Company does not comply with applicable state usury laws, the Company may be responsible for payment of penalties and face the potential loss of some or all of its Portfolio Loan investment.
Risks Related to the Company’s REIT Qualification
We have limited experience operating a REIT and we cannot assure you that our past experience will be sufficient to successfully manage our business as a REIT.
We have limited experience operating a REIT. The REIT provisions of the Code are complex, and any failure to comply with those provisions in a timely manner could prevent us from qualifying as a REIT or force us to pay unexpected taxes and penalties. In such event, our net income would be reduced.
Our failure to qualify as a REIT would cause us to be treated as a regular corporation subject to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and members.
The Company intends to elect to be treated as a corporation taxable as a REIT commencing with our taxable year ending December 31, 2022, but there can be no assurance that the Company will qualify or be able to maintain its qualification as a REIT. The Company is relying on counsel from its financial auditors, tax accountants and legal professionals, however qualification as a REIT depends upon our satisfaction of a range of complex asset, income, organizational, distribution, member ownership and other requirements on a continuing basis. We have structured and intend to continue structuring our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the highly technical nature of these rules, the ongoing importance of factual determinations, and the possibility of unidentified issues in prior periods or changes in the Company’s circumstances, each could adversely affect the Company’s ability to qualify as a REIT.
If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, generally we would be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment, and we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
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Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The requirements associated with ongoing REIT qualification of the Code may limit our ability to hedge our liabilities. To maintain our REIT status, a certain percentage of our “gross income” must come from specified types of investments. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute “gross income” that qualifies for purposes of meeting these requirements. As a result of these rules, we may need to limit our use of advantageous hedging techniques. From inception (2009) through the filing date of this supplement, the Company has not engaged in transactions to hedge its liabilities.
To qualify as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives.
To obtain the favorable tax treatment accorded to REITs, the Company normally will be required each year to distribute to members at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. The Company will be subject to U.S. federal income tax on its undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions the Company pays with respect to any calendar year are less than the sum of (1) 85% of the Company’s ordinary income, (2) 95% of the Company’s capital gain net income and (3) 100% of the Company’s undistributed income from prior years. These requirements could cause the Company to distribute amounts that otherwise would be spent on acquisitions of assets or liquidate otherwise attractive investments and it is possible that the Company might be required to borrow funds, use proceeds from the issuance of securities, pay taxable dividends of Units or debt securities or sell assets in order to distribute enough of its taxable income to qualify or maintain qualification as a REIT and to avoid the payment of U.S. federal income and excise taxes. Thus, compliance with the REIT requirements may hinder the Company’s ability to operate solely on the basis of maximizing profits.
The use of taxable REIT subsidiaries, which may be required for REIT qualification purposes, would increase our overall tax liability and thereby reduce our cash available.
Some of our assets may need to be owned by, or operations may need to be conducted through, one or more taxable REIT subsidiaries (each, a “TRS”). Any of our TRSs would be subject to U.S. federal, state and local income tax on their taxable income. The after-tax net income of our TRSs would be available for distribution to us. Further, we would incur a 100% excise tax on transactions with our TRSs that are not conducted on an arm’s-length basis. While we intend that all transactions between us and our TRSs would be conducted on an arm’s-length basis, and therefore, any amounts paid by our TRSs to us would not be subject to the excise tax, no assurance can be given that no excise tax would arise from such transactions.
The tax on prohibited transactions may limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, which would be treated as sales for U.S. federal income tax purposes.
If the Company sells any “dealer” property, the net income from such sale would be subject to a 100% “prohibited transactions” tax. The determination of whether any property is “dealer property” is a fact-specific question, and although the Company intends to structure any dispositions of properties in a manner that avoids such tax, no assurance can be provided in this regard. Further, to the extent that the Company seeks to avoid imposition of the prohibited transaction tax by causing one of its TRSs to dispose of the applicable property, such TRS generally would be subject to corporate income tax on its net gain resulting from such disposition.
We may not request an opinion of counsel as to our status as a REIT, which increases the risk that we may not be appropriately structured and operated to qualify and maintain qualification as a REIT.
REITs engaging in a registered public offering must obtain a written opinion of counsel as to whether the REIT will qualify for taxation as a REIT under the Code and make that opinion available to the public as part of its registration process. Opinions of counsel as to an entity’s eligibility to qualify as a REIT are not binding on the IRS and are not guarantees that such an entity will qualify and continue to qualify as a REIT. In addition, legal counsel’s tax opinions are based upon the law existing and applicable as of the date of the opinions, all of which can change, either prospectively or retroactively. However, accounting firms and law firms that render opinions to entities desiring to qualify as REITs would advise their clients as to the likelihood of meeting the qualification requirements and may suggest changes in an entity’s intended structure or intended method of operation to enhance the likelihood that an entity will meet the applicable requirements. While we have consulted with our legal counsel, we are not required to request, and may not request, a written opinion that sets forth our legal counsel’s opinion on whether we will be appropriately structured and operated to meet the complex requirements necessary to be taxed as a REIT. Accordingly, no such opinion is available, and we face a greater risk that we may not be appropriately structured and operated to qualify and maintain our qualification as a REIT.
The ability of our Manager to revoke our REIT qualification without member approval may cause adverse consequences.
Our Manager may revoke or otherwise terminate our REIT Election, without the approval of our members, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for distributions paid to members in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates, as well as state and local taxes, which may have adverse consequences on our total return to members.
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This Offering Circular includes forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are generally identifiable by the use of words such as “may,” “should,” “expects,” “plans,” “believes,” “estimates,” “predicts,” “potential,” and other similar words or expressions. Such statements include information concerning our plans, expectations, possible or assumed future results of operations, trends, financial results and business plans, and involve risks and uncertainties that are difficult to predict and subject to change based on various important factors, many of which are beyond our control. Such factors include, but are not limited to, those discussed in the “Risk Factors” section of this Offering Circular. These and other important factors could cause actual results to differ materially from those contained in any forward-looking statement. You should not place undue reliance on our forward-looking information and statements. The forward-looking statements included in this Offering Circular are made as of the date of this Offering Circular, and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. All forward-looking statements contained in this Offering Circular are expressly qualified by these cautionary statements. Statements other than statements of historical fact are forward-looking statements.
The historical results described in this Offering Circular with respect to previous mortgage lending are historical only, and were influenced by available opportunities, diverse market conditions and other factors beyond the control of the Company. Any projections made in this Offering Circular are based on historical examples and the Company’s estimates of future conditions. There is no assurance that lending opportunities experienced in the past will occur in the future, that market conditions will be as favorable to the Company as they have been in the past, or that investors will enjoy returns on their investment comparable to those enjoyed by them or by others with respect to their participation in other investments sponsored by the Manager. The actual results experienced by the Company will differ, and such variation could be material. Please see the section “Risk Factors” before deciding to purchase Senior Notes.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE SENIOR NOTES, THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SENIOR NOTES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL, STATE OR FOREIGN SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The proceeds to the Company from the sale of Senior Notes will be equal to the aggregate principal amount of Senior Notes we sell. The estimated expenses for the preparation, filing, printing, legal, accounting and other fees and expenses related to the offering of approximately $652,000 have been paid by the Company since the Company began offering the Senior Notes on March 1, 2018. The Company intends to use the proceeds from this offering to fund loans to borrowers and not to fund the Company’s operating expenses and other obligations. The Company has not identified the particular investments it will make. Accordingly, an investor must rely upon the ability of the Manager in making investments consistent with the Company’s investment objectives and policies. Although the Managing Directors have been successful in locating investments in the past, the Company may be unable to find a sufficient number of attractive opportunities to invest its committed capital or meet its investment objectives. The Company does not intend to use proceeds for the purpose of repurchasing or redeeming Equity Program interests in the Company or repaying Senior Notes, but may do so as necessary to appropriately manage cash flows or to meet the distribution requirements associated with REIT qualification. The Company does not anticipate any material changes to the use of proceeds described above in the event that less than all of the Senior Notes being qualified are sold and the proceeds are subsequently reduced. The Company intends to issue Senior Notes only if it believes sufficient investment opportunities exist in the near term. As provided in rules promulgated by the Securities and Exchange Commission, the Company may issue pursuant to a qualified offering up to $75,000,000 of Senior Notes in any 12 month period. The Company is offering the Senior Notes on an ongoing basis and the amount of Senior Notes offered pursuant to this Offering Circular has been reduced to reflect Senior Notes sold within the 12 months prior to the date of this Offering Circular.
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Overview
The Company was formed in 2009 as an Oregon limited liability company for the purpose of making commercial purpose loans by lending funds to real estate investors to finance the ownership, entitlement, development or rehabilitation of residential and commercial real estate throughout the United States. The Company has no employees and is managed by Iron Bridge Management Group, LLC, an Oregon limited liability company (the “Manager”), which is owned by Gerard Stascausky and operated by Gerard Stascausky and Sarah Gragg Stascausky (the “Managing Directors”). The Company may lease certain employees from the Manager from time to time, and the amount of any employee leasing payments made are deducted from the loan servicing fees payable to the Manager. Gerard Stascausky and Sarah Gragg Stascausky combined bring to the Company over 20 years of investment banking experience, over 18 years of distressed real estate investment experience, and over 22 years of private real estate lending experience. The Manager provides Portfolio Loan origination and servicing services to the Company. See “Management” on Page 50 of this Offering Circular.
The Company’s primary business is to provide commercial purpose loans for the acquisition and rehabilitation of distressed residential and commercial real estate as well as to provide opportunistic financing for real estate development and construction. The Company’s primary sources of investment capital are its private Equity Program interests, Senior Notes and Bank Borrowings. All operating expenses and offering expenses are paid from investment profits distributable to Equity Program investors after interest expense is paid on Senior Notes and Bank Borrowings. The commercial purpose loans extended by the Company are based upon underwriting criteria the Manager has found to be successful in the past. See “Underwriting” on Page 30 of this Offering Circular.
The Company primarily originates and structures its own loans, with such loans being secured by first lien deeds of trust or mortgages. However, the Company may also take title to properties (either directly or through a wholly owned subsidiary) to facilitate prompt acquisitions from trustees at auction, pre-foreclosure acquisitions from defaulting borrowers, or any other real estate acquisition in which the Company believes taking title to the property is in the best interest of the Company. The wholly owned subsidiary may provide the Company a level of liability protection on owned assets, while preserving the Company’s economic interests.
The Company’s investments are exclusively in non-owner occupied real estate loans. The Company does not originate new owner-occupied residential loans of any kind.
Company Vision
We believe that the real estate finance industry is in the early stages of a major transformation that should create significant value for borrowers, investors and real estate finance companies. Technology and new securities laws should drive increased efficiency. For borrowers, this should mean lower interest rates and better service. For investors, this should mean superior risk-adjusted returns that are not available in the public markets. And for the innovative companies that lead this change, it should mean an opportunity to create value while effectively managing risk.
Background and Strategy
Real estate finance markets are highly fragmented, with numerous large, mid-size, and small lenders and investment companies, such as banks, savings and loan associations, credit unions, insurance companies, institutional lenders and private lenders all competing for investment opportunities. Many of these market participants experienced losses in the real estate market, which started to decline in 2006 and reached its bottom in 2012. As a result of credit losses and restrictive government oversight, many of these financial institutions are not participating in this market to the extent they had before the credit crisis. In addition, it appears that the number of banks and other institutional lenders willing to lend for the acquisition and rehabilitation of commercial and residential investment properties has decreased. In particular, we believe that banks and other institutional lenders are generally more reluctant to lend money secured by residential property until the property is constructed or fully renovated and either rented or ready for purchase by an owner-occupant. Developers particularly rely on private lending sources such as the Company to fill the need for financing between the time a property is purchased and the time, after construction or rehabilitation, when it is ready to be rented or sold. We believe the Company fills a significant gap by providing much needed financing of this type for areas with a growing need for such financing, and that profitable investment opportunities will be available to the Company based on the fragmented nature of the rehab lending market and the limited competition from banks and other institutional lenders.
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Why Private Lending Offers Asymmetrical Investment Returns
The Company believes that its Portfolio Loan investments can earn a higher rate of return per unit of risk compared to public market investments (e.g., publicly-traded stocks and bonds) because the private lending markets in which it operates are less efficient than public markets. The efficient market theory generally assumes two things: (1) information is ubiquitous and (2) capital moves freely. These two assumptions are important in understanding why we believe that the private lending industry can produce asymmetrical investment returns, which can be defined simply as higher rates of investment return per unit of risk than the efficient market theory would suggest.
The first assumption, “information is ubiquitous,” generally means that all investors know about all investments available and have analyzed all the information available related to those investments. In the public markets this assumption is often true. For example, large investment funds with billions of dollars in investment capital often employ large staffs of analysts, each dedicated to specific industries or companies. The public companies they analyze are generally required by law to disclose material information to the public in a timely manner. When new information is made available, these analysts can quickly assimilate the information and invest accordingly. These conditions make information ubiquitous in the public markets, but these conditions generally do not hold true in the private lending industry for rehab and new construction projects.
The second assumption, “capital moves freely,” generally means that investors are able and motivated to allocate capital among investment opportunities in a way that always maximizes the investment return per unit of risk. Again, in the public markets, this assumption is often true. For example, large investment funds are generally competing to attract investment capital by earning a superior investment return relative to their peers and are therefore motivated to reallocate investment capital in order to maximize investment returns. In addition, the public markets are generally liquid and allow these institutional investors to buy and sell quickly with minimal transactional costs. These conditions allow capital to move freely in the public markets, but these conditions generally do not exist in the private lending industry for rehab and new construction projects.
By comparison, within the private lending industry information generally is not ubiquitous and capital generally does not move freely. For example, private lenders in Colorado or Texas may not necessarily know about lending opportunities in Oregon or Washington. Moreover, even if those private lenders were made aware of these lending opportunities, the private lenders may not be interested or structurally capable of evaluating and funding the loans in the timeframes required. Further, capital generally does not move freely in the private lending industry for rehab and new construction projects. For example, the largest lenders in the real estate industry are banks, which are both government regulated and structurally challenged to move quickly. Government regulations often dissuade banks from pursuing certain types of profitable loans in order to comply with larger risk management overlays. The banks are also often structured in ways that make them relatively slow in analyzing and funding loans. What this means is that the private lending industry for rehab and new construction projects is fragmented and relatively inefficient and does not comply with the efficient market theory’s assumptions of ubiquitous information flow and free movement of capital. This inefficiency provides an opportunity for participants in the private lending industry to earn asymmetrical investment returns, or, in other words, a higher rate of return per unit of risk versus public market investments as indicated in the following graph.
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Defensive Attributes of the Company’s Business Model
While there can be no guaranty that investors in the Company will not suffer a loss on their investment, we believe that the Company’s business model has certain defensive attributes that may allow the Company to perform relatively well in adverse economic environments. The following is a list of defensive business model attributes that we believe have allowed the Company to earn an attractive investment return with no loss to investors from Company inception (April 2009) through the effective date of this offering circular. However, there can be no assurance that these attributes would provide the same level of protection in the future.
The Company does not rely on increases or decreases in real estate prices. The Company’s investment returns are primarily derived from the interest payments and fees paid by the Company’s Portfolio Borrowers who have generally demonstrated an ability to find profitable projects in various economic environments. We believe this is one of the reasons why the Company’s profitability and investor returns have remained stable through depreciating, flat and appreciating real estate markets since 2009.
The Company generally makes short term loans of 12 months or less that enable both the Company and its Portfolio Borrowers to adapt quickly to changing economic conditions. For example, if real estate prices soften and resale activity slows down, some of our Portfolio Borrowers may break even or lose money on current Projects because their estimated resale prices may prove to have been too optimistic. However, because these are short-term Projects with defined exit strategies, our Portfolio Borrowers are often able to adapt quickly by buying the next Project at a lower price to account for changing market conditions.
Changes in interest rates do not require the Company to reprice its Portfolio Loans, minimizing interest rate risk. The Company has the intent and ability to hold its Portfolio Loans to maturity. Therefore, Portfolio Loans are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned. Changes in interest rates do not require the Company to reprice its Portfolio Loans. However, changes in interest rates can create reinvestment risk related to changes in the rate of return available on new Portfolio Loans made by the Company.
The Company’s Portfolio Borrowers are more price setters than price takers. Because our Portfolio Borrowers’ Projects are short-term, and their profits come primarily from the value added improvements made to the Project, we believe our Portfolio Borrowers are more sensitive to completing and selling their Projects quickly than they are to the current trend in real estate prices. For example, between 2009 and 2012, when real estate prices were in decline, many of the Company’s Portfolio Borrowers were buying properties from foreclosure auctions at very low prices, rehabbing the houses, and then listing the houses for sale at prices that were often lower than competing listings, resulting in quick sales.
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The Company’s loan portfolio is primarily secured by residential real estate, which we believe to be a more defensive asset class relative to assets correlated to other sectors of the economy. Real estate is a well-known inflation hedge, but what’s more important is that, in our view, the Federal Reserve and other policymakers are likely to prioritize the health of the residential real estate market over other sectors of the U.S. economy. The simple reason is that consumption is approximately 70% of U.S. gross domestic product and housing is the largest single investment for most consumers. Accordingly, we believe that it is unlikely that policymakers will allow the residential real estate market to suffer for an extended period without taking action. The same cannot be said for other sectors of the economy. For example, the oil and gas industry experienced a major decline in energy prices during 2014 and 2015 that led to significant capital spending reductions and industry layoffs. However, from an economic perspective the benefits of lower energy prices transmitted through increased consumer spending generally appeared to offset the negative effects of oil industry contraction.
The Company’s business model generates strong and stable monthly recurring revenues, which means the Company is well positioned to cover interest payments. For the 12 months ended December 31,2021, the Company generated revenues of $13.6 million and combined interest expense of $2.8 million related to its Senior Notes ($1.4 million) and Bank Borrowings ($1.4 million). Revenues were 4.8 times the amount needed to cover this combined interest expense. In these calculations, the interest payable on Senior Notes is combined with the interest payable on Bank Borrowings because Bank Borrowings have a senior security interest to Senior Noteholders. We believe that this level of interest coverage provides Senior Noteholders a significant layer of protection that should help safeguard investor capital during an adverse economic event. See “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional details.
Investor capital is further protected by the value of the real estate collateral. As of December 31, 2021, the estimated “as-is” value of the real estate collateral was $163.4 million, which secured the combined $65.9 million of Senior Notes ($29.4 million) and Bank Borrowings ($36.5 million). The value of the real estate collateral was approximately 2.48 times the amount necessary to pay off our Senior Notes and Bank Borrowings combined. Similarly, the principal balance of Senior Notes and Bank Borrowings combined represented an “as-is” loan-to-value of 40% on the real estate collateral. In these calculations, the principal balance owed on Senior Notes is combined with the principal balance owed on Bank Borrowings because Bank Borrowings have a senior security interest ahead of Senior Noteholders. We believe that this level of real estate asset coverage and loan-to-value provides another important layer of real estate asset protection that should help safeguard investor capital during an adverse economic event. See “As-Is Loan-to-Value and Asset Coverage Based on Percentage Completion” on Page 37 for additional information regarding loan-to-value analysis and the method of estimating “as-is” value.
Portfolio Loan Characteristics
Project Type. The primary focus of the Company’s lending activities is on single-family residential rehab and new construction projects. As described above, the Company believes that this market is underserved by banks and other institutional lenders. In addition, the relatively short-term nature of these projects (12 months or less) allows the Company and its Portfolio Borrowers to adjust quickly to changing market conditions.
The following table provides information about the distribution of the Company’s loan portfolio by project type segmented further by number of loans and the unpaid principal balance (“UPB”) of those loans.
|
| As of the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Number of loans |
|
|
|
|
|
| ||
Single-family residential rehab |
|
| 281 |
|
|
| 255 |
|
Single-family residential new construction |
|
| 25 |
|
|
| 13 |
|
Multi-family residential rehab |
|
| 1 |
|
|
| 2 |
|
Multi-family residential new construction |
|
| 1 |
|
|
| 1 |
|
Commercial |
|
| 2 |
|
|
| 5 |
|
Land entitlements |
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Percentage of UPB |
|
|
|
|
|
|
|
|
Single-family residential rehab |
|
| 82 | % |
|
| 84 | % |
Single-family residential new construction |
|
| 11 | % |
|
| 5 | % |
Multi-family residential rehab |
|
| 4 | % |
|
| 3 | % |
Multi-family residential new construction |
|
| <1 | % |
|
| 1 | % |
Commercial |
|
| 3 | % |
|
| 6 | % |
Land entitlements |
|
| 0 | % |
|
| 0 | % |
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During the residential real estate downturn from 2009 through 2012, the Company only made residential rehab loans on existing single family properties. From 2013 through 2015, the Company modestly increased the amount of loans it made for single-family and multi-family new construction. This trend reflected the general improvement in the real estate market over that time and a corresponding shift in the business models of our borrowers from fixing distressed properties purchased through foreclosure sales or from bank owned inventory to more value-added projects, such as square footage additions or new construction. During 2015, 2016 and 2017, the Company’s single-family and multi-family new-construction loans, in aggregate, remained consistent at less than 25% of loan portfolio UPB. From 2018 through 2021, the Company made fewer new construction loans in favor of more residential rehab loans. At December 31, 2021, Company’s single-family and multi-family new-construction loans, in aggregate, were less than 10% of UPB. The Company believes that the real estate securing residential rehab loans is generally more secure compared to the real estate securing new construction loans because, on average, the amount of construction funds required to complete rehab projects is less, the time to complete a rehab project is shorter, and rehab projects usually come with an existing certificate of occupancy allowing the owner to more easily rent the property in an adverse economic environment.
It is important to point out that the Company does not make loans for land entitlement purposes only. Any land entitlement loans represent phase one of two phase projects that require land entitlement to be completed prior to new construction commencing on either single-family or multi-family residential structures.
Geographical Distribution. The Company continues to experience steady loan demand and stable real estate resale activity. However, the real estate markets it serves can be affected by both regional economics and macro economic cycles. For this reason, the Company believes that increasing its geographic diversification and having the ability to rebalance its loan portfolio between geographies is important to effectively manage risk.
The following table provides the geographic distribution of the Company’s loan portfolio by state segmented further by the number and unpaid principal balance of loans (“UPB”) that were active at the end of the period and those loans that paid off during the period.
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Table of Contents |
|
| As of or for the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Arizona |
|
|
|
|
|
| ||
Number of active loans, end of period |
|
| 3 |
|
|
| 2 |
|
Percentage of total UPB |
|
| 1 | % |
|
| 1 | % |
California |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 91 |
|
|
| 87 |
|
Percentage of total UPB |
|
| 46 | % |
|
| 49 | % |
Colorado |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 25 |
|
|
| 16 |
|
Percentage of total UPB |
|
| 10 | % |
|
| 7 | % |
D.C. - Washington |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| - |
|
|
| 1 |
|
Percentage of total UPB |
|
| - |
|
|
| <1 | % |
Florida |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 7 |
|
|
| 3 |
|
Percentage of total UPB |
|
| 1 | % |
|
| 1 | % |
Georgia |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 15 |
|
|
| 3 |
|
Percentage of total UPB |
|
| 2 | % |
|
| <1 | % |
Illinois |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| - |
|
|
| 2 |
|
Percentage of total UPB |
|
| - |
|
|
| <1 | % |
Indiana |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 2 |
|
|
| 1 |
|
Percentage of total UPB |
|
| <1 | % |
|
| <1 | % |
Maryland |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 10 |
|
|
| 9 |
|
Percentage of total UPB |
|
| 1 | % |
|
| 1 | % |
Missouri |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 30 |
|
|
| 8 |
|
Percentage of total UPB |
|
| 3 | % |
|
| 1 | % |
New Mexico |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| - |
|
|
| 1 |
|
Percentage of total UPB |
|
| - |
|
|
| <1 | % |
North Carolina |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 1 |
|
|
| 7 |
|
Percentage of total UPB |
|
| <1 | % |
|
| 1 | % |
Oregon |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 37 |
|
|
| 42 |
|
Percentage of total UPB |
|
| 10 | % |
|
| 16 | % |
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|
| As of or for the Year Ended December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Tennessee |
|
|
|
|
|
| ||
Number of active loans, end of period |
|
| - |
|
|
| 1 |
|
Percentage of total UPB |
|
| - |
|
|
| <1 | % |
Texas |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 45 |
|
|
| 33 |
|
Percentage of total UPB |
|
| 13 | % |
|
| 7 | % |
Utah |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 22 |
|
|
| 20 |
|
Percentage of total UPB |
|
| 5 | % |
|
| 5 | % |
Virginia |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 1 |
|
|
| 5 |
|
Percentage of total UPB |
|
| <1 | % |
|
| <1 | % |
Washington |
|
|
|
|
|
|
|
|
Number of active loans, end of period |
|
| 21 |
|
|
| 35 |
|
Percentage of total UPB |
|
| 6 | % |
|
| 10 | % |
During 2016, the Company maintained stable lending activity across its existing geographies and began lending in Florida, Massachusetts, New Jersey, North Carolina, Oklahoma and South Carolina. During 2017, the Company began lending in Georgia, Tennessee and Virginia. During 2018, the Company began lending in Louisiana and increased its portfolio concentration toward non-judicial foreclosure states. During 2019 and 2020, the Company began lending in the District of Columbia, New Mexico and Utah and further increased its portfolio concentration toward non-judicial foreclosure states. The Company believes that lending in non-judicial foreclosure states is less risky, generally, than lending in judicial foreclosure states because the amount of time and expense required to foreclose non-performing loans is less. As of December 31, 2021 and 2020, the percentage of loan portfolio UPB secured by property located in non-judicial states was 98% and 99%, respectively.
The Company believes that the benefits of geographic diversity outweigh the risks associated with managing a wide geographic distribution of borrowers and real estate collateral. Specifically, the Company evaluates and adjusts its loan program offerings to borrowers in those states that offer better investment returns per unit of risk. Some of the variables evaluated by the Company in making the decision to expand or contract in a specific geographic market include the competitive pricing pressure from competing lenders, availability of borrower projects, the margins on those borrower projects and trends in regional economic activity.
26 |
Table of Contents |
Borrowers. The Company’s Portfolio Borrowers are often comprised of one to three member teams that form a company and take title to Projects in their company name. The team members usually have prior experience in real estate development, construction, finance or sales. For example, a common three-person team might include a real estate agent, general contractor and financier, each contributing their expertise to the team. The real estate agent might be tasked with identifying attractive Projects, making suggestions regarding what capital improvements should be made to the Projects and helping to market and sell the Projects. The contractor might be tasked with assessing the cost, complexity and time necessary to make the planned capital improvements to the Project and managing that construction process. The financier might be tasked with managing the lender relationships, equity investor relationships in the Project, if any, and handling all back office accounting.
Between 2009 and 2015, the Company did not pursue a formal marketing or advertising program to grow its base of Portfolio Borrowers. The growth in the number of Portfolio Borrowers came almost exclusively through word of mouth. However, beginning in 2016, the Company implemented a marketing and advertising plan, which has helped the Company identify qualified Portfolio Borrowers and advantageous lending opportunities in each geographic market.
It has been our experience that providing Portfolio Borrowers with exceptional service leads to business referrals, which we believe is the best form of marketing. In addition, because our Portfolio Borrowers are often repeat customers, the value of each Portfolio Borrower relationship is much higher than it would be if the Portfolio Borrowers were not repeat customers.
The following table provides information regarding borrower concentrations as of the dates indicated.
|
| As of the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Portfolio Loans |
|
| 310 |
|
|
| 276 |
|
Portfolio Borrowers |
|
| 159 |
|
|
| 175 |
|
Average number of loans per borrower |
|
| 1.9 |
|
|
| 1.6 |
|
Top borrower (percentage of UPB) |
|
| 6.4 | % |
|
| 4.5 | % |
Top 3 borrowers (percentage of UPB) |
|
| 14.1 | % |
|
| 11.0 | % |
Loan Term. All of the Company’s loans are made with maturity dates of 12 months or less. However, it is the Company’s policy to provide borrowers, whose loans are not in default, with six-month loan extensions, as needed, to allow more time to finish projects. We believe the relatively short-term nature of these projects allows the Company and its Portfolio Borrowers to adjust quickly to changing market conditions.
27 |
Table of Contents |
The following table sets forth the distribution of loans by age at the dates indicated:
|
| As of the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Number of loans |
|
|
|
|
|
| ||
00-06 months |
|
| 203 |
|
|
| 200 |
|
06-09 months |
|
| 58 |
|
|
| 24 |
|
09-12 months |
|
| 21 |
|
|
| 21 |
|
12+ months |
|
| 28 |
|
|
| 31 |
|
Percentage of unpaid principal balance |
|
|
|
|
|
|
|
|
00-06 months |
|
| 60 | % |
|
| 65 | % |
06-09 months |
|
| 20 | % |
|
| 9 | % |
09-12 months |
|
| 7 | % |
|
| 7 | % |
12+ months |
|
| 13 | % |
|
| 19 | % |
The loans over twelve months represent larger new construction projects, stabilized commercial projects, and two phase projects, which were excepted to take additional time to complete.
28 |
Table of Contents |
Loan Turnover. The following table provides information associated with the Company’s Portfolio Loan turnover for the periods shown:
|
| As of or for the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Loans originated, during period |
|
| 597 |
|
|
| 469 |
|
Loans paid off, during period |
|
| 562 |
|
|
| 442 |
|
Loans foreclosed, during period |
|
| 1 |
|
|
| 2 |
|
Portfolio Loans, end of period |
|
| 310 |
|
|
| 276 |
|
Total historical payoffs, end of period |
|
| 3,513 |
|
|
| 2,950 |
|
Total historical originations, end of period |
|
| 3,823 |
|
|
| 3,226 |
|
Total loan origination and associated Portfolio Loan turnover increased gradually each year from 2013 through 2017 as the Company worked to balance a steady increase in capital formation with quality loan origination. During 2018, the number of loans originated decreased as the Company shifted its origination toward states with larger loan sizes. During 2019 and 2020, the number of loans originated increased as the Company grew its loan portfolio to balance with the issuance of additional Senior Notes. During 2021, the number of loans originated increased as the Company increased its Bank Borrowings to meet borrower demand.
Loan Size. The following table sets forth the distribution of loans by size (based on the unpaid principal balance) at the dates indicated:
|
| As of the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Portfolio unpaid principal balance |
| $ | 115,701,463 |
|
| $ | 92,048,404 |
|
Average loan size |
|
| 373,231 |
|
|
| 333,509 |
|
Median loan size |
|
| 272,124 |
|
|
| 225,000 |
|
$0-$100,000 |
|
| 22 |
|
|
| 32 |
|
$100,001-$200,000 |
|
| 81 |
|
|
| 91 |
|
$200,001-$300,000 |
|
| 67 |
|
|
| 62 |
|
$300,001-$500,000 |
|
| 78 |
|
|
| 44 |
|
$500,001-$1,000,000 |
|
| 44 |
|
|
| 37 |
|
$1,000,000-$1,500,000 |
|
| 10 |
|
|
| 5 |
|
$1,500,000-$2,000,000 |
|
| 8 |
|
|
| 3 |
|
$2,000,000-$2,500,000 |
|
| 0 |
|
|
| 2 |
|
$2,500,000-$3,000,000 |
|
| 0 |
|
|
| 0 |
|
The Company saw a modest increase in average and median loan sizes from 2017 through 2021, reflecting the Company’s shift toward west coast states, which have relatively higher priced real estate on average, and the appreciation of the real estate market.
The Company’s objective is to make loans secured by real estate priced in the liquid segments of each geographic market. Therefore, the distribution of loan sizes between time periods largely reflects both changes in real estate prices over time and a mix shift between geographies. While the Company is sensitive to loan size diversification, it does not target a mix of loan sizes.
29 |
Table of Contents |
Portfolio Loan Criteria and Policies
Underwriting. The Company engages in the business of making loans secured by first lien deeds of trust or mortgages that encumber real estate located in the United States, its territories and possessions. The Company may also invest indirectly in a loan by acquiring an ownership interest in an entity formed for the sole purpose of holding a qualifying loan. The Company’s loans are not insured or guaranteed by any governmental agency or private entity.
For each Portfolio Borrower, the Company performs a criminal background check, orders a credit report, measures liquidity, interviews the borrower to assess experience level and evaluates the quality of previous work. The Company also requires each Portfolio Borrower to provide a construction cost budget, detailing the cost and scope of planned capital improvements, and a profit analysis, detailing the borrower’s estimated resale price, total project cost and estimated profit.
As an asset-based lender, the Company’s underwriting guidelines are heavily weighted toward real estate valuation, liquidity and loan-to-value (LTV) coverage. Specifically, the Company operates under the following underwriting guidelines:
· | the Company does not lend unless secured by a first lien deed of trust or mortgage; | |
· | the Company does not lend unless the borrower has a clearly defined exit strategy; | |
· | the Company does not lend without assessing the borrower’s ability and willingness to pay; and | |
· | the Company does not lend more than 70% of the estimated “after-repair value” of the collateral (70% LTV coverage). |
The Company has the sole discretion whether to originate a mortgage loan at a given LTV. Some of the factors considered by the Company when determining the maximum LTV to be extended on a mortgage loan are:
· | age, type, condition, and location of the collateral; | |
· | borrower creditworthiness and credit history; | |
· | loan amount and credit terms requested; | |
· | additional cross-collateralized properties; | |
· | proposed changes to or reconstruction of the collateral; | |
· | tenant history and occupancy rate (if applicable); and | |
· | amount of the interest reserve or construction loan (if any). |
30 |
Table of Contents |
In determining the value of real estate collateral for purposes of loan underwriting and LTV calculations, the Company inspects the properties and evaluates comparable property values in the area through the use of Multiple Listing Service (MLS) data. Based on this information, the Company prepares an estimate of the “after-repair value” of each property. The Company’s “after-repair” value estimates assume that all planned capital improvements to the real estate collateral have been completed and that the Company has disbursed all construction loan proceeds, and represents the Company’s estimate of the market value of the collateral after completion of the project based on information about comparable properties available at that time. In more complex transactions or for properties with limited comparable data, the Company may seek a formal valuation report such as an appraisal or broker price opinion. Appraisals are recognized in the mortgage banking industry to represent estimates of value, and should not be relied upon as the only measure of true worth or realizable value. Collateral value is determined solely in the judgment of the Company.
The Company believes that performing in-house real estate valuations provides it with a competitive advantage. By performing hundreds of in-house valuations per year in multiple geographies, the Company is able to continually refine its appraisal process and analyze real estate market trends within different geographies. This internal valuation analysis enables the Company to make faster and more informed lending decisions, which we believe help mitigate risk while providing Portfolio Borrowers with a higher quality of service.
There are no limitations on the types or locations of real estate investment loans within the United States or any requirement for current yield as opposed to overall return. Moreover, the Company’s investment strategy does not seek to balance the investment portfolio by property types, return characteristics or location, but the Company is sensitive to concentration risk. The Manager has the discretion to lend the Company’s assets on both new construction and existing properties.
The Company will not enter into any new commitment to make a loan where the cumulative principal amount of such loan would exceed 10% of the principal value of Portfolio Loans plus cash and cash equivalents of the Company as of the date of such commitment.
The Manager has discretion to amend the Portfolio Loan criteria and policies from time to time. Therefore, in essence, the investment objectives are those defined by the manager from time to time.
Disbursement of Loan Proceeds
Company loans are funded through an escrow account handled by the Manager or a qualified attorney, title insurance company or escrow company. The escrow agent is instructed not to disburse any funds until the following conditions are met:
· | Satisfactory title insurance coverage has been obtained, except as described in the following paragraph, with the title insurance policy naming the Company as the insured and providing title insurance in an amount equal to the principal amount of the loan. Title insurance insures only the validity and priority of the Company’s deed of trust or mortgage, and does not insure the Company against loss by reason of other causes, such as diminution in the value of the property securing the loan, over-appraisals or borrower defaults. The Company does not intend to arrange for mortgage insurance, which would afford some protection against loss if the Company foreclosed on a loan and there was insufficient equity in the property securing the loan to repay all sums owed. | |
· | The Company does not intend to arrange for title insurance policies on properties purchased from county auction, in which the borrower is borrowing from the Company under a Master Loan and Security Agreement. In such cases, the Company lends to the borrower during a period in which the borrower has equitable (but not marketable) title, and the Company performs its own title research. Once the Trustee’s Deed or Sherriff’s Deed is received and recorded following the foreclosure sale, the Company’s first lien position is perfected. The Master Loan and Security Agreement cross-collateralizes the loan against other properties owned by the borrower. | |
· | Satisfactory hazard and liability insurance has been obtained for all loans, or only liability insurance in the event of a loan secured by unimproved land, which insurance shall name the Company as loss payee in an amount equal to the principal amount of the Company’s loan or the replacement value of the property, as dictated by legal statute. | |
· | All loan documents (notes, deeds of trust, etc.) and insurance policies name the Company as payee and beneficiary or additional loss insured, as applicable. In the event the Company purchases loans, the Company shall receive assignments of all beneficial interest in any document related to each loan so purchased. Company investments in loans may not be held in the name of the Manager or any other nominee. |
31 |
Table of Contents |
Disbursement of Construction Draws
The Company disburses construction draws to Portfolio Borrowers to pay for planned capital improvements to the real estate collateral based on a pre-defined scope of work, construction budget and time schedule. To mitigate risk in this process, the Company follows certain policies and procedures that incorporate some or all of the following practices. However, it is important to point out that the Company evaluates the risks related to each project, considering such variables as borrower experience, and project location, size, timing and scope of work to determine the right combination of practices to follow.
Practices related to disbursement of construction draws include, but are not limited to, the following:
· | Construction Cost Budget – The construction cost budget is a spread sheet provided by the borrower that provides the Company with line item detail related to the planned capital improvements. The construction cost budget is prepared during the underwriting processes, and the borrower will update and submit the construction cost budget with each draw request. | |
· | Summary Page – The summary page organizes the draw request into two categories: (1) reimbursable expenses to be paid by the Company to the borrower, and (2) direct payments by the Company to contractors and vendors. The Company will reimburse the borrower for completed work as long as the borrower provides proof of payment. The Company will pay contractors and vendor invoices directly for completed work. |
· | Conditional Lien Waivers – Conditional lien waivers are legal agreements provided by contractors and material vendors to the Company or the borrower. The contractor or vendor agrees to waive its right to file a mechanics lien against the property for work performed through a specific date conditioned upon the receipt of a specific payment amount. | |
· | Final Lien Waivers – Final lien waivers are legal agreements provided by contractors and material vendors to the Company or the borrower. The contractor or vendor agrees to waive its right to file a mechanics lien against the property for all work performed on the property, conditioned upon the receipt of a final payment amount. | |
· | Property Inspections – The Company orders property inspections by qualified third party inspectors to evaluate the amount and quality of construction work performed at various stages of construction or redevelopment. | |
· | Advanced Funding – In certain circumstances, the Company may agree to advance a borrower funds to be used to make future capital improvements. In those cases, the Company requires that, among other things, the borrower provide proof of payment and that the work be 100% complete prior to a subsequent advance. In addition, the Company is often secured through cross-collateralization with other projects owned by the same borrower. |
32 |
Table of Contents |
Loan Servicing
The Company’s loans are serviced by the Manager and the Manager is compensated for such loan servicing activities. See “Management Fees” on Page 51 of this Offering Circular.
We believe that the quality of service provided by the Company to Portfolio Borrowers is an important competitive differentiator in the private lending industry. For this reason, the Company chooses to originate, underwrite and service all of its loans in-house. In-house loan underwriting enables the Company to make fast, common sense lending decisions, which Portfolio Borrowers appreciate. For example, new borrower applications generally can be processed in 48 hours, loan proposals generally can be made in 24 hours and existing Portfolio Borrowers can receive funding in two to five days. In addition, because the Company does not require third party approvals to make loans, Portfolio Borrowers have confidence in the funding commitments made by the Company.
We also believe that in-house loan servicing is important for mitigating loan portfolio risk. Maintaining a close relationship with Portfolio Borrowers and servicing Portfolio Loans through every step of the loan life cycle allows the Company to quickly identify and address problem loans.
Loan servicing includes, but is not limited to, the following:
· | Payment Reminder Statements – Calculating, generating and delivering payment reminders to Portfolio Borrowers on a monthly basis. The accrued interest calculations are performed on a daily basis and take into account intra-month adjustments to the unpaid principal balance related to construction draw advances and adjustments to the interest rate of the loans, if any. | |
| ||
· | Loan History Statements – Calculating, generating and delivering loan history statements to Portfolio Borrowers on a monthly basis. The loan history statements are updated on a daily basis and present a summary of all financial transaction activity related to the loan, including transaction dates, funding amounts, accrued interest amounts, payment amounts, loan advances, loan fees and payoff amounts. | |
| ||
· | Construction Loan Statements – Calculating, generating and delivering construction loan history statements to Portfolio Borrowers on a monthly basis. The construction loan history statements are updated on a daily basis and present all construction loan advances, including transaction dates, advance amounts, vendors paid and balance of construction loan remaining. | |
| ||
· | Interest Reserve Statements – Calculating, generating and delivering interest reserve history statements to Portfolio Borrowers on a monthly basis. The interest reserve statements are updated on a daily basis and present all interest reserve advances, if any, made to cover loan payments, including transaction dates, advance amounts and balance remaining. |
· | Payment Collection – Portfolio Borrowers make loan payments monthly in arrears and are instructed to mail their checks or money orders directly to the Manager for deposit into the Company’s general account. Portfolio Borrowers may also elect to have their payments electronically debited from their bank accounts by the Company. | |
| ||
· | Construction Draw Processing – Accepting, evaluating and managing construction loan draw requests submitted by Portfolio Borrowers. Construction draw processing includes educating borrowers about the draw process, collecting required documentation, managing third-party property inspectors, evaluating the quality of work and percentage of completion against the balance of the construction loan, and disbursing funds to Portfolio Borrowers or contractors. | |
| ||
· | Loan Payoffs – Calculating, preparing and submitting loan payoff statements. The Company works directly with the escrow company or attorney handling the closing. Following a loan payoff and payoff reconciliation, the Company prepares a reconveyance form in order to release its security interest in the property. | |
| ||
· | Delinquent Loans and Foreclosure – The Company follows internal policies and procedures related to colleting payment on delinquent loans, offering and negotiating pre-foreclosure remedies and filing foreclosure. All foreclosure proceedings are handled by third-party foreclosure trustees or attorneys, as required by each state. |
33 |
Table of Contents |
Loan Performance
We measure our performance through various metrics, including our net income, net margin, net interest rate spread, net interest margin, ratio of interest-earning assets to interest-bearing liabilities, non-performing loans to total loans, late fee and default interest from non-performing loans, charge-offs on non-performing loans, estimated active portfolio loan-to-value compared to actual paid-off portfolio loan-to-sale price, and interest coverage ratios.
The following are selected ratios regarding the performance of our loans for the fiscal years ended December 31, 2020 and 2019. Historical performance is not necessarily an indicator of future performance, and we cannot guaranty that these ratios will be maintained into the future.
|
| As of and for the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Selected performance ratios |
|
|
|
|
|
| ||
Net interest rate spread |
|
| 7.435 | % |
|
| 6.676 | % |
Net interest margin |
|
| 9.434 | % |
|
| 7.724 | % |
Ratio of interest-earning assets to interest-bearing liabilities |
|
| 1.75 |
|
|
| 1.21 |
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans (percentage of UPB) |
|
| 0.5 | % |
|
| 2.9 | % |
|
|
|
|
|
|
|
|
|
Loan to value - active loans, end of period |
|
|
|
|
|
|
|
|
Unpaid principal balance |
| $ | 115,701,463 |
|
| $ | 92,048,404 |
|
Undisbursed construction loan balance (1) |
|
| 14,237,524 |
|
|
| 10,101,465 |
|
Estimated “after-repair” value (2) |
|
| 204,791,000 |
|
|
| 158,951,000 |
|
Estimated “after-repair” loan-to-value (3) |
|
| 63 | % |
|
| 64 | % |
|
|
|
|
|
|
|
|
|
Loan to value - paid off loans, during period |
|
|
|
|
|
|
|
|
Principal balance |
|
| 133,811,153 |
|
|
| 102,765,141 |
|
Actual sale price |
|
| 230,920,485 |
|
|
| 167,542,858 |
|
Actual loan-to-sale price (4) |
|
| 58 | % |
|
| 61 | % |
Original “after-repair” loan-to-value estimate |
|
| 65 | % |
|
| 65 | % |
|
|
|
|
|
|
|
|
|
Interest coverage ratios |
|
|
|
|
|
|
|
|
Interest coverage - Bank Borrowings (5) |
|
| 10.0 | x |
|
| 12.2 | x |
Cumulative interest coverage - Senior Notes (6) |
|
| 4.8 | x |
|
| 5.3 | x |
Cumulative preferred coverage – Class C Equity (7) |
|
| 3.2 | x |
|
| 3.2 | x |
Cumulative preferred coverage – Class B Equity (8) |
|
| 2.2 | x |
|
| n/a |
|
Average portfolio leverage, during period |
|
| 57.0 | % |
|
| 75.6 | % |
________
(1) Unfunded loan balance is comprised of construction funds that have been approved but not yet disbursed.
(2) The Company prepares an estimate of the “after-repair” value of the collateral for each Portfolio Loan. The Company’s “after-repair” value estimate for each property assumes that all planned capital improvements to the real estate collateral have been completed and that the Company has disbursed all construction loan proceeds, and represents the Company’s estimate of the market value of the project after completion of all repairs based on information about comparable properties available at the time. See “Portfolio Loan Criteria and Policies – Underwriting” on Page 30 for additional details regarding estimation of “after-repair” value.
(3) Estimated “after-repair” loan-to-value is calculated by dividing the sum of the unpaid principal balance and the unfunded loan balance by the estimated “after-repair” value. Real estate values are based on the Company’s “after-repair” value estimates and loans are weighted by the principal balance of each loan.
(4) Actual loan-to-sale price represents the amount of the fully funded loan divided by the actual sale price of the real estate collateral. The principal balance of each loan was used to calculate the weighted average. Loans that were refinanced or secured by real estate collateral that was sold wholesale (prior to planned improvements being completed) to other investors were excluded from the calculation.
(5) Bank Borrowings have a first priority security interest in all of the Company’s assets, including Portfolio Loans. Interest coverage equals gross income divided by the interest expense related to Bank Borrowings.
(6) Senior Notes have a second priority interest in all of the Company’s assets, including its Portfolio Loans. Cumulative interest coverage of Senior Notes equals gross income divided by the total interest expense related to Senior Notes and Bank Borrowings combined. The Company began issuing Senior Notes on March 1, 2018.
(7) Class C Equity has the highest preference among the Company’s outstanding equity classes in the event the Company were to liquidate all of the Company’s assets, including Portfolio Loans. Cumulative preferred return coverage of Class C Equity equals total income divided by the total preferred return due Class C Equity, plus interest expense related to Senior Notes and Bank Borrowings combined. Effective February 1, 2021, the Company’s subordinate secured, six percent interest rate, six-month maturity, promissory notes (the “Junior Notes”) were prepaid, and holders of the Junior Notes reinvested the outstanding principal amount into six percent preferred return, participating, Class C Units of equity.
(8) Class B Equity has the next highest preference after the Class C Equity among the Company’s outstanding equity classes in the event the Company were to liquidate all of the Company’s assets, including Portfolio Loans. Cumulative preferred return coverage of Class B Equity equals total income divided by the total preferred return due Class B Equity, Class C Equity, plus interest expense related to Senior Notes and Bank Borrowings combined. Effective February 1, 2021, the Company’s 10% preferred return, participating, equity offering (the “Equity”) was exchanged for nine percent preferred, participating, Class B Units of equity.
34 |
Table of Contents |
Non-Performing Loans and REO Assets. The following definitions are used when categorizing the Company’s Delinquent, Non-Performing, Non-Accruing, Impaired and Real Estate Owned assets:
| · | Delinquent Loan: A loan with a monthly payment that is 30 days or more past due. |
| · | Non-Performing Loan: A Delinquent Loan that is in the foreclosure process but still accruing interest. |
| · | Non-Accruing Loan: A Delinquent Loan that is in the foreclosure process but no longer accruing interest. The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectability of principal or interest is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination. |
| · | Impaired Loan: A Delinquent Loan in which the estimated net proceeds from the disposition of the collateral (from auction sale or otherwise) is insufficient to cover the total principal, unpaid accrued interest and foreclosure fees due. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at lower of cost or fair value. Impaired loans are charged to the allowance for loan losses when management believes, after considering economic and business conditions, collection efforts and collateral position that collection of principal is not probable. |
| · | Real Estate Owned: Real estate that becomes an asset of the Company following a foreclosure sale or through a deed in lieu of foreclosure that is held for sale. |
|
|
|
| · | Rental Property: Real estate that the Company holds for use. |
The Company’s policy is to categorize a loan as both a Delinquent Loan and Non-Performing Loan and to begin the foreclosure process if the Company has not received payment from the borrower within 30 days of the due date. Industry standard is to categorize a loan as Delinquent for the first 90 days and then to categorize the loan as Non-Performing after 90 days. We believe that our more aggressive policy is appropriate given that our loans have shorter maturities relative to traditional loans. This policy enables the Company to get an earlier start on the foreclosure process should the loan continue to remain delinquent (the time to foreclose on a property can range from 75 to 180 days or longer if the borrower files bankruptcy). However, this more conservative policy does tend to generate more Non-Performing Loans that are ultimately cured.
When a loan becomes Non-Performing and the foreclosure process is initiated, accounting rules require the Company to continue to accrue interest monthly on the Non-Performing Loan, as long as the Manager believes in good faith that the net proceeds from the disposition of the collateral, through foreclosure sale or otherwise, will be sufficient to recover the principal, unpaid accrued interest and foreclosure fees due. In contrast, if the Manager, at any time, believes that the net proceeds from the disposition of the collateral may not be sufficient to recover the principal, unpaid accrued interest and foreclosure fees due, then accounting rules require the Manager to stop accruing interest on the loan. Only this type of loan will be classified as a Non-Accruing Loan. Finally, if for whatever reason, the net proceeds from the disposition of the collateral are estimated to be insufficient to pay the principal, unpaid accrued interest and foreclosure fees due, then the loan will be classified as an Impaired Loan. Accounting rules require that the shortfall related to an Impaired Loan be booked against the Company’s allowance for loan losses.
The Company anticipates that its provision-for-loan-losses accrual rate will fluctuate on a monthly basis between 0.0% and 1.0% annualized. These adjustments will increase or decrease distributable income to Equity Program investors, accordingly. However, the provision-for-loan-losses accrual rate and the associated allowance-for-loan-loss balance are subject to adjustments based on the rate of historical charge-offs and the Company’s assessment of near-term portfolio performance.
While the Company’s objective is to minimize the number of non-performing loans in its loan portfolio, on average non-performing loans and related REO properties have generated additional profits for the Company.
The Company provides further information about Delinquent, Non-Performing, Non-Accruing, Impaired and Real Estate Owned assets in the reports of quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Portfolio Roll Forward Analysis. The Company makes short term loans with maturities of 12 months or less. These Portfolio Loan payoffs provide a primary source of cash flow to the Company. To help analyze the velocity of this cash flow the Company performs a monthly loan portfolio roll forward analysis. This analysis evaluates the number of active loans and the principal balance of those loans at the beginning of each month, and the dollar volume of principal advances made and principal payment received by the Company during each month. With this information the Company is able to analyze historical monthly cash flows related to loan portfolio funding and payoffs, and calculate the number of days required for the loan portfolio to turn over or to pay off in full, assuming the Company stopped making new loans and the historical principal payment velocity remained constant.
The Company provides further information about its portfolio roll forward analysis in the quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Cash Utilization. The Company considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Cash on deposit occasionally exceeds federally insured limits. The Company believes that it mitigates this risk by maintaining deposits with major financial institutions.
Average cash utilization during the year ended December 31, 2021 and 2020 was 99.6% and 99.2%, respectively. The high level of average cash utilization reflects the Company’s use of a revolving line of credit provided by Bank Borrowings. The revolving line of credit is an important cash management tool, which allows the Company to fully utilize investor capital while managing the ebbs and flows of Portfolio Loan originations and payoffs. See “Bank Borrowings” Page 47 for additional details.
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We generally maintain liquidity to make Portfolio Loans, pay monthly investor distributions and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on the balance sheet is significantly less important than our potential liquidity available under our Portfolio Loan payoff schedule and revolving line of credit. We currently believe that the Company has sufficient liquidity and capital resources available to make additional Portfolio Loans, repay Senior Notes and Bank Borrowings, and make monthly cash distributions to investors.
The Company provides further information about these metrics in the quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Leveraging the Portfolio
The Company intends to continue to leverage its loan portfolio. The Company anticipates borrowing funds from bank lenders and the offer and sale of additional Senior Notes in order to fund additional mortgage loans. The aggregate amount of debt provided by the Company’s debt securities and Bank Borrowings may not exceed eighty percent (80%) of total assets (the “Maximum Debt Covenant”). See “Financial Statements” beginning on Page F-3 for information regarding debt and Bank Borrowings. In addition, under the Second Amended Operating Agreement, effective February 1, 2021, the Company is required to maintain Class A and Class B Units with unreturned capital contributions of a minimum of 20% of the total assets of the Company (the “Minimum Equity Covenant”).
As of December 31, 2021 and 2020, the Company was in compliance with the Maximum Debt Covenant. The Company was also in compliance with the Minimum Equity Covenant as of December 31, 2021, the first year end in which such covenant was in effect.
Sources of Income
While the Company’s revenues come primarily from monthly interest payments on Portfolio Loans, other sources of income include gains from asset sales, discount points, origination fees, late fees and recapture of loan amounts on discounted note purchases.
Monthly Interest Payments. The Company’s newly originated loans average an interest rate of 8% to 16%. Payments are typically interest-only, due monthly and paid in arrears.
Short Term Capital Gains or Losses. The Company may generate a profit or loss when the disposition value of a foreclosed property exceeds or falls short of the principal amount owed plus accrued interest. The disposition value is defined as the liquidation price minus costs specifically incurred due to the foreclosure process (e.g., legal fees, filing fees, reparation expenses).
Discount Points and Origination Fees. Discount points are pre-paid interest that Portfolio Borrowers purchase to lower the rate of interest the Portfolio Borrowers pay on subsequent monthly interest payments. These points are typically paid as a percentage of the loan’s value. The income generated from discount points range from 0% to 4% of the principal value of the loan. Similarly, origination fees are paid by the Portfolio Borrower at the time the loan is originated to cover the Company’s cost of originating the loan and can range from $0.00 to $2,000. All discount points and origination fees are paid directly to the Company and are accreted to income over the life of the loan.
Late Fees or Default Rate. The Company is entitled but not required to collect late fees if any installment is not received within five days of the due date. The borrower may be charged a late payment fee equal to five percent (5%) of the monthly installment. A similar fee is charged again if late by 10 days and again if late by 15 days. Any dishonored checks are treated as an unpaid installment and are subject to the same late payment penalties plus a $250.00 special handling fee. In the event any installment is past due more than 15 days, the interest rate on the note may be increased to 24% per annum and remain in effect until all defaults have been cured.
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Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on our interest-earning assets, such as Portfolio Loans and bank deposits, and the expense we pay on interest-bearing liabilities, such as private debt and Bank Borrowings. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities. This analysis allows the Company to determine its interest rate spread, net interest margin, and ratio of interest-earning assets to interest bearing liabilities.
The Company provides further information about its analysis of net interest income in the quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Analysis of Interest Coverage
The interest coverage ratio is the ratio of total income to interest expenses. Bank Borrowings have a first priority security interest in all of the Company’s assets, including Portfolio Loans. Therefore, interest coverage for Bank Borrowings equals gross income divided by the interest expense related to Bank Borrowings. Senior Notes have a second priority interest in all of the Company’s assets, including its Portfolio Loans. Therefore, cumulative interest coverage of Senior Notes equals gross income divided by the total interest expense related to Senior Notes and Bank Borrowings combined. The Company reports to investors on a quarterly basis the results of its interest coverage analysis, indicating the amount of income available each quarter to pay interest expense on Bank Borrowings and Senior Notes.
The Company provides further information about its analysis of interest coverage in the quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Portfolio Loan-to-Value and Asset Coverage
Portfolio Loan-to-Value based on “After-Repair” Value. The Company is an asset-based lender and its underwriting guidelines are heavily weighted toward real estate valuation, liquidity and loan-to-value coverage. In determining real estate collateral value, the Company inspects the properties and evaluates comparable property values in the area through the use of Multiple Listing Service (MLS) data. Based on this information, the Company prepares an estimate of the “after-repair” value for each property. The Company’s “after-repair” value estimates assume that all planned capital improvements to the real estate collateral have been completed and that the Company has disbursed all construction loan proceeds, and represents the Company’s estimate of the market value of the collateral after completion of the project based on information about comparable properties available at that time. In more complex transactions or for properties with limited comparable data, the Company may seek a formal valuation report such as an appraisal or broker price opinion. However, appraisals are recognized in the mortgage banking industry to represent estimates of value, but should not be relied upon as the only measure of true worth or realizable value. Collateral value is determined solely in the judgment of the Company. Please see “Portfolio Loan Criteria and Policies” on Page 30 for additional details regarding the Company’s loan underwriting methodology.
The Company believes that performing in-house real estate valuations provides it with a competitive advantage. By performing hundreds of in-house valuations per year in multiple geographies, the Company is able to continually refine its appraisal process and analyze real estate market trends within different geographies. This internal valuation analysis enables the Company to make faster and more informed lending decisions, which we believe help mitigate risk while providing Portfolio Borrowers with a higher quality of service.
“As-Is” Loan-to-Value and Asset Coverage Based on Percentage Completion. In order to provide an estimate of the “as-is” real estate collateral value at end of period, and to account for projects that are in process of construction or redevelopment, the Company uses a straight line percentage completion method to estimate the “as-is” real estate value. Specifically, the Company estimates the percentage completion of all real estate projects based on the percentage of construction funds disbursed as of a particular date and then multiplies this percentage completion by the total estimated value creation (estimated “after-repair” value of real estate minus purchase price) to determine the current value added through capital improvements. The current value added through capital improvements is then added to the original purchase price to calculate the “as-is” value of the real estate collateral as of a particular date. This estimated “as-is” value is then used to analyze the cumulative loan-to-value and real estate asset coverage of each investment program. It is important to note that the “as-is” loan-to-value and asset coverage ratios improve as the percentage completion increases.
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The Company reports to investors on a quarterly basis the cumulative “as-is” loan-to-value and cumulative “as-is” asset coverage ratios for all investment programs, based on the estimated “as-is” valuation of real estate collateral. Cumulative loan-to-value is the value of the debt or equity investment plus any senior debt divided by the estimated “as-is” real estate collateral value. Cumulative asset coverage is the estimated “as-is” real estate collateral value divided by the debt or equity investment and any senior debt. The Company also reports to investors on a quarterly basis the results of its valuation methodology testing. These tests compare the actual loan to sale-price for those loans that paid off during a given quarter against the Company’s estimated valuation for those same properties at the time the loans were made. This quarterly analysis helps the Company to analyze and improve its in-house valuation methodology on an ongoing basis.
The Company provides further information about these metrics in the quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Purchase and Sale of Loans
The Company typically originates its mortgage loans. However, the Company may also purchase loans from unrelated third parties. Loans purchased by the Company must not be in default at the time of purchase and must otherwise satisfy the lending guidelines described above. Generally, the purchase price to the Company for any such loan will be the lesser of par value or fair market value. From inception (2009) through the effective date of this offering circular, the Company has not purchased a mortgage loan.
The Company does not presently invest in mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business; however, the Company may sell mortgage loans or enter into inter-creditor agreements if the Manager determines that it is advantageous for the Company to do so based upon the current interest rates, the length of time that the loan has been held by the Company, and the overall investment objectives of the Company.
The Company makes mortgage loans for investment and does not expect to engage in real estate operations in the ordinary course of business, except as may be required if the Company forecloses on a property on which it has invested in a mortgage loan and takes over ownership and management of the property. The Company may sell non-performing Portfolio Loans or foreclosed property securing Portfolio Loans, or sell an interest in such collateral to an affiliate of the Company, for the purpose of restructuring the Portfolio Loan or repositioning the property for sale. From inception (2009) through the effective date of this offering circular, the Company has not sold a loan or a property to an affiliate of the Company.
None of the Company, its Manager, Managing Directors or affiliates is precluded from (i) selling a property to any Senior Noteholder or Equity Program investor in the Company in connection with a foreclosure, including with purchase financing, or (ii) making a loan to, purchasing a loan from or entering into a loan or co-lending transaction or activity with any Senior Noteholder or Equity Program investor in the Company, provided that any transaction meets our contractual obligations under our agreements related to the Senior Notes or any other contractual or legal obligations. From inception (2009) through the effective date of this Offering Circular, the Company has not completed such a transaction.
Legal Proceedings
The Company is not subject to any legal proceedings that are material to its business or financial condition.
Competition
The real estate market is competitive and rapidly changing. We expect competition to persist and intensify in the future, which could harm our ability to identify suitable Portfolio Loans. The business in which the Company is engaged is highly competitive, and the Company and Manager and its affiliates compete with numerous other established entities, including banks and credit unions. The Company and Manager also expect to encounter significant competition from other market participants including private lenders, private equity fund managers, real estate developers, pension funds, real estate investment trusts, other private parties, potential investors or homeowners, and other people or entities with objectives similar in whole or in part to those of the Company. Competition could result in reduced volumes, reduced fees or the failure of the Company to achieve or maintain more widespread market acceptance, any of which could harm the Company’s business. Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than the Company, and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. The Company’s potential competitors may also have longer operating histories, or extensive customer bases, greater brand recognition and broader customer relationships than we have.
The Company has historically been able to earn Portfolio Loan yields above the industry average by providing superior service to its Portfolio Borrowers and by opportunistically expanding its loan origination in those markets that offer the best return per unit of risk. However, we anticipate that our portfolio yields will continue to decline over time as we adjust our loan programs to remain price competitive. In order to remain competitive long-term the Company must continue to provide its borrowers with a superior quality of service and lower its cost of capital in order to provide borrowers with more competitively priced loans.
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Governmental Regulation
Investment Company Act. An investment company is defined under the Investment Company Act to include any issuer engaged primarily in the business of investing, reinvesting, or trading in securities. Absent an exemption, investment companies are required to register as such with the SEC and to comply with various governance and operational requirements. We intend to structure the operation of the Company so as not to subject the Company to the provisions of the Investment Company Act. In particular, the Company expects to rely on, among other things, the exemption from registration afforded by compliance with Section 3(c)(5) of the Investment Company Act. Section 3(c)(5) excludes from the definition of “investment company” issuers of non-redeemable securities primarily engaged in “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The Manager has not sought a no-action letter from the SEC to confirm that the Company is eligible for this exemption. However, the Manager will rely on guidance issued by the SEC stating that so long as (1) qualifying percentages of the Company’s assets consist of mortgages and other liens on or interests in real estate; and (2) the remaining percentage of the Company’s assets consist primarily of real estate-related assets, the Company will remain exempt from the Investment Company Act registration requirements. If we were considered an “investment company” within the meaning of the Investment Company Act, we would be subject to numerous requirements and restrictions relating to our structure and operation.
Lending Regulations. The Company is a lender with respect to its Portfolio Loans, and the Company will be deemed a borrower and the Senior Noteholders deemed lenders with respect to the Senior Notes. Oregon and other states have numerous laws and regulations, which apply to the activities of lenders and the rights of borrowers. The applicability of these laws and regulations, and their exemptions and exclusions, are frequently complex and highly fact-centric, and they vary by jurisdiction and are subject to change. In addition, litigation in a number of states has imposed liability upon lenders, or otherwise adversely impacted lenders, in a manner that Senior Noteholders may not be accustomed to as a result of other investment activities. For example, a number of states have adopted usury laws, which generally prohibit the charging of interest in certain circumstances in excess of a statutorily defined rate. The Company relies on qualified advisors and uses commercially reasonable efforts to comply with laws and regulations applying to lenders and borrowers, and seeks exemptions and exclusions as advisable from such laws where appropriate to meet the investment objectives of the Company and this offering.
In addition, the Company makes its Portfolio Loans pursuant to state finance lender licensing exceptions for commercial loans. However, the Company or the Manager may obtain a finance lender’s license in specific states or retain the services of third parties to comply with such licensing, should it be deemed advisable. The Company relies on qualified advisors and uses commercially reasonable efforts to comply with laws and regulations applying to lenders and borrowers, and seeks exemptions and exclusions as advisable from such laws where appropriate to meet the investment objectives of the Company and this offering. The Company believes that such efforts are sufficient to avoid issues of noncompliance. However, investors should be aware that, under certain circumstances, a failure to comply with applicable regulations by the Company or a Senior Noteholder could result in civil or criminal penalties.
Lender Liability. As an additional consideration, legal decisions in many jurisdictions have imposed liability upon lenders for actions such as declaring defaults with respect to loans and refusing to meet company loan commitments under certain circumstances. In addition, some courts have permitted litigants to pursue claims against lenders for environmental torts of a borrower and other liability as a result of their association with the borrower. Such so-called “lender liability” is a developing and uncertain area of the law, and there can be no assurance that such a claim could not be brought against the Company or, by extension, an investor. In addition, in some cases, courts have re-characterized loans or debt securities as equity instruments, such that lenders or debt security holders have been subject to “equitable subordination” and thus not entitled to the preferred status of a creditor in a bankruptcy or other adversarial proceeding. Such decisions have been highly fact specific, and there can be no assurance that a court would not follow a similar approach with respect to the Senior Noteholders’ loans to the Company, or the Company’s loans to its Portfolio Borrowers. Investors are encouraged to consult with their legal counsel regarding the lender-related issues discussed above.
Environmental Regulations. Federal, state and local laws and regulations impose environmental controls, disclosure rules and zoning restrictions that directly impact the management, development, use, or sale of real estate. Such laws and regulations tend to discourage sales and lending activities with respect to some properties, and may therefore adversely affect us specifically, and the real estate industry in general. The Company’s failure to uncover and adequately protect against environmental issues in connection with a Project investment may subject us to liability. Environmental laws and regulations impose liability on current or previous real property owners or operators for the cost of investigation, cleaning up or removing contamination caused by hazardous or toxic substances at the property. Liability can be imposed even if the original actions were legal and the owner had no knowledge of, or was not responsible for, the presence of the hazardous or toxic substances. Such liabilities may interfere with the Company’s ability to realize on its lending activities.
Property
The Manager leases office space for its principal executive offices in Portland, Oregon pursuant to a multi-year lease. We believe that these facilities are adequate for our current operations.
REIT Status
The Company intends to elect to be treated as a corporation taxed as a real estate investment trust commencing with the year ending December 31, 2022. A REIT is an entity entitled to special and beneficial U.S. federal income tax treatment, provided it satisfies various requirements relating to its organization, its ownership, its distributions and the nature of its assets and income. Subject to a number of significant exceptions, an entity that qualifies as a REIT generally is not subject to U.S. federal corporate income taxes on income and gain that it distributes annually to its members. However, a REIT nonetheless may be subject to a variety of taxes, including payroll taxes and state, local and foreign income, property, gross receipts and other taxes on its assets and operations.
Among other requirements, a REIT generally must derive most of its income from real estate loans and real property and its assets predominantly must consist of such loans and real property. It also must be beneficially owned by 100 or more persons, and have not more than 50% in value of its outstanding stock owned, directly or indirectly, by five or fewer individuals, as determined under the Code. The Company must also make a special election under the Code to be treated as a corporation taxed as a REIT, which the Company intends to do commencing on its 2022 tax return. Upon such election and subject to meeting the REIT eligibility requirements, the Company will cease to be treated as a partnership for U.S. federal income tax purposes and instead be treated as a corporation taxable as a REIT commencing with our taxable year ending December 31, 2022. The Company’s failure to qualify as a REIT would cause us to be treated as a regular corporation subject to U.S. federal income tax and potentially state and local tax.
In addition to the above requirements, to obtain the favorable tax treatment accorded to REITs, the Company normally will be required each year to distribute to members at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. In the event regular distributions are insufficient to meet the distribution requirements applicable to a REIT, the Company alternatively may arrange for borrowings in order to maintain its REIT status, issue a qualifying distribution of additional equity, or take advantage of “consent dividend” procedures in which the Company is deemed to have distributed, and the Company’s members would be deemed to have received, taxable dividends without the payment of actual cash. Failure to make required distributions may result in additional taxes and penalties to the Company.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the Company’s results of operation, financial condition, and liquidity.
Overview
We are a private lender formed in 2009 as an Oregon limited liability company. The Company makes commercial purpose loans by lending funds to real estate investors to finance the ownership, entitlement, development and redevelopment of residential and commercial real estate throughout the United States. We generate most of our revenue from interest on loans and loan fees. Our loan portfolio consists of a mix of single-family and multi-family redevelopment and new construction Projects. Our primary source of funding is private equity, private debt and Bank Borrowings. Our largest expenses are management fees paid to the Manager, Iron Bridge Management Group LLC, and interest paid on private debt and Bank Borrowings.
The following selected financial data as of and for the fiscal years ended December 31, 2020 and 2019 is derived from audited financial statements of the Company and should be read in conjunction with such financial statements and notes which are included in this Offering Circular beginning on Page F-3.
|
| As of or for the Year Ended |
| |||||
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Selected income statement data |
|
|
|
|
|
| ||
Interest income |
| $ | 13,326,103 |
|
| $ | 10,771,323 |
|
Interest expense |
|
| 2,949,531 |
|
|
| 4,174,573 |
|
Net interest income |
|
| 10,376,572 |
|
|
| 6,596,750 |
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 1,387,365 |
|
|
| 1,070,990 |
|
Net interest income after provision for loan losses |
|
| 8,989,207 |
|
|
| 5,525,760 |
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
| 314,807 |
|
|
| 2,465,541 |
|
Non-interest expense |
|
| 5,681,359 |
|
|
| 5,166,398 |
|
Income tax expense (benefit) |
|
| 3,385 |
|
|
| 12,296 |
|
Net income (loss) |
|
| 5,006,635 |
|
|
| 2,277,506 |
|
Net margin |
|
| 36.6 | % |
|
| 17.2 | % |
|
|
|
|
|
|
|
|
|
Selected balance sheet data |
|
|
|
|
|
|
|
|
Total assets |
| $ | 117,655,318 |
|
| $ | 94,794,888 |
|
Net loans |
|
| 113,303,926 |
|
|
| 90,908,306 |
|
Rental property, net |
|
| - |
|
|
| 733,355 |
|
Real estate owned held for sale |
|
| 2,889,930 |
|
|
| 1,881,701 |
|
Allowance for loan losses |
|
| 1,698,883 |
|
|
| 506,036 |
|
|
|
|
|
|
|
|
|
|
Bank Borrowings, net |
|
| 36,361,430 |
|
|
| 22,201,226 |
|
Senior Notes |
|
| 29,467,505 |
|
|
| 24,229,442 |
|
Junior Notes |
|
| - |
|
|
| 23,843,628 |
|
Equity |
|
| 49,518,458 |
|
|
| 21,725,428 |
|
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Effects of COVID-19 on business model and portfolio performance
Through the effective date of this offering, the Company experienced no material financial impact from the COVID-19 pandemic and related stay-at-home orders. The Company remains hyper-focused on monitoring its borrowers, improvement loan draws, and the health of the underlying real estate sub-markets it serves. Our Portfolio Borrowers have continued to successfully buy, fix and sell properties despite the over 40% year over year decline in pending home sales following the April 2020 COVID-19 stay-at-home orders. Our observation during April and early May of 2020 was that the decline in buyer demand due to stay-at-home orders was more than offset by a decline in the number of homeowners willing to list their homes for sale due to their reluctance to have strangers enter their homes for showings. While this did lead to a significant decline in overall residential real estate transaction volume, our Portfolio Borrowers do not occupy their properties and generally had few problems securing buyers and selling their Projects consistent with anticipated timelines. However, during late May and June 2020 demand for residential real estate rebounded significantly, approaching pre-pandemic levels, while the supply of homes for sale remained low as many homeowners were hesitant to list their homes for sale. From July through December 2021, the supply of homes for sale has remained low while demand for housing has increased significantly, resulting in increasing home prices, a market environment that has generally benefited our Portfolio Borrowers.
It is also important to point out that the residential real estate market entered the pandemic with strong demand, very low inventory and generally conservative bank lending standards, a sharp contrast to the real estate bubble that existed prior to the great recession of 2008. In addition, the government has deployed many policy tools developed during the great recession that are designed to avoid a massive supply of foreclosures that could depress housing prices and lead to a financial/banking crisis. For example, all government backed mortgages currently allow borrowers to avoid foreclosure through forbearance. Similarly, many states and counties have implemented legislation or executive orders to delay foreclosure activity on non-government backed mortgages. While these foreclosure restrictions could affect the Company’s ability to foreclose on some of its Portfolio Loans under certain conditions, the Company has mitigated this risk by requiring interest reserves on almost all of its loans since mid-April 2020.
While the Company has not experienced an increase in delinquent loans so far, the Company is prepared to manage those situations individually. In an abundance of caution, the Company has taken the following actions to mitigate future risks, until the Company has determined the risks associated with the COVID-19 crisis have sufficiently dissipated: (1) new loans require borrowers to pre-pay interest; (2) new loans are being made at lower loan-to-value ratios; (3) the Company continues lending to only the highest quality borrowers; (4) the Company continues to focus its lending in non-judicial states, which it believes to be less risky than judicial states; and (5) the Company primarily lends on lower risk Projects (less complex scope of work, existing occupancy permits, resale prices in the liquid segments of each real estate sub-market).
Due to the complex nature of the impact of COVID-19 on the economy, it is difficult to predict future impacts, though we believe the structure of our business remains solid. Please see the Company’s most recent quarterly or annual results for any additional updates.
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Recapitalization
As of January 31, 2021, the Company had one class of equity, and in addition to the Bank Borrowings, two forms of debt outstanding: the Junior Notes and the Senior Notes.
Effective February 1, 2021, the Company adopted a Second Amended and Restated Operating Agreement, which among other changes, created four classes of membership interests consisting of Class A, Class B, Class C and Class D Units (collectively “Units”):
| · | The Class A Units were issued to employees of the Company’s Manager, Iron Bridge Management Group, LLC (the “Manager”), and/or their tax-advantaged accounts. The return on these Class A Units is intended to replace the right of the Manager to receive “Performance Fees”. See “Management Fees” on Page 51 of this Offering Circular. |
| · | The former membership interests of the Company were exchanged for Class B Units. |
| · | The Company’s Junior Notes were, at the election of the holders, converted into Class C Units of the Company. |
| · | A new Class D Unit was created. |
The Company may unilaterally redeem the Units, and any member has the right to require the redemption of their Units, subject to certain limitations, including that the Company is prohibited from redeeming any Class A Units or Class B Units when the unreturned capital contributions of the Class A Units and Class B Units on an aggregate basis equal less than 20% of the total assets of the Company.
At any meeting of members, each member has one vote for each Unit held by such member. Unless a greater vote is required by the Oregon Limited Liability Company Act, as amended from time to time, or the Operating Agreement, any action approved by members with more than one-half of the issued and outstanding Units of all Members is the act of the members.
References herein to the Junior Notes refer to the historical Junior Notes, and effective February 1, 2021, no Junior Notes remain outstanding.
Fluctuating interest rates could adversely affect our business.
Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect our ability to originate new loans and our borrowers’ ability to sell their projects to repay our loans. If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business.
Further, our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, and other interest-earning assets and the interest paid on borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and, in turn, our profitability. We are unable to predict changes in interest rates, which are affected by factors beyond our control, including inflation, deflation, recession, unemployment, money supply and other changes in financial markets.
Critical Accounting Policies and Accounting Estimates
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments, are set forth below.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when the Company believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects the Company’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by the Company in determining the adequacy of the allowance include, but are not limited to, detailed reviews of individual loans, historical and current trends in loan charge-offs for the various portfolio segments evaluated, the level of the allowance in relation to total loans and to historical loss levels, levels and trends in non-performing and past due loans, external factors including regulatory, competition, and the Company’s assessment of economic conditions.
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The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem loans. The Company continuously reviews these policies and procedures and makes further improvements as needed. However, the Company’s methodology may not accurately estimate inherent loss or external factors and changing economic conditions may impact the loan portfolio and the level of reserves in ways currently unforeseen.
Due to macroeconomic risks related to the COVID-19 pandemic, the Company’s expects to accrue a provision for loan losses at a rate higher than the historical rate of 0% and 1.0% annualized. See “Non-Performing Loans and REO Assets” on Page 35 for additional disclosures.
REO and Foreclosed Assets. Assets acquired through or in lieu of loan foreclosure are initially recorded at lower of cost or fair value less estimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are performed annually and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest income or expense. Costs related to the development and improvement of REO assets are capitalized.
Due to the subjective nature of establishing the asset’s fair value when it is acquired, the actual fair value of the REO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Gains and losses on the disposition of REO and foreclosed assets are netted and posted to other non-interest income or expenses. See “Non-Performing Loans and REO Assets” on Page 35 for additional disclosures.
Fair Value of Mortgage Loans Receivable. The Company has the intent and ability to hold its mortgage loans to maturity. Therefore, mortgage loans are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned. Mortgage loans receivable make up the only class of financing receivables within the Company’s lending portfolio.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the loan will be reduced to the present value of estimated future cash flows discounted at the loan’s effective interest rate. If a loan is collateral-dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause the Company to have serious doubts about the further collectability of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. See ”Non-Performing Loans and REO Assets” on Page 35 for additional disclosures.
Deferred Loan Origination Fees. The Company will capitalize loan origination fees and recognize the fees as an adjustment of the yield on the related loan. Deferred loan origination fees are accreted to income over the life of the loan under the effective interest method.
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The Company offers its borrowers loan options with a combination of low origination fees and high interest rates or loans with high origination fees and low interest rates. While the yield earned by the Company on these loan options is similar, changes in the percentage of Portfolio Loans with high origination fees can affect the amount of interest income derived from deferred loan origination fees.
Income Taxes. Since inception, the Company has been treated as a limited liability company for federal and state income tax purposes. Under the laws pertaining to income taxation of limited liability companies, the Company as an entity pays no federal income tax. Accordingly, no provision for income taxes besides the minimum state franchise taxes and the LLC gross receipts fees are reflected in the Company’s financial statements. The Company has evaluated its current tax positions and has concluded that as of December 31, 2021, the Company does not have any significant uncertain tax positions for which a reserve would be necessary.
The Company intends to elect to be treated as a corporation taxed as a REIT for tax purposes commencing with the fiscal year ended December 31, 2022. See “Taxation of the Company” on Page 67 for additional details.
Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
Net Income, Net Margin and Net Interest Rate Spread. Net income was $5,006,635 for the year ended December 31, 2021, compared to $2,277,506 for the year ended December 31, 2020, an increase of $2,729,129, or 119.8%. The increase in net income year-over-year was primarily attributable to the Company’s equity recapitalization, which converted Junior Note debt investors to Class C Unit equity investors, and loan portfolio growth. See “Recapitalization” on Page 42 for additional details.
For the years ended December 31, 2021 and 2020, the net interest margin was 9.434% and 7.724%, respectively, and net interest rate spread was 7.435% and 6.676%, respectively. The increase in these performance metrics during 2021 compared to 2020 reflects the Company’s equity recapitalization on February 1, 2021, and a reduction in the Company’s cost of capital. See “Net Interest Income” on Page 45 for additional details.
Interest Income. Total interest income increased $2,554,780, or 23.7%, to $13,326,103 for the year ended December 31, 2021 compared to $10,771,323 during the year ended December 31, 2020. The increase in interest income was primarily the result of a $24.6 million, or 28.8%, increase in average interest-earning assets more than offsetting a 50 basis point decline in the average yield earned on interest earning assets.
The average daily balance of cash during the years ended December 2021 and 2020 was $429,604 and $659,485, respectively. Interest income earned on those cash balances during that time was immaterial.
Interest Expense. Total interest expense decreased $1,225,042, or 29.3%, to $2,949,531 for the year ended December 31, 2021 from $4,174,572 for the year ended December 31, 2020.
Interest expense on Junior Notes decreased $1,540,673, or 92.4%, to $127,489 for the year ended December 31, 2021, from $1,668,162 for the year ended December 31, 2020. The decrease in interest expense was primarily attributable to Junior Notes converting to Class C Units of equity on February 1, 2021. See “Recapitalization” on Page 42 for additional details.
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Interest expense on Senior Notes increased $34,385, or 2.4%, to $1,452,530 or the year ended December 31, 2021, from $1,418,145 for the year ended December 31, 2020. The increase in interest expense was primarily attributable to a $5.03 million, or 21.1%, increase in the average balance of Senior Notes outstanding, which averaged $28.8 million during 2021 versus an average of $23.8 million during 2020. The Company began issuing Senior Notes on March 1, 2018.
Interest expense on Bank Borrowings increased $281,247, or 25.8%, to $1,369,512 for the year ended December 31, 2021 from $1,088,265 for the year ended December 31, 2020. This increase was attributable to a $9.7 million, or 43.2%, increase in the average balance of Bank Borrowing, which averaged $32.2 million during 2021 versus an average of $22.5 million during 2020. This increase in the average balance of Bank Borrowings more than offsetting a 59 basis points decrease in the average interest rate paid on Bank Borrowings to 4.260% from 4.848% between 2021 and 2020, respectively..
Net Interest Income. Net interest income increased $3,779,821, or 57.3%, to $10,376,572 for the year ended December 31, 2021 from $6,596,751 for the year ended December 31, 2020. The increase resulted primarily from the conversion of Junior Notes to Class C Units on February 1, 2021 and an increase in average interest earning assets. Our average interest-earning assets increased $24.6 million, or 28.8%, to $110.0 million for the year ended December 31, 2021 from $85.4 million for the year ended December 31, 2020, and our net interest rate spread increased 76 basis points to 7.435% for the year ended December 31, 2021 from 6.676% for the year ended December 31, 2020. Our net interest margin also increased 171 basis points to 9.434% for the year ended December 31, 2021 from 7.724% for the year ended December 31, 2020. The modest increase in our interest rate spread and net interest margin during 2021 reflected yields on interest-earning assets falling slower than yields on interest-bearing liabilities. The 50 basis point reduction in average yield earned on interest-earning assets was the result of industry pricing pressure, which the Company more than offset with a 125 basis point reduction in average yield paid on interest-bearing liabilities. The reduction in yield paid was primarily due to the Company converting its Junior Notes to Class C Units of equity on February 1, 2021, lowering the interest rate paid on Senior Notes from 6.0% to 5.5% on November 24, 2020 and again from 5.5% to 5% on February 23, 2021, and refinancing the Company’s Bank Borrowings to a lower interest rate. See “Recapitalization” on Page 42, “Senior Notes” on Page 48 and “Bank Borrowings” on Page 47 for additional details.
Rental Property Income. Rental property income decreased $586,002, or 94.4%, to $34,843 during the year ended December 31, 2021 from $620,845 for the year ended December 31, 2020. The Company owned four multifamily rental properties located in Chicago, Illinois, which were acquired through a deed in lieu of foreclosure. Two of the rental properties were sold in November 2020. See “Rental Property” on Page 46 for additional details.
Non-Interest Income. Other income decreased $2,150,734, or 87.2%, to $314,807 for the year ended December 31, 2021 from $2,465,541 for the year ended December 31, 2020.
The decrease in other income year-over-year was primarily attributable to large charge offs and corresponding reversals in the allowance for loan losses during the fourth quarter of 2020, related to the Company’s disposition of its Rental Properties.
Other income generally includes late payment fees and default interest related to non-performing loans, income from REO Assets, and reversals in the allowance for loan losses used to offset losses on loans and REO Asset sales. We expect this income to vary between periods driven by the number of non-performing loans, timing of non-performing loan payoffs, collectability of default interest and late fees on non-performing loans, and the profitability of REO Asset sales.
Non-Interest Expense. Non-interest expense increased $481,462, or 9.3%, to $5,647,860 for the year ended December 31, 2021 from $5,166,398 for the year ended December 31, 2020. The largest change in non-interest expense was a $282,876, or 26.4%, increase in provision for loan losses. See “Provision for Loan Losses” below for additional details. The second largest change in non-interest expense was a $190,568, or 67.9%, increase in professional fees related to the Company’s recapitalization during the first quarter of 2021. See “Recapitalization” on Page 42 for additional details.
The decrease in other income year-over-year was primarily attributable to large charge offs and corresponding reversals in the allowance for loan losses during the fourth quarter of 2020, related to the Company’s disposition of its Rental Properties.
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Provision for Loan Losses. Based on our analysis of loan portfolio performance, as outlined above starting on Page 42 in “Critical Accounting Policies and Accounting Estimates – Allowance for Loan Losses,” we recorded a $1,353,866 provision for loan losses for the year ended December 31, 2021, compared to a provision of $1,070,990 for the year ended December 31, 2020. The allowance for loan losses was $1,698,883, or 1.5%, of total unpaid principal balance at December 31, 2021, compared to $506,036, or 0.5%, of total unpaid principal balance at December 31, 2020. Total delinquent loans were $2,889,930, or 2.5%, of the total unpaid principal balance at December 31, 2021 compared to $2,699,498, or 2.9%, at December 31, 2020. The allowance for loan losses reflects the estimate we believe to be appropriate to cover probable incurred losses inherent in the loan portfolio at December 31, 2021 and 2020.
It is important to point out that the Company’s policy is to categorize a loan as both a Delinquent Loan and Non-Performing Loan and to begin the foreclosure process if the Company has not received payment from the borrower within 30 days of the due date. Industry standard is to categorize a loan as Delinquent for the first 90 days and then to categorize the loan as Non-Performing after 90 days. We believe that our more aggressive policy is appropriate given that our loans have shorter maturities relative to traditional loans. This policy enables the Company to get an earlier start on the foreclosure process should the loan continue to remain delinquent (the time to foreclose on a property can range from 75 to 180 days or longer in a judicial foreclosure or bankruptcy). However, this more conservative policy does tend to generate more Non-Performing Loans that are ultimately cured. See “REO and Foreclosed Assets”, Page 43, for additional details.
Income Taxes. Income tax expense for the year ended December 31, 2021 and 2020 were $3,385 and $12,296, respectively. This tax expense is related to municipal franchise taxes. Under the laws pertaining to income taxation of limited liability companies, the Company as an entity pays no federal income tax. The Company intends to elect to be treated as a corporation taxed as a REIT commencing with the fiscal year ended December 31, 2022. See “Critical Accounting Policies and Accounting Estimates – Income Taxes” Page 42 for additional disclosures regarding income taxation.
Comparison of Financial Condition at December 31, 2021 and 2020
Total Assets. At December 31, 2021, total assets equaled $117.7 million, an increase of $22.9 million, or 24.1%, from $94.8 million at December 31, 2020. The increase in total assets primarily reflected a $22.4 million increase in mortgage loans receivable, net, as the Company saw continued strength in loan demand driven by a robust residential real estate market.
Mortgage Loans Receivable, Net. Net loans are the unpaid principal balance of Portfolio Loans, net of deferred loan origination fees, allowance for loan losses and fair value adjustments related to impairment. See “Critical Accounting Policies and Accounting Estimates – Deferred Loan Origination Fees” and “– Fair Value of Mortgage Loans Receivable” Page 43 for additional details.
At December 31, 2021, net loans equaled $113.3 million, an increase of $22.4 million, or 24.6%, from $90.9 million at December 31, 2020. The increase in net loans year-over-year was primarily attributable to an increase in the size of the loan portfolio, driven by an improvement in loan demand during the twelve months ended December 31, 2021.See “Portfolio Loan Characteristics” Page 23 for additional details.
Real Estate Held for Sale (REO). As of December 31, 2021, the Company had REO asset inventory of $2.9 million (2.5% of total assets) comprised of 2 properties located in Alameda County, California. Repairs to one property are 90% complete and the Company is waiting for a public works permit to be issued prior to listing the property for sale. The second property is currently listed for sale. During the twelve months ended December 31, 2021, one REO asset was acquired and no REO asset was sold.
This compares to December 31, 2020, when the Company had REO asset inventory of $1.9 million (2.0% of total assets) comprised of 1 property located in Alameda County, California.
Rental Property. As of December 31, 2021, the Company had no rental properties.
This compares to December 31, 2020, when the Company had rental property of $733,355 million (0.8% of total assets) comprised of two 3-unit apartment buildings located in Illinois
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Liquidity and Capital Resources
The Company’s primary sources of funds include Portfolio Loan payoffs, monthly interest payments received on Portfolio Loans, and Bank Borrowings. Other sources of funds may include proceeds from Equity Program investors and Senior Notes as well as the disposition of non-performing assets.
As discussed above, effective February 1, 2021, all of the Junior Notes were converted into Class C Units or other equity interests in the Company, and the Junior Notes are no longer outstanding.
Equity Program. On April 1, 2009, the Company commenced a private placement equity offering of 10% Preferred, Participating LLC ownership interests. The private placement offering represented all of the Company’s equity until February 1, 2021, and is a continuous offering that allows the Company to raise additional equity as needed. Equity Program investors are able to demand redemption of their equity units, subject to certain restrictions.
At December 31, 2021, equity equaled $49.5 million, an increase of $27.8 million, or 127.9%, from $21.7 million at December 31, 2020. Equity was comprised of $4.9 million of Class A Units, $20.3 million of Class B Units, $24.3 million of Class C Units. The Company maintained sufficient equity balances in all periods to comply with bank covenants, Senior Note covenants and covenants in the Company’s operating agreement pertaining to the different classes of equity.
Bank Borrowings. As of December 31, 2021, the Company had a $50 million line of credit from Umpqua Bank. This revolving line of credit was collateralized by all of the Company’s assets, including all of its Portfolio Loans, and was senior in priority to the Senior Notes. While the line of credit provided leverage and a source of low cost capital to make loans, the primary benefit to the Company was cash management. Because the revolving line of credit allowed the Company to draw on and pay down the line of credit daily, the Company could use the line of credit to efficiently manage the ebbs and flows of Portfolio Loan funding and payoffs while keeping investor capital fully utilized. The revolving line of credit could also provide the Company with liquidity to meet investor withdrawal requests.
The line of credit was subject to a “borrowing base” limitation. The borrowing base was an amount equal to the lesser of 65 percent of the outstanding balance of the Company’s Portfolio; subject to certain adjustments and exclusions and subject to a cap of $50 million. At December 31, 2021, the borrowing base was $50 million. Under the line of credit, the Company was also required to maintain compliance with certain financial covenants, including maintenance at the end of each calendar quarter of (a) a debt to tangible net worth of not more than 1.00 to 1.00 ratio that did not exceed 0.50 to 1.00 (calculated as the outstanding line of credit balance divided by the sum of equity and Senior Notes); (b) a turnover ratio of no less than 1.00 to 1.00 (calculated as the ratio of paid off note receivables to average line of credit utilization); and (c) interest and preferred return coverage ratio of no less than 1.00 to 1.00 (calculated as the ratio of cash flow to interest expense and preferred returns). As of December 31, 2021, the Company was in compliance with all of the foregoing financial covenants.
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As of December 31, 2021 and 2020, $50 million and $40 million was available under the Company’s line of credit agreement, respectively. During the first quarter of 2016, the Company replaced its previous line of credit with a $20 million line of credit with Western Alliance Bank, which was subsequently increased to $40 million. On May 13, 2021, the Company entered into a Business Loan and Security Agreement (Revolving Line of Credit) dated effective May 7, 2021 (the “Umpqua Loan Agreement”) with Umpqua Bank (“Umpqua”), an Oregon state-chartered bank, with respect to a revolving credit line (“Umpqua Credit Line”) from Umpqua, and in connection therewith issued to Umpqua a promissory note (the “Umpqua Note”) for a maximum principal amount of up to $40,000,000. The conditions precedent to the effectiveness of the Umpqua Credit Line were satisfied, and the transactions contemplated thereunder consummated, on May 14, 2021. The Umpqua Credit Line refinanced the Company’s $40,000,000 revolving line of credit from Western Alliance Bank and the agreements associated with the Western Alliance Bank line of credit were terminated. Effective August 10, 2021, the Umpqua Loan Agreement was amended to increase the maximum amount of funds available under the Umpqua Credit Line to $50,000,000, and was amended again, effective as of January 28, 2022 and June 8, 2022, to increase the amount of funds available to $60,000,000 and $75,000,000, respectively.
For the years ending December 31, 2021 and 2020, average line of credit utilization during these periods was 72.2% and 56%, respectively.
The Company targets a line of credit utilization rate of 50-80%, which allows the Company to meet unanticipated loan requests from borrowers or unanticipated withdrawal requests from investors. Similarly, if the Company’s Portfolio Loans pay off faster than anticipated or if new loan originations do not match the rate of loan payoffs, the line of credit can be paid down while keeping investor capital fully utilized.
Senior Notes. The Securities and Exchange Commission qualified the Senior Secured Demand Notes offering effective February 23, 2018, and the Company began issuing Senior Notes on March 1, 2018. The Senior Notes initially had an interest rate of 6.0%, but in accordance with their terms, the Company lowered the interest rate paid on Senior Notes from 6.0% to 5.5% on November 24, 2020 and again from 5.5% to 5% on February 23, 2021.
The following table sets forth the Company’s Senior Notes at the dates indicated:
|
| As of or for the Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Total assets |
| $ | 117,655,318 |
|
| $ | 94,794,888 |
|
Senior Notes |
|
| 29,467,505 |
|
|
| 24,229,442 |
|
Percentage of total assets |
|
| 25.0 | % |
|
| 25.6 | % |
As of December 31, 2021 and 2020, Senior Notes were $29.5 million (25.0% of total assets) and $24.2 million (25.6% of total assets), respectively. The Company began issuing Senior Notes on March 1, 2018.
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The Company anticipates that Senior Notes will continue to increase as a percentage of total assets as the Company works to lower its blended cost of capital by increasing the percentage of Senior Notes relative to equity.
Junior Notes. On May 1, 2010, the Company commenced a private placement offering of secured promissory notes with six-month maturities offering an interest rate of 12% per annum. On April 1, 2015, the Company amended the offering, reducing the interest rate to 10% per annum. On April 1, 2017, the Company amended the offering again, reducing the interest rate to 8% per annum. On May 1, 2019, the Company amended the offering again, reducing the interest rate to 7% per annum. On October 1, 2020, the Company amended the offering again, reducing the interest rate to 6% per annum. Junior Notes were subordinate to the Senior Notes and Bank Borrowings. Effective February 1, 2021, all of the Junior Notes were converted into Class C Units or other forms of equity in the Company. See “Recapitalization” on Page 42.
At December 31, 2020, Junior Notes were $23.8 million (25.2% of total assets). Junior Notes declined in absolute dollars and as a percentage of total assets as a result of the Company closing the Junior Notes to new investors.
Off-Balance Sheet Arrangements. In the normal course of operations, the Company engages in financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. Specifically, the Company does not charge interest to borrowers on loan proceeds held back for construction until the funds are disbursed. Upon disbursement, the incremental loan proceeds are added to the existing unpaid principal balance of the loan. This practice requires the Company to categorize these held back loan proceeds as an unfunded loan balance.
The Company provides further information about these off-balance sheet arrangements in the quarterly financial results it provides to investors and files with the Securities and Exchange Commission.
Inflation
The effect of changing prices on financial institutions is typically different than on non-banking companies since a substantial portion of a lender’s assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes to interest rates can be directly correlated to price level indices; therefore, the Company can best counter inflation over the long term by managing sensitivity to interest rates of its net interest income and controlling levels of noninterest income and expenses. In addition, the short-term duration of the Company’s Portfolio Loans minimizes interest rate risk compared to loan portfolios with longer durations.
Trend Information
During the year ended December 2021, the Company saw continued strength in loan demand, primarily driven by a robust residential real estate market with price appreciation above historical averages and inventory of residential real estate below historical averages. Due to the ongoing economic uncertainty caused by COVID-19 and anticipated Federal Reserve interest rate increases during 2022, the Company continued its risk mitigation strategy: (1) most new loans required borrowers to pre-pay interest; (2) we continued lending to only the highest quality borrowers; (3) we continued lending primarily in non-judicial states, which we believe to be less risky than judicial states; and (4) we continued lending on lower risk projects (less complex scope of work, existing occupancy permits, resale prices in the liquid segments of each real estate sub-market).
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The Company is managed by its Manager, Iron Bridge Management Group, LLC, an entity owned by Gerard Stascausky and operated by its Managing Directors, Gerard Stascausky and Sarah Gragg Stascausky. The Managing Directors are responsible for and have complete control over the Company’s operations, lending policies and decisions with respect to the Portfolio Loans. The Manager was organized in May 2008. Gerard Stascausky and Sarah Gragg Stascausky are married to each other.
Name | Position | Age | Term of Office | |||
Gerard Stascausky | Managing Director of Manager | 52 | May 2008 | |||
Sarah Gragg Stascausky | Managing Director of Manager | 49 | June 2008 |
Gerard Stascausky
Mr. Stascausky, co-founder of the Manager, has been investing in the real estate foreclosure and pre-foreclosure market since 2004. Prior to launching the Manager, he ran Bridgeport Home Solutions LLC, which specialized in the research, acquisition and management of foreclosure and pre-foreclosure properties in the Portland metro market.
Mr. Stascausky brings to the Manager over 15 years of investment banking experience. In 1993, he joined Sutter Securities as an investment banking analyst, structuring municipal debt offerings. In 1996, he left to join the equity research department at Montgomery Securities, where he conducted securities research on the payment processing and networking equipment industries. With his background in technology research, he joined Credit Suisse in 1999 as one of the industry’s first technology specialist equity salesmen. Finally, in 2003, he was recruited to join Pacific Crest Securities, where he served as a senior equity salesman, research product manager and member of the management team.
Mr. Stascausky graduated with honors from the University of California, Davis in 1993. He earned a B.A. in Economics and minors in Psychology and Political Science. In 1996, he earned his Chartered Financial Analyst designation from the CFA Institute.
Sarah Gragg Stascausky
Sarah Gragg Stascausky, co-founder of the Manager, has over nine years of experience in the real estate foreclosure and pre-foreclosure market and currently provides both operational and strategic services to the Company. From 1995 through 2002, Ms. Stascausky worked as an equity research analyst for Robertson Stephens LLP, conducting securities research on the retail industry, with primary focus on the home improvement sector. Ms. Stascausky was responsible for company specific research as well as analysis of regional and national retail and real estate industry trends.
Ms. Stascausky graduated from the University of Oregon in 1994 with a major in Political Science and minor in Business Administration. She earned her Master’s in Business Administration from the Stanford Graduate School of Business in 2001.
Employees
In addition to its two Managing Directors, the Manager has nine employees, including one in accounting, five in loan underwriting and three in loan servicing.
Company Expenses
The Company will be responsible for all of its operating expenses including, without limitation, (i) all costs and expenses incurred in connection with identifying, evaluating, structuring, negotiating, developing, closing and servicing investments consummated by the Company (including, without limitation, any due diligence, travel, legal and accounting expenses, any deposits and commitment fees and other fees and out-of-pocket costs related thereto); (ii) taxes of the Company; (iii) all costs and expenses associated with obtaining and maintaining insurance for the Company and its assets, if any; (iv) all costs related to litigation (including threatened litigation) involving the Company, and indemnification expenses; (v) expenses and fees associated with third party auditors, accountants, attorneys and tax advisors and other professionals with respect to the Company and its activities; (vi) fees incurred in connection with the maintenance of bank or custodian accounts; (vii) brokerage points and commissions, referral and finder fees, and other investment costs incurred by or on behalf of the Company and paid to third parties; (viii) all expenses incurred in connection with the registration of the Company’s securities under applicable securities laws or regulations; (ix) all expenses of liquidating the Company or its investments; and (x) other general ordinary Company administration and overhead expenses. The Company will also pay all expenses associated with the offering, including expenses for the preparation, filing, printing, legal, accounting and other fees and expenses related to the offering.
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The Manager will be responsible for costs of its own personnel (including compensation and benefits), office space and general overhead expenses incurred in performing duties to the Company, provided, however, that, for administrative convenience, the Company may lease certain employees from the Manager and, in such event, the Company will reimburse the Manager for all W-2 wages, deferred compensation and employee benefits paid to the employees leased by the Company. To the extent that the Company reimburses the Manager for W-2 wages paid to the employees leased by the Company (the “Company Employee Expense”), the Company (and not the Manager) will be entitled to claim the Company Employee Expense for income tax purposes. As of the date of this Offering Circular, the Company has not leased any employees from the Manager.
Management Fees
The Company does not have any employees, officers, or directors. The Manager is responsible for managing the Company. The Manager receives compensation for its services to the Company, in the form of a loan servicing fee and through January 31, 2021, a management incentive fee, as described in the following paragraphs. During the year ended December 31, 2021, the Manager received the following compensation (all of which was received in cash):
Name |
| Capacity in which compensation was received (e.g. Chief Executive Officer, director, etc.) |
| Base Management Fee ($) |
|
| Management Incentive Fee ($) |
|
| Total compensation ($) |
| |||
Iron Bridge Management Group, LLC |
| Manager |
| $ | 3,345,804 |
|
| $ | 895 |
|
| $ | 3,346,699 |
|
The loan servicing fee relates to servicing investment loans and is equal to 3% per annum of the principal amount of each investment, payable monthly, provided that the loan servicing fee will be reduced by the amount of any Company Employee Expense for which the Manager is reimbursed by the Company. The Manager is solely responsible for its own operating costs, including the cost of its own personnel, office space and general overhead. The loan servicing fee for a particular month is paid to the Manager no later than the last day of the immediately succeeding month.
Until January 31, 2021, the management incentive fee was equal to one-half (1/2) of all distributable cash in excess of the 10% annual preferred return payable to the Company’s Equity Program investors. “Distributable cash” is the excess of the sum of all cash receipts of all kinds (other than capital contributions) over cash disbursements, including interest expense paid to Senior Noteholders, Junior Noteholders and Bank Borrowings. The management incentive fee, if any, was paid to the Manager no later than the last day of the immediately succeeding month.
Effective February 1, 2021, the Operating Agreement was amended such that the management incentive fee was eliminated, and instead Class A Units were issued to employees of the Manager or their tax-advantaged accounts. The Class A Units were issued in exchange for consideration of $1 per Class A Unit. The Class A Units are entitled to 90% of distributions of available cash derived from Company profits, after the payment of all accrued preferred returns on the Class B, Class C, and Class D Units. The Class A Units will also be entitled to the return of their unreturned capital contributions in a liquidation or similar distribution event, as well as 90% of distributions from such event after all Units have received all accrued and payable preferred returns and all unreturned capital contributions. 3,045,846 Class A Units were issued to employees of the Manager or their tax-advantaged accounts in the Recapitalization. See “Recapitalization” on Page 42.
Gerard Stascausky and Sarah Gragg Stascausky may also receive distributions from the Company in their capacities as Equity Program investors, as discussed below.
Investment by Managing Directors
The Managing Directors, Gerard Stascausky and Sarah Gragg Stascausky, will maintain at all times a minimum combined Equity Program investment in the Company of $500,000. As of December 31, 2021, Gerard Stascausky and Sarah Stascausky owned approximately $7.1 million, or 14.4%, of the equity interests in the Company, consisting of approximately $4.2 million Class A Units and $3.0 million Class B Units. See also “Security Ownership of Management and Certain Security Holders” on Page 52.
Fiduciary Duties of the Manager
Under Oregon law, a manager is accountable to a limited liability company’s equity owners as a fiduciary, which means that a manager is required to exercise good faith with respect to a company’s affairs. The Senior Noteholders do not have an equity owner’s interest in the Company and are solely creditors of the Company. Accordingly, the Manager does not have a direct fiduciary obligation to the Senior Noteholders. The Company, however, will enter into certain contractual operating covenants and commitments to the Senior Noteholders pursuant to the Senior Note Purchase Agreement, the Senior Note, and the Security Agreement, the breach of which by the Company may give the Senior Noteholders a cause of action against the Company. See “Description of Senior Notes” on Page 55 of this Offering Circular.
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Indemnification and Exculpation
To the fullest extent not prohibited by law, the Manager will not be liable to the Company or its Equity Program investors for any act or omission performed or omitted by the Manager in good faith pursuant to the authority granted to it by the Operating Agreement, including the management or conduct of the business and affairs of the Company, the offer and sale of securities, the management of affiliates insofar as such business relates to the Company (including activities that may involve a conflict of interest) or the winding up of the business of the Company.
The Company must indemnify the Manager and each agent of the Manager for any loss or damage arising out of its activities on behalf of the Company or in furtherance of the Company’s interests, without relieving the Manager and its agents of liability for a breach of the Manager’s fiduciary duties. A successful indemnification of the Manager or any litigation that may arise in connection with its indemnification could deplete the assets of the Company, thereby reducing funds available to pay the Senior Notes. Therefore, Senior Noteholders may have a more limited opportunity of recovery than they would have absent these provisions in the Operating Agreement.
To the extent that the indemnification provisions permit indemnification for liabilities arising under the Securities Act, in the opinion of the SEC, such indemnification is contrary to public policy and therefore unenforceable.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The following table presents information regarding the Company’s Equity Program investors as of December 31, 2021 by:
| · | our Manager; |
| · | each of our Manager’s Managing Directors; |
| · | each equity owner known by us to beneficially hold 10% or more of the Company’s equity interests; and |
| · | all of our Manager’s Managing Directors as a group. |
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Beneficial ownership is generally determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise noted, the address for each beneficial owner listed below is 9755 SW Barnes Road, Suite 420, Portland, OR 97225.
Name |
| Number of Class A Units |
|
| Percent of Class (1) |
|
| Number of Class B Units |
|
| Percent of Class (2) |
|
| Number of Class C Units |
|
| Percent Of Class (4) |
| ||||||
Manager: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Iron Bridge Management Group, LLC |
|
| 0 |
|
|
| 0 | % |
|
| 0 |
|
|
| 0 | % |
|
| 0 |
|
|
| 0 | % |
Managing Directors of Manager: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerard Stascausky |
|
| 3,336,516 |
|
|
| 68.6 | % |
|
| 2,966,246 |
|
|
| 14.6 | % |
|
| 0 |
|
|
| 0 | % |
Sarah Gragg Stascausky |
|
| 832,225 |
|
|
| 17.1 | % |
|
| 0 |
|
|
| 0 | % |
|
| 0 |
|
|
| 0 | % |
TOTAL |
|
| 4,168,741 |
|
|
| 85.7 | % |
|
| 2,966,246 |
|
|
| 14.6 | % |
|
| 0 |
|
|
| 0 | % |
Other holders of 10% or more of the Company’s equity interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susanne Baumann Trust (3) |
|
| 0 |
|
|
| 0 | % |
|
| 4,083,319 |
|
|
| 20.1 | % |
|
| 2,333,907 |
|
|
| 9.6 | % |
Howard Bubb |
|
| 0 |
|
|
| 0 | % |
|
| 2,357,106 |
|
|
| 11.6 | % |
|
| 1,506,778 |
|
|
| 6.2 | % |
____________
(1) | Percentages are based on 4,865,227 Class A Units of Equity Program interests outstanding as of December 31, 2021. |
(2) | Percentages are based on 20,329,004 Class B Units of Equity Program interests outstanding as of December 31, 2021. |
(3) | Susanne Baumann exercises voting and dispositive authority over all securities held by the Susanne Baumann Trust. |
(4) | Percentages are based on 24,324,226 Class C Units of Equity Program interests outstanding as of December 31, 2021. |
At any meeting of members, each member has one vote for each Unit held by such member. Unless a greater vote is required by the Oregon Limited Liability Company Act, as amended from time to time, or the Operating Agreement, any action approved by members with more than one-half of the issued and outstanding Units of all Members is the act of the members.
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INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
As part of the Recapitalization that became effective on February 1, 2021, the Manager entered into the Second Operating Agreement with the existing members of the Company as well as the former holders of the Junior Notes. The Second Operating Agreement, among other changes, modified the fees to be received by the Manager. As part of the Recapitalization, Gerard Stascausky and Sarah Gragg Stascausky, Managing Directors of the Manager, received Class A Units and Class B Units of the Company. In particular, they collectively were issued 2,863,311 Class A Units, or 94% of the Class A Units, and Gerard Stascausky received 2,906,677 Class B Units, or 15.6% of the Class B Units. The Class A Units were intended to replace the Management Incentive Fees payable to the Manager. Since the initial Recapitalization, additional Class A Units and Class B Units have been issued to Gerard Stascausky and Sarah Gragg Stascausky in the ordinary course of business. All Units received by Gerard Stascausky and Sarah Gragg Stascausky, as well as any other equity owner known by the Company to beneficially hold 10% or more of the Company’s equity interests, were issued on the same terms as Units issued to other members. The Recapitalization transactions were consented to by the holders of a Majority of Interest of the Senior Notes. See “Recapitalization” on Page 42, and “Management Fees” on Page 51.
Other than the Manager’s relationship to the Company as Manager and the beneficial ownership of units of the Company as described above, the Company has not engaged in, nor currently proposes to engage in, any transaction in which any of the Manager, any affiliates of the Manager, any other person holding more than a 10% interest in the Company, or any immediate family member of such persons, had or is to have a direct or indirect material interest.
The following describes some of the important areas in which the interests of the Manager may conflict with those of the Company.
Manager’s Affiliation with Other Companies
The Manager’s primary business activity during the life of the Company will be the management of the Company. However, the Manager may be affiliated with other investment entities and not manage the Company as its sole and exclusive business function. In the future, the Manager may act as a manager to other affiliated entities in similar capacities, potentially diluting the Manager’s focus on the Company. The Manager may have conflicts of interest in allocating management time, services and functions between various existing entities and any future mortgage lending entities that it may organize.
The Manager and its affiliates and principals may be the owner or manager of other entities that have investment objectives that are similar to those of the Company, potentially creating a conflict of interest. The Operating Agreement expressly provides that neither the Manager nor any owner of the Manager will be obligated to present to the Company any particular investment opportunity that comes to its attention, even if such opportunity is of a character that might be suitable for purchasing by the Company.
The member of the Manager, Gerard Stascausky, invests in real estate for his own accounts, and expects to continue to invest in real estate for his own accounts, including investment in other business ventures, public or private limited partnerships or limited liability companies, and neither the Company, any Equity Program investor, nor Senior Noteholder is entitled to an interest therein.
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Conflict with Related Programs
The Company will not loan money to any entity in which the Manager has a direct financial interest. However, the Manager and its affiliates may cause the Company to join with other entities organized by the Manager for similar or related purposes as partners, joint ventures or co-owners under some form of ownership in certain loans, or in the ownership of repossessed real property. Such arrangements would be formed because the Manager believed such arrangement is in the best interest of the Company. For example, bank loan covenants applied to the Company’s portfolio of loans may allow the Manager to form a separate entity to purchase from the Company any loan that is delinquent, increasing the borrowing capacity available through Bank Borrowings. Such covenants are designed to protect investor interests; however, the interests of the Company and those of such other entities may conflict, and the Manager controlling or influencing all such entities may not be able to resolve such conflicts in a manner that serves the best interests of the Company. As of and prior to the effective date of this Offering Circular, no such conflicts existed.
Lack of Independent Legal Representation
The Company has not been represented by independent legal counsel to date. The use of the Manager’s counsel in the preparation of this document and the organization of the Company may result in a lack of independent review. Investors should consult their own legal counsel with respect to an investment in Senior Notes.
Management Fees
The Manager will act as loan servicer for the compensation described in this document. Loan servicing firms not affiliated with the Manager might provide comparable services on terms more favorable to the Company.
The Manager has reserved the right to retain the services of other firms, in addition to, or in lieu of, the Manager, to perform the loan origination, loan servicing and other activities in connection with the Company’s loan portfolio, when such services are deemed by the Manager to be in the best interest of the Company. Any such other firms may also be affiliated with the Manager. For example, it may become possible for the Manager or an affiliated company of the Manager to provide hazard and liability coverage to Portfolio Borrowers on better terms that those available to Portfolio Borrowers purchasing similar insurance coverage individually. As of and prior to the effective date of this Offering Circular, no such services were being performed by Manager affiliated companies.
The Company has also issued to employees of the Manager Class A Units of the Company, which were intended to replace the right of the Manager to receive “Performance Fees” under the Company’s previous Operating Agreement. The terms of the Class A Units were not determined through arms-length negotiation. The structure of the Class A Units may provide an incentive to the Manager to seek out higher risk opportunities to earn returns greater than the preferred return.
The Company is offering $45,000,000 aggregate principal amount of its Senior Secured Demand Notes. The minimum principal investment is $50,000; provided that the Manager, in its sole discretion, may waive this requirement with respect to any investor.
Interest
Each Senior Note will bear simple interest on the unpaid principal amount of the Senior Note at the rate of interest per annum specified in this Offering Circular or the most recent supplement to this Offering Circular (the “Interest Rate”). The Company may change the Interest Rate at any time, provided that (i) the Interest Rate may not be increased or decreased by more than one-half percent (0.5%) at the time of any change, (ii) the Interest Rate may not be changed more than once during any 90 day period, and (iii) the Interest Rate change is applied to all Senior Notes outstanding. The Company will provide written notice to each Senior Noteholder before making any change in the Interest Rate (“Rate Change Notice”). The effective date of the change in Interest Rate for any Senior Note will be the date that is 90 days after the date of the Rate Change Notice. Accrued interest will be computed daily on the basis of a 365-day year and applied to the actual number of days for which the principal is outstanding. Interest will be payable monthly in arrears. Any change in Interest Rate on outstanding Senior Notes will be effected as an accounting adjustment in the account of the holders of outstanding Senior Notes. The Company will not issue new or replacement Senior Notes to the holders of outstanding Senior Notes.
At the time the Company issues any Rate Change Notice, it will file with the SEC and distribute to prospective investors a supplement to this Offering Circular that will fully disclose the material terms of the prospective interest rate change. Prior to the effective date of any pending interest rate change, the Company will file with the SEC a post-qualification amendment to the Offering Statement or a supplement to the Offering Circular that will disclose the new interest rate and will be distributed with the Offering Circular beginning on the effective date of the interest rate change.
As of the date of this Offering Circular, the Interest Rate is five percent (5.0%).
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The Company monitors the interest rate environment and market conditions and considers whether changes in the Interest Rate are appropriate on an ongoing basis. Subject to the procedures and limitations described above, the Company may make additional changes to the Interest Rate at any time.
Maturity
Each Senior Note shall have a term commencing on the date of issue (“Issue Date”) and expiring on the Maturity Date. The “Maturity Date” is the date that is 30 days after the date that the Company receives the Senior Noteholder’s demand for payment; provided that the Manager, in its sole discretion, may extend the Maturity Date by up to three months.
If the Company receives demands for payment from Senior Noteholders collectively holding more than thirty percent (30%) of the unpaid principal amounts of all outstanding Senior Notes, then the Company may elect to (i) extend the Maturity Date for all Senior Notes while the Company liquidates and winds up its Portfolio Loans to its borrowers, (ii) during any such extension period, make payments, or prepayments as applicable, to all Senior Noteholders in proportion to the relative principal amounts of all outstanding Senior Notes, not just the Senior Noteholders who have demanded payment, and (iii) give notice to the Senior Noteholders that the Company is electing to take these actions.
If the Company receives a demand for payment from a Senior Noteholder (or group of affiliated Senior Noteholders) with respect to a Senior Note or Senior Notes with an aggregate unpaid principal balance of $2 million or more, then the Company must pay at least $1 million in principal on account of such Senior Notes on or before the Maturity Date. The Maturity Date will be extended, as long as the Company continues making payments of at least $1 million in principal on account of such Senior Notes during each 30-day period following the original Maturity Date.
The Company may prepay all or a portion of the Senior Notes without penalty at any time, in the discretion of the Company. Without limiting the foregoing, the Company may prepay without penalty all or any portion of principal or interest of any one or more Senior Notes: (i) of ERISA Plan Senior Noteholders who have submitted prepayment requests for the purpose of meeting ERISA plan distribution requirements; (ii) to ensure that the Company remains exempt from applicable ERISA “Plan Asset” regulations; (iii) to meet any regulatory compliance requirement for a Senior Noteholder or the Company; or (iv) to reorganize the Company’s capital structure.
Payment Terms
The Company will make monthly payments of accrued interest only on each Senior Note. Principal and accrued interest may be prepaid in whole or in part at any time without penalty. All payments shall be allocated first to payment of unpaid accrued interest, if any, then to unpaid principal. All unpaid accrued interest and unpaid principal will be due and payable on the Maturity Date.
In the event there are insufficient funds available to pay accrued interest and principal in full as they become due and payable, the Company will direct payment of such interest and principal pro rata among Senior Noteholders in accordance with the relative amounts of unpaid accrued interest and principal on the then-outstanding Senior Notes.
In the event that the Company is in default with respect to its Bank Borrowings, the Company may be precluded from making payments under the Senior Notes.
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Events of Default
An Event of Default will be deemed to have occurred under the Senior Notes upon:
· | the Company’s failure to pay interest or principal when due, or any default under indebtedness that results in acceleration of the maturity of a material amount of indebtedness of the Company; | |
· | any breach in any material respects of any material covenant or obligation of the Company under the Senior Note or the related agreements; | |
· | any representation or warranty made by the Company in the Senior Note or the related agreements proving to be false or incorrect in any material respect; or | |
· | certain events involving the bankruptcy or the appointment of a receiver. |
Upon an Event of Default, all unpaid principal and accrued interest, if any, will become immediately due and payable either automatically, in the event of a default because of events involving bankruptcy or the appointment of a receiver, or at the option of holders of a Majority of Interest. If an Event of Default occurs, a Majority of Interest may, on behalf of all Senior Noteholders, (i) instruct the Collateral Agent to provide to the Company notice to cure such default and/or declare the unpaid principal amount of the Senior Notes to be due and payable, together with any and all accrued interest thereon and all costs payable pursuant to such Senior Notes; (ii) instruct the Collateral Agent to proceed to protect, exercise and enforce, on behalf of all Senior Noteholders, their rights and remedies under the Security Agreement, and such other rights and remedies as are provided by law or equity; (iii) instruct the Collateral Agent to waive any Event of Default by written notice to the Company and the other Senior Noteholders; and (iv) instruct the Collateral Agent to take any action that it may take under the Security Agreement by instructing the Collateral Agent in writing to take such action on behalf of all Senior Noteholders. Individual Senior Noteholders, unless individually a Majority of Interest, will not be able to accelerate payment under the Senior Notes or exercise and enforce their rights and remedies under the Security Agreement in the event of a default.
Restrictions on Transfer
The Senior Notes will not be transferable except under very limited circumstances and then only in the sole discretion of the Company. There is no secondary market for sale of the Senior Notes and none is expected to develop. In addition, holders of the Senior Notes may not offer, sell, pledge or otherwise transfer the Senior Notes except in compliance with the registration requirements of the Securities Act and any other applicable securities laws or pursuant to an exemption therefrom.
Reinvestment Program
In lieu of receiving payment of interest, a Senior Noteholder may request reinvestment of interest payments at the time of the subscription for its Senior Note or in writing upon 30 days’ prior notice, subject to the investor suitability requirements described below under “Who May Purchase Senior Notes” and the approval by the Manager. Upon acceptance of the request, in the sole discretion of the Company, interest payments may be added to principal of the outstanding Senior Note as and when they come due (“Roll-over Interest”). Increase in principal due to Roll-over Interest will be noted in the adjustment to the principal of such Senior Noteholder’s Senior Note maintained in the records of the Company. Senior Noteholders who elect to have their monthly interest payments reinvested will benefit from monthly compounding.
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Security Interest
Repayment of principal and accrued interest will be secured by an interest in the assets of the Company (the “Collateral”) pursuant to the Security Agreement for the benefit of the Senior Noteholders between the Company and Carr Butterfield, LLC, as Collateral Agent (the “Security Agreement”), a copy of which has been filed as an exhibit to the Offering Statement of which this Offering Circular is a part. The Collateral will consist of all of the assets of the Company, including but not limited to bank accounts, Portfolio Loans, and personal property of the Company, whether tangible or intangible either now owned or hereafter acquired. The Company has limited fixed, tangible assets and its primary assets are Portfolio Loans.
Subordination
The Company currently leverages a portion of its Portfolio Loans through Bank Borrowings, secured by a collateral assignment of promissory notes and related deeds of trust or mortgages. On May 13, 2021, the Company entered into a Business Loan and Security Agreement (Revolving Line of Credit) dated effective May 7, 2021 (the “Umpqua Loan Agreement”) with Umpqua Bank (“Umpqua”), an Oregon state-chartered bank, with respect to a revolving credit line (“Umpqua Credit Line”) from Umpqua, and in connection therewith issued to Umpqua a promissory note (the “Umpqua Note”) for a maximum principal amount of up to $40,000,000. The conditions precedent to the effectiveness of the Umpqua Credit Line were satisfied, and the transactions contemplated thereunder consummated, on May 14, 2021. The Umpqua Credit Line refinanced the Company’s $40,000,000 revolving line of credit from Western Alliance Bank (the “WAB Loan”) and the agreements associated with the WAB loan were terminated. No prepayment fees were payable in connection with such refinancing. Effective August 10, 2021, the Umpqua Loan Agreement was amended to increase the maximum amount of funds available under the Umpqua Credit Line to $50,000,000, and was amended again, effective as of January 28, 2022 and June 8, 2022, to increase the amount of funds available to $60,000,000 and $75,000,000, respectively.
Outstanding borrowings pursuant to the Umpqua Credit Line will accrue interest at a rate equal to the greater of: (i) four percent (4%); or (ii) two and three-quarters of one percent (2.75%) in excess of the one (1) month LIBOR rate. If LIBOR is no longer available for any reason, Umpqua may replace LIBOR with an index selected by Umpqua in its reasonable discretion, giving due consideration to any evolving or then-prevailing market convention for determination of a replacement for LIBOR, and to any selection or recommendation by a governmental authority or market-governing body. Interest accrued on outstanding borrowings will be payable monthly, in arrears. The Umpqua Credit Line will expire, and all principal amounts then outstanding will become due and payable, on May 7, 2023, subject to the Company’s option to extend the Umpqua Credit Line for an additional six month period at the Company’s option. The principal balance of the Umpqua Credit Line may be prepaid, in whole or in part, without premium or penalty. The Umpqua Bank Loan proceeds will be used to provide working capital for the origination of the Company’s commercial loans to residential and commercial real estate borrowers (“Portfolio Loans”).
The amount that may be borrowed pursuant to the Umpqua Credit Line at any given time is subject to a “borrowing base” limitation in an amount equal to 65% of eligible Portfolio Loans, subject to certain adjustments and exclusions, up to the maximum amount of $75,000,000. As of December 31, 2021, the borrowing base was $50,000,000. Under the Umpqua Credit Line, the Company is also required, among other covenants, to maintain compliance with certain financial covenants, including maintenance of (a) a debt to equity ratio that does not exceed 1.00 to 1.00 (calculated as the outstanding line of credit balance divided by the sum of the Company’s tangible net worth and subordinated debt); (b) a turnover ratio of 1.00 to 1.00 (calculated as amounts collected on Portfolio Loans divided by the average outstanding loan balance under the Umpqua Credit Line); and (c) an interest to preferred return coverage ratio of 1.00 to 1.00 (calculated as the sum of net profits and interest expense divided by the sum of interest expense and the amount of regularly scheduled preferred returns to equity holders).
Similar to the WAB Loan, the Umpqua Credit Line is secured by a first priority security interest in all of the Company’s assets, including all of its Portfolio Loans. As provided for in the Senior Secured Demand Note Purchase Agreement between the Company and each purchaser of a Senior Note, Umpqua’s security interest is senior in priority to the Senior Notes, as evidenced by the Subordination Agreement. Under the Umpqua Subordination Agreement, the Senior Notes will continue to be entitled to receive and collect regularly scheduled payments of interest and principal, as well as any other prepayment of principal, so long as no event of default under the Umpqua Credit Line has occurred or is continuing. The current subordination agreement affecting the seniority of the Company’s Bank Borrowings has been filed as an exhibit to the Offering Statement of which this Offering Circular is a part.
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The Company plans to continue to utilize Bank Borrowings and to secure such debt with a senior security interest in the Portfolio Loans, subject to the Maximum Debt Covenant. The bank or banks holding the original Portfolio Loan documents will have a perfected security interest in such assets. Senior Noteholders are agreeing that a secured Bank Borrowing may have a security interest in all or some of the Collateral securing a Senior Note that is senior in priority as to either or both its payment or exercise than the security interest of the Senior Noteholders under the Security Agreement. The Company is authorized by the Senior Noteholders to enter into such agreements and instruments with the lender of a Bank Borrowing on terms as required by the Company to effect the priority of the security interest and conditions to the enforcement rights of the senior lender under the Bank Borrowings with respect to the Collateral. The Company will not collaterally assign notes or deeds of trust to Senior Noteholders.
In the event that the Company is in default with respect to its Bank Borrowings, the Company may be precluded from making payments under the Senior Notes.
As of December 31, 2021, the property subject to the liens associated with Bank Borrowings and the Senior Notes was valued at approximately $163.4 million, and the outstanding amount of Bank Borrowings and Senior Notes was $65.9 million.
Covenants
Among other covenants provided to Senior Noteholders, the Company has agreed that the aggregate amount of Bank Borrowings and debt offered by the Company, if any, may not exceed eighty percent (80%) of total assets. In addition, the Company has agreed to:
· | perfect the security interest of the Senior Noteholders; | |
| ||
· | make all payments ratably among the outstanding Senior Notes in proportion to the aggregate principal and interest amounts payable under each Senior Note, subject to the Company’s direction to prepay all or a portion of certain Senior Notes; | |
| ||
· | require the Managing Directors to devote such amount of their business time to the operations of the Company and the Manager as is reasonably necessary to effectively manage the affairs of the Company and the Manager; | |
| ||
· | keep the Company books in accordance with GAAP and have such books audited at the end of each fiscal year; | |
|
|
|
· | transmit tax reporting information and certain financial statements to the Senior Noteholders; | |
| ||
· | use commercially reasonable efforts to prevent the structure of any co-lending activity from constituting an investment in a fractionalized mortgage, interest in a mortgage pool, tenancy in common, or other security; | |
| ||
· | make all mortgage loans in the United States and it territories; and | |
| ||
· | to perform its obligations under the Senior Note Purchase Agreement, the Senior Note Subscription Agreement, the Senior Notes and the Security Agreement. |
The Company also agrees not to amend the Operating Agreement in a manner that materially and adversely affects the Senior Noteholders, except to the extent approved by a Majority of Interest. The Majority in Interest consented to the amendments to the Operating Agreement executed in connection with the Recapitalization.
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Distributions to and Repurchases of Equity
The Company intends to elect to be treated as a corporation taxed as a REIT commencing with the fiscal year ending December 31, 2022. Among other requirements, to obtain the favorable tax treatment accorded to REITs, the Company normally will be required each year to distribute to members at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. In the event regular distributions are insufficient to meet the distribution requirements applicable to a REIT, the Company alternatively may arrange for borrowings in order to maintain its REIT status, issue a qualifying distribution of additional equity, or take advantage of “consent dividend” procedures in which the Company is deemed to have distributed, and the Company’s members would be deemed to have received, taxable dividends without the payment of actual cash. Failure to make required distributions may result in additional taxes and penalties to the Company.
Pursuant to the Third Amended Operating Agreement, each Class A member, Class C member, and Class D member will be treated as having elected to, reinvest all distributions made with respect to their Class A Units, Class C Units and Class D Units for the purchase of additional Units of the same class associated with such distributions. Each Class B member shall reinvest all distributions made with respect to its Class B Units for the purchase of additional Class C Units or Class D Units, as determined by the Manager in its sole discretion unless such Class B Member has provided advance written notice to the Manager of its preference. In each case, the reinvestment of distributions by a member in additional Units shall be at a purchase price equal to the fair market value of such Unit at the time of such reinvestment, as determined by the Manager in its sole discretion. No transaction fees will be charged to a member who reinvests and such reinvestment shall apply both to Units held at the time of the election and Units subsequently acquired pursuant to reinvestment.
Notwithstanding the foregoing, under the Third Amended Operating Agreement, a member may affirmatively elect to receive a portion of its distributions from the Company in cash by providing advance written notice to the Manager on such form, within such times and subject to such limitations as are established by the Manager. If no election to receive cash distributions is made, then distributions will be reinvested as described above. To terminate an election to receive cash distributions, a member must notify the Manager in writing of its termination on such form as is established by the Manager and such revocation will be effective for distributions related to the first month following the month in which the revocation notice is received, which are paid, if at all, in the second month following the month in which the revocation notice is received.
The Manager may, pursuant to the Third Amended Operating Agreement, in its sole and absolute discretion, terminate reinvestment of distributions in whole or in part. In such case, the members will be deemed to have made the election to receive cash distributions with respect to any such terminated distribution reinvestment. If, in the opinion of the Manager, the reinvestment of distributions by an ERISA Member (as defined in the Operating Agreement Restatement) ERISA Member equal or exceed or would, after giving effect to the admission of any ERISA Members, equal or exceed 25% of the aggregate capital contributions of (or the value of any other interests of or the Units held by), as applicable, all members, then the Manager may in its sole discretion not permit such member to reinvest distributions and such ERISA Member shall be deemed to have made the election to receive cash distributions.
If the Manager determines in its sole discretion that distributions in excess of the amount the Manager otherwise would have distributed to members pursuant to the Third Amended Operating Agreement are necessary or appropriate to ensure or maintain the status of the Company as a REIT for U.S. federal income tax purposes or to avoid the imposition of any U.S. federal income or excise tax (such excess amount, “Excess Distributions”), the Manager may cause the Company to make such Excess Distributions but automatically reinvest such Excess Distributions for the purchase of additional Units of the same class associated with such Excess Distribution (or, in the case of Class B members, of another class). Any such reinvestment shall be at a purchase price equal to the fair market value of such Unit at the time of such reinvestment, as determined by the Manager in its sole discretion. No transaction fees shall be charged to a member in connection with such reinvestment.
The Third Amended Operating Agreement also provides that the Manager has the authority to purchase or repurchase any or all interests in the Company from any Person for such consideration as the Manager may determine in its reasonable discretion to the extent the Manager determines necessary or advisable to preserve the qualification of the Company as a REIT.
Accounting and Reports to Senior Noteholders
Annual audited financials concerning the Company’s business affairs will be provided to Senior Noteholders. Each Senior Noteholder will receive a copy of the Company’s income statement, balance sheet and statement of cash flows prepared by an Independent Certified Public Accountant, along with the Senior Noteholder’s respective 1099-INT.
The Company will also provide Senior Noteholders with (i) monthly interest statements related to their investment accounts, (ii) quarterly financial reports, including portfolio metrics and unaudited financial statements. The Company’s books and records are maintained on the accrual basis for accounting purposes and for reporting income and losses for federal income tax purposes.
In connection with this offering, the Company will also be required to file with the SEC annual, semiannual, and current event reports for at least the fiscal year in which this Offering Circular was qualified and for so long as offers and sales made in reliance on this Offering Circular are ongoing.
Amendments to Senior Noteholder Agreements
No modification or waiver of any provision of the Senior Note Purchase Agreement, the Senior Notes or the Security Agreement or consent to departure therefrom shall be effective unless in writing and approved by the Company and Senior Noteholders holding a Majority of Interest.
Power of Attorney
The Manager will be granted a special power of attorney by the Senior Note Purchase Agreement for the purpose of executing documents that the Senior Noteholders have expressly agreed to execute and deliver or which are required to be executed, delivered or filed under applicable law.
We are offering up to $45,000,000 in aggregate principal amount of our Senior Notes on a “best efforts” basis. The initial minimum investment amount required is $50,000, provided that the Manager, in its sole discretion, may waive this requirement with respect to any investor. We are offering the Senior Notes directly, without an underwriter or placement agent, and on a continuous basis. We do not have to sell any minimum amount of Senior Notes to accept and use the proceeds of this offering. Therefore, once you purchase a Senior Note, we may immediately use the proceeds of your investment and your investment will be returned only when we repay your Senior Note. We cannot assure you that all or any portion of the Senior Notes we are offering will be sold. We have not made any arrangement to place any of the proceeds from this offering in an escrow, trust, or similar account. The Senior Notes are not listed on any securities exchange, there will not be any public trading market for the Senior Notes at the time of this offering, and there are no plans to facilitate the development of a market for the Senior Notes in the future. We have the right to reject any investment, in whole or in part, for any reason. The intended methods of offer include, without limitation, website promotion, email, telephone, direct mail and personal contacts. Investors can purchase Senior Notes directly from the Company by completing the applicable purchase documentation, and delivering such documentation together with an amount equal to the principal amount of the Senior Notes subscribed for directly to the Company. Gerard Stascausky and Sarah Gragg Stascausky, on behalf of the Manager, will participate in selling the Senior Notes on behalf to the Company. The Senior Notes can be purchased by check, ACH, money order, or bank wire transfer. Wire transfer instructions will be provided upon request. See “Subscription Procedures” on Page 62 of this Offering Circular.
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If an underwriter is selected to assist in this offering, the Company will be required to amend this Offering Circular to include the disclosures required regarding engaging an underwriter to assist in the offering. Although the Company is not using a selling agent or finder in connection with this offering, it will use a website as an online portal and information management tool in connection with the offering. The website is owned and operated by the Manager, and can be viewed at http://www.ironbridgelending.com.
This Offering Circular will be furnished to prospective investors upon their request via electronic PDF format and will be available for viewing and download 24 hours per day, seven days per week on the website, subject to planned or unplanned interruptions of website access, as well as on the SEC’s website at www.sec.gov.
In addition to this Offering Circular, subject to the limitations imposed by applicable securities laws, we expect to use additional advertising, sales and other promotional materials in connection with this offering. These materials may include information relating to the Company and our business, this offering or public advertisements and audio-visual materials, in each case only as authorized by the Company. Although these materials will not contain information in conflict with the information provided by this Offering Circular and will be prepared with a view to presenting a balanced discussion of risk and reward with respect to the Senior Notes, these materials will not give a complete understanding of this offering, the Company or the Senior Notes and are not to be considered part of this Offering Circular. This offering is made only by means of this Offering Circular and prospective investors must read and rely on the information provided in this Offering Circular in connection with their decision to invest in the Senior Notes. All investors will be furnished with a current Offering Circular before or at the time of any written offers.
The Company is conducting this offering as a “Tier 2” offering pursuant to Regulation A. As such, the Company is limited with respect to the amount of Senior Notes it can sell to investors that are not “accredited investors,” as defined under Rule 501 promulgated under the Securities Act. In particular, the aggregate purchase price to be paid by the investor can be no more than 10% of the greater of such investor’s:
· | annual income or net worth (with annual income and net worth for such natural person purchasers determined in accordance with Securities Act regulations, as described below), if the investor is an individual; or | |
· | revenue or net assets for such investor’s most recently completed fiscal year end, if such investor is not a natural person. |
In order to meet this requirement, the Company will ask prospective investors to make representations with respect to their status as an “accredited investor,” and with respect to their annual income or revenue, net worth or net assets, or other characteristics that are determinative of eligibility.
An “accredited investor,” within the meaning of Rule 501 promulgated under the Securities Act, must be able to represent at least one of the following:
(i) | The investor is an INDIVIDUAL who has net worth, either individually or upon a joint basis with the investor’s spouse or spousal equivalent, of at least $1,000,000, or has had an individual income in excess of $200,000 for each of the two most recent years, or a joint income with the investor’s spouse or spousal equivalent in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. In calculating an investor’s net worth, the investor (A) must exclude the value of the investor’s primary residence as an asset; (B) may exclude debt secured by the primary residence, up to the estimated fair market value of the residence; (C) must include the amount of any increase on the debt secured by the primary residence incurred within 60 days prior to the purchase of the Senior Notes (unless related to the acquisition of the primary residence); and (D) must include debt in excess of the fair market value of the residence; | |
(ii) | The investor is an IRREVOCABLE TRUST, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000 whose purchase is directed by a person with such knowledge and experience in financial and business matters that such person is capable of evaluating the merits and risks of the prospective investment; | |
(iii) | The investor is a BANK, SAVINGS AND LOAN ASSOCIATION, INSURANCE OR INVESTMENT COMPANY registered under the Investment Company Act, a business development company, a Small Business Investment Fund licensed by the United States Small Business Administration, any Rural Business Investment Company as defined in section 384A of the Consolidated Farm and Rural Development Act; a plan with total assets in excess of $5,000,000 established and maintained by a state for the benefit of its employees, or a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act; | |
(iv) | The investor is a BROKER or DEALER registered pursuant to Section 15 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), an INVESTMENT ADVISER registered pursuant to the Investment Advisers Act of 1940 or registered pursuant to the laws of a state; or an investment adviser exempt from registration with the SEC under the private fund adviser exemption or the venture capital fund exemption; | |
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| (v) | The investor is an EMPLOYEE BENEFIT PLAN and either (A) all investment decisions are made by a bank, saving and loan association, insurance company, or registered investment advisor, or (B) the investor has total assets in excess of $5,000,000 or, if such plan is a self-directed plan, investment decisions are made solely by persons who are accredited investors; |
(vi) | The investor is a CORPORATION, PARTNERSHIP, LIMITED LIABILITY COMPANY OR BUSINESS TRUST, not formed for the purpose of acquiring the Senior Notes, or an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), in each case with total assets in excess of $5,000,000; | |
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| (vii) | Any other entity of a type not listed above, not formed for the specific purpose of acquired the Senior Notes, owning “investments” (as defined under the Investment Company Act of 1940) in excess of $5,000,000; |
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| (viii) | A natural person who holds, in good standing, one of the following PROFESSIONAL LICENSES: the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), or the Investment Adviser Representative license (Series 65); or |
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| (ix) | A FAMILY OFFICE, as defined in the Investment Advisers Act of 1940, that (i) has assets under management in excess of $5 million; (ii) is not formed for the specific purpose of acquiring the Securities and (iii) has a person directing the prospective investment who has such knowledge and experience in financial and business matters so that the family office is capable of evaluating the merits and risks of the prospective investment and any FAMILY CLIENT, as defined in the Investment Advisers Act of 1940, of a family office meeting the above requirements and whose prospective investment is directed by such family office |
(x) | The investor is an ENTITY in which all of the equity owners, or a living trust or other revocable trust in which all of the grantors and trustees, qualify under one of the clauses above. |
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Investment in the Senior Notes may also only be suitable for certain types of investors. For example, an investment in the Company is illiquid and subject to limitations on the right to demand payment from the Company. Therefore, investment in the Senior Notes is also only suitable for investors that can withstand the lack of liquidity of the Senior Notes. Tax-exempt entities such as Individual Retirement Accounts and Keogh plans should consider the ERISA risks before investing.
Prospective investors are reminded that, notwithstanding his or her qualification as a suitable purchaser of Senior Notes, the Company may accept or reject, in its sole and absolute discretion, all or a portion of such investor’s subscription for Senior Notes or subscription to increase the principal amount of Senior Notes.
Investors who wish to purchase Senior Notes must complete and sign a Senior Note Subscription Agreement, the Senior Note Purchase Agreement, an investor suitability questionnaire, and such other documentation as is deemed appropriate by the Manager. The subscription documents must be delivered to the Manager together with a check or wire transfer in an amount equal to the principal amount subscribed pursuant to the Senior Note Purchase Agreement. If the Senior Note Purchase Agreement is accepted, the Company will issue a Senior Note in the principal amount of such purchase. The Manager may reject any subscription for Senior Notes in its discretion, and must reject subscriptions in certain circumstances.
As a condition to the purchase of Senior Notes, prospective investors will be required to deposit payment therefor in a pooled subscription account that is held in the Company’s name with an unaffiliated FDIC insured bank or credit union, for the exclusive purpose of holding subscription deposits as provided in the Senior Note Purchase Agreement. The subscription account shall be separate from the Company’s general accounts. The Company is not obligated to pay interest on funds held in the Subscription Account, and any interest earned with respect thereto may be retained by the Company in consideration of its costs. Effective with the sale of the Senior Notes or additional Senior Notes, the Senior Noteholders authorize the Company to transfer from the subscription account to the Company’s general accounts the purchase price therefor. Any funds remaining in the subscription account after payment of the purchase price shall be returned by the Company to the prospective investor or Senior Noteholder.
A prospective investor or Senior Noteholder may withdraw his commitment to purchase Senior Notes or additional Senior Notes, as applicable, at any time until his offer to purchase the Senior Note or Senior Notes has been accepted by the Company. In the event of a timely withdrawal or the rejection by the Company of a subscription, the Company will promptly return the deposits of the purchase price therefor to the prospective investor or Senior Noteholder.
Interest begins to accrue following the acceptance of a Senior Noteholder’s subscription by the Company and the closing of the purchase of a Senior Note.
Investors will not be entitled to interest on funds pending acceptance of a subscription. If a subscription is not accepted, the purchase price will be returned, without interest, within five business days via check, ACH or wire transfer, at the discretion of the Manager. Investors will be required to provide the Manager with wire transfer instructions in the Senior Note Purchase Agreement.
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If you are a fiduciary of an Employee Benefit Plan (a “Plan Investor”) subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or section 4975 of the Code, you are urged to consult with your own counsel regarding the application of ERISA and the Code to your purchase. The following is intended to be a summary only and is not a substitute for careful planning with a professional.
In considering a purchase of the Senior Notes, fiduciaries of Plan Investors should consider their basic fiduciary duty under ERISA that requires them to discharge their investment duties prudently and solely in the interest of plan participants and beneficiaries. In making such a determination, a fiduciary of a Plan Investor should be sure that the investment is in accordance with the governing instruments and the overall policies of the plan, and that the investment will comply with the diversification and prudence requirements of ERISA. Plan Investor fiduciaries should consider the role that a purchase of the Senior Notes would play in the plan’s overall investment portfolio.
In addition, provisions of ERISA and the Code prohibit transactions involving the assets of an Employee Benefit Plan and persons who have specified relationships with the plan, unless an exemption is available for such transaction. A Plan Investor fiduciary should be sure that a purchase of Senior Notes will not constitute or give rise to a direct or indirect non-exempt prohibited transaction. In particular, Plan Investors must make an independent investment decision with respect to their purchase of Senior Notes issued by the Company and must not rely upon the Manager or its affiliates for investment advice regarding such participation.
ERISA and its accompanying regulations are complex and, to some extent may be interpreted by the courts or the administrative agencies inconsistently. This discussion only addresses certain features of ERISA as it applies to the Senior Notes, and does not purport to constitute a thorough analysis of ERISA with respect to your investment in the Company. Each investor subject to ERISA should consult with its own legal counsel concerning the implications under ERISA of the ownership of Senior Notes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
NOTE OF CAUTION: THE FOLLOWING DISCUSSION SUMMARIZES CERTAIN, ALTHOUGH NOT ALL, U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO AN INVESTMENT IN THE SENIOR NOTES BY U.S. PERSONS (DEFINED BELOW). THESE CONSIDERATIONS MAY VARY WITH THE IDENTITY AND STATUS OF THE INVESTOR. THIS SUMMARY PROVIDES ONLY A GENERAL DISCUSSION AND DOES NOT REPRESENT A COMPLETE ANALYSIS OF ALL POTENTIAL TAX CONSEQUENCES ARISING FROM AN INVESTMENT IN THE COMPANY. IT IS BASED ON THE PROVISIONS OF THE CODE, THE TREASURY REGULATIONS PROMULGATED THEREUNDER, AND JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS THEREOF, ALL AS OF THE DATE OF THIS OFFERING CIRCULAR. NO ASSURANCE CAN BE GIVEN THAT FUTURE LEGISLATION, TREASURY REGULATIONS, ADMINISTRATIVE PRONOUNCEMENTS OR COURT DECISIONS WILL NOT SIGNIFICANTLY CHANGE APPLICABLE LAW, PERHAPS RETROACTIVELY, AND MATERIALLY AFFECT THE FOLLOWING DISCUSSION.
This summary is based on provisions of the Code, U.S. Treasury regulations promulgated thereunder, judicial authorities and administrative rulings, all as in effect as of the date of this Offering Circular and all of which are subject to change or differing interpretations, possibly with retroactive effect. The Company has not sought, and does not intend to seek, any ruling from the Internal Revenue Service (the “IRS”) with respect to the statements made and the conclusions reached in this summary, and there can be no assurance that the IRS will not take positions contrary to such statements and conclusions or that a court will not agree with any such positions of the IRS. Nor is the Company receiving any tax opinion from counsel.
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If an entity that is treated as a partnership for U.S. federal income tax purposes holds Senior Notes, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership and certain determinations made at the partner level. Entities that are treated as partnerships for U.S. federal income tax purposes and persons holding Senior Notes through an entity treated as a partnership for U.S. federal income tax purposes are urged to consult their own tax advisors.
This summary does not in any way either bind the IRS or the courts, or constitute an assurance that the federal income tax considerations discussed herein will be accepted by the IRS, any other federal, state or local agency or the courts.
Further, this summary does not address tax considerations that may apply (i) to prospective investors who are subject to special tax rules (such as banks, insurance companies, tax-exempt organizations, regulated investment companies, real estate investment trusts, dealers or traders in securities or currencies, persons who hold their interests in the Company as part of a hedging, “straddle” or “conversion” transaction or otherwise as part of a holding with any other position, or (ii) under the alternative minimum tax, any federal tax other than the federal income tax or any state, local or foreign tax laws. Further, for purposes of this summary, the term “U.S. Person” or “U.S. Holder” means any (i) individual citizens or residents of the United States, (ii) corporations created or organized under the laws of the United States or any state or political subdivision thereof (including the District of Columbia), (iii) estates, the incomes of which are subject to U.S. federal income taxation regardless of the source of such income or (iv) trusts subject to the primary supervision of a U.S. court and the control of one or more U.S. Persons.
This summary is included for general information only. Nothing herein is or should be construed as legal or tax advice to any potential investor. Accordingly, each person considering an investment in the Company should consult its own tax adviser in order to understand fully the possible federal income and other tax consequences to it of such an investment.
Tax Consequences to Senior Noteholders
This summary applies only to beneficial owners of the Senior Notes that will hold the Senior Notes as “capital assets” within the meaning of Section 1221 of the Code, and who purchase Senior Notes in this offering. This summary does not discuss the U.S. federal income tax considerations applicable to subsequent purchasers of the Senior Notes. This summary further assumes that the Senior Notes will be treated as debt for U.S. federal income tax purposes.
Classification of the Senior Notes for U.S. Federal Income Tax Purposes
We believe that the Senior Notes will be treated as “contingent payment debt instruments” (or “CPDI”) for U.S. federal income tax purposes subject to taxation under the “noncontingent bond method,” and the balance of this discussion assumes that this characterization is proper and will be respected. Under this characterization, the Senior Notes generally will be subject to the Treasury regulations governing contingent payment debt instruments (“CPDI Regulations”). Under these regulations, a U.S. Holder will be required to accrue original issue discount (“OID”), taxed as interest income, on a constant yield basis based on a “comparable yield” and a “projected payment schedule,” both as described below, regardless of whether such holder uses the cash or accrual method of accounting for U.S. federal income tax purposes. As a result, a U.S. Holder may be required to include interest in income each year in excess of any stated interest payments actually received in that year. A U.S. Holder which does not use the “comparable yield” and follow the “projected payment schedule” as established by us to calculate its OID and interest income on a note must timely disclose and justify the use of other estimates to the IRS.
Federal Income Taxation of the Senior Notes under the CPDI Regulations
The Noncontingent Bond Method. Generally, a CPDI issued for money must be accounted for under the noncontingent bond method. Under this method, interest accrues as if the CPDI were a “comparable fixed-rate debt instrument”, and then appropriate adjustments are made to account for the difference between the actual payments on the CPDI and the assumed payments on the comparable fixed-rate debt instrument.
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The CPDI Regulations provide that a U.S. Holder must accrue an amount of ordinary interest income, as original issue discount for U.S. federal income tax purposes, for each accrual period prior to and including the maturity date of the CPDI that equals the product of:
| · | the adjusted issue price (as defined below) of the CPDI as of the beginning of the accrual period; |
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| · | the comparable yield (as defined below) of the CPDI, adjusted for the length of the accrual period; and |
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| · | a fraction, the numerator of which is the number of days during the accrual period that the U.S. Holder held the CPDI and the denominator of which is the number of days in the accrual period. |
The “adjusted issue price” of a CPDI is its issue price, increased by any interest income previously accrued, determined without regard to any adjustments to interest accruals described below, and decreased by the projected amount of any payments (in accordance with the projected payment schedule described below) previously made with respect to the CPDI.
The term ‘‘comparable yield’’ as used in the CPDI Regulations means the greater of (i) the annual yield we would pay, as of the issue date, on a fixed-rate, debt instrument with no contingent payments, but with terms and conditions otherwise comparable to those of the CPDI, and (ii) the applicable federal rate.
The CPDI Regulations require that we provide to U.S. Holders, solely for U.S. federal income tax purposes, a schedule of the projected amounts of payments (the ‘‘projected payment schedule’’) on the CPDI. This schedule must produce a yield to maturity that equals the comparable yield. A U.S. Holder of Senior Notes can obtain a projected payment schedule and comparable yield relating to the Senior Note(s) held by such holder by submitting a written request to Gerard Stascausky at 9755 SW Barnes Road, Suite 420, Portland, Oregon 97225, or by calling (503) 225-0300.
The comparable yield and the projected payment schedule will not be provided for any purpose other than to determine a U.S. Holder’s interest accruals and adjustments thereto in respect of the contingent payment notes for U.S. federal income tax purposes. They will not constitute a projection or representation by us regarding the actual amounts that will be paid on the contingent payment notes.
Interest Adjustments. In general, holders and issuers of a CPDI, including cash-basis holders, accrue interest (referred to as OID) based on the projected payment schedule using the constant yield method that applies to a comparable fixed-rate debt instrument. When a payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. If a U.S. Holder receives in a taxable year actual payments (including any Roll-over Interest) with respect to a CPDI that, in the aggregate, exceed the total amount of projected payments for that taxable year, the U.S. Holder will incur a “net positive adjustment” under the CPDI Regulations equal to the amount of such excess. The U.S. Holder will treat a net positive adjustment as additional interest income in that taxable year.
If a U.S. Holder receives in a taxable year actual payments with respect to a CPDI that, in the aggregate, are less than the amount of projected payments for that taxable year, the U.S. Holder will incur a ‘‘net negative adjustment’’ under the CPDI Regulations equal to the amount of such deficit. This net negative adjustment:
(i) | will first reduce the U.S. Holder’s interest income on the CPDI for that taxable year; | |
| (ii) | to the extent of any excess after applying (i), will give rise to an ordinary loss to the extent of the U.S. Holder’s interest income on the CPDI during prior taxable years, reduced to the extent such interest was offset by prior net negative adjustments; and |
(iii) | to the extent of any excess after applying (i) and (ii), will be carried forward as a negative adjustment to offset future interest income with respect to the contingent payment note or to reduce the amount realized on a sale, exchange or retirement of the CPDI. |
With respect to non-corporate U.S. Holders, a net negative adjustment is not subject to the two percent floor limitation on miscellaneous itemized deductions.
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Interest and OID. A U.S. Holder will be required to include accrued interest income (treated as OID) in taxable income under the noncontingent bond method, as described above, regardless of the holder’s method of accounting for U.S. federal income tax purposes.
The amount a U.S. Holder electing Roll-over Interest will be required to include in taxable income as interest each year will generally significantly exceed the amount of interest payments actually received in that year, if any, regardless of whether the U.S. Holder uses the cash or accrual method of tax accounting.
Sale, Exchange, Retirement, Redemption, or Other Taxable Disposition of Senior Notes
A U.S. Holder generally will recognize gain or loss upon the sale, exchange, or other taxable disposition (including a retirement or redemption) of a Senior Note in an amount equal to the difference between (i) the amount of cash proceeds and the fair market value of any property received on the sale or other taxable disposition (other than any amount received that is attributable to accrued but unpaid stated interest which generally will be taxable as ordinary income if not previously included in such holder’s income) and (ii) such holder’s adjusted tax basis in the Senior Note.
A U.S. Holder’s adjusted tax basis in a Senior Note generally will equal the cost of the Senior Note to the holder, increased by any interest income previously accrued by the U.S. Holder (determined without regard to any adjustments to interest accruals described above) and decreased by the amount of any noncontingent payments and the projected amount of any contingent payments previously made in respect of the Senior Note (without regard to the actual amount paid).
Any gain recognized on a taxable disposition of a Senior Note will be ordinary income, even if you hold the debt instrument as a capital asset. Conversely, if you sell a Senior Note at a loss, your loss should be an ordinary loss to the extent of the excess of your prior OID accruals on the debt instrument over the total net negative adjustments previously taken into account as ordinary losses in respect of the Senior Note, and thereafter a capital loss. The deductibility of capital losses is subject to limitations under the Code.
Medicare Contribution Tax on Net Investment Income
Individuals are subject to a Medicare contribution tax of 3.8% on the lesser of (a) “net investment income” for a taxable year and (b) the excess, if any, of the individual’s modified adjusted gross income for such year over a threshold amount. The threshold amount is $250,000 for taxpayers filing a joint return or as a surviving spouse, $125,000 for married taxpayers filing separately and $200,000 for other individuals. This tax is in addition to any income taxes also imposed on such income. “Net investment income” generally means the excess, if any of (a) the sum of (1) gross income from interest, dividends, annuities, royalties and rents, (2) gross income derived from a passive activity, and (3) net gain attributable to the disposition of property other than property held in an active trade or business over (b) the allowable deductions allocable to such gross income or net gain. Look-through rules apply to gains from the disposition of partnership interests and stock in S corporations. Estates and certain trusts are also subject to the Medicare contribution tax, but on a different tax base. Prospective investors should consult their own tax advisors as to the application of Medicare contribution tax to the ownership and disposition of the Senior Notes.
Information Reporting Requirements and Backup Withholding
A U.S. Holder will be subject to U.S. information reporting with respect to interest or distribution paid or accrued on the Senior Notes and gross proceeds from the sale, exchange or other disposition (including a retirement or redemption) of the Senior Notes unless such U.S. Holder comes within certain exempt categories and, when required, demonstrates this fact. A U.S. Holder that is subject to U.S. information reporting generally will also be subject to U.S. backup withholding (currently at a rate of 24%) unless such U.S. Holder provides certain information to the applicable withholding agent, including a correct taxpayer identification number and a certification that it is not subject to backup withholding. A U.S. Holder that does not comply with these requirements may be subject to certain penalties. Backup withholding is not an additional tax. Any amounts withheld from a payment to a U.S. Holder as backup withholding generally are allowable as a refund or a credit against the U.S. Holder’s federal income tax liability, provided the required information is timely furnished to the IRS.
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Prohibited Transaction Excise Tax
ERISA and the Code prohibit certain transactions between Benefit Plans and certain related parties (termed “disqualified persons” and “parties in interest”). The effect of the prohibited transaction rules is that a fifteen percent (15%) excise tax may be imposed each year on the related party on account of such transactions occurring between a plan and the related party. If the transaction is not corrected during the applicable correction period, a 100 percent (100%) excise tax can be levied. Also, either the Department of Labor or a participant can sue a trustee or other plan fiduciary to make restitution for any losses resulting from the prohibited transaction, and to seek other equitable remedies.
Taxation of the Company
The Company intends to elect to be treated as a corporation taxed as a REIT commencing with the fiscal year ending December 31, 2022. Upon the Company becoming a REIT, the taxation of the Company will significantly change and the Company’s disclosures with respect to taxation will change as described below. The below description supplements the description of “Income Taxes” included under the heading “Critical Accounting Policies and Accounting Estimates” starting on Page 42 of the Offering Circular.
The Company intends to be treated as a corporation taxable as a REIT for federal income tax purposes under the Code, commencing with the taxable year ending December 31, 2022. In general, in each year in which the Company qualifies as a REIT, it will not be subject to U.S. federal income tax as long as it distributes all its REIT taxable income. However, even if the Company qualifies as a REIT, it will still be subject to U.S. federal income tax as follows:
(1) U.S. federal income tax will be imposed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains.
(2) Under certain circumstances, the Company may be impacted by the corporate alternative minimum tax.
(3) U.S. federal income tax will be imposed at the highest corporate rate on (a) net income from the sale or other disposition of “foreclosure property” held primarily for sale to customers in the ordinary course of business, and (b) other nonqualifying income from foreclosure property.
(4) A 100% penalty tax will apply to net income from “prohibited transactions.” Prohibited transactions generally are certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than certain property held for at least two years, foreclosure property, and property involuntarily converted.
(5) A penalty tax will apply to the Company if it fails to satisfy the gross income or the asset tests (described in further detail below), but nonetheless maintains its qualification as a REIT because certain other requirements have been satisfied. Similarly, a penalty tax will apply to the Company if it maintains its REIT status despite its failure to satisfy one or more REIT qualification requirements other than the gross income tests and asset tests.
(6) If the Company fails to distribute during each calendar year at least the sum of (x) 85% of its ordinary income for such year, (y) 95% of its net capital gain income for such year, and (z) any undistributed taxable income from prior periods, it will be subject to a 4% excise tax on the excess of such amounts over the amount distributed.
(7) If the Company were determined to have been taxable as a C corporation prior to becoming a REIT, then during the five-year period beginning on the first day of the first taxable year for which its REIT election is effective (the “Recognition Period”), any gain recognized by the Company on the disposition of any property held by the Company or any partnership in which an interest was held as of the beginning of such Recognition Period will be subject to tax at the highest corporate rate to the extent of the excess of (x) the fair market value of such property as of the beginning of such Recognition Period, over (y) the adjusted tax basis of the Company or the partnerships in such property as of the beginning of such Recognition Period (the “Built-in Gain”).
(8) If the Company acquires any asset from a C corporation in a transaction in which the adjusted tax basis of the asset in the hands of the Company is determined by reference to the adjusted tax basis of the asset (or any other property) in the hands of the C corporation, and the Company recognizes gain on the disposition of such asset during the ten-year period beginning on the date on which such asset was acquired by the Company, then the Built-in Gain will be subject to tax at the highest regular corporate tax rate.
(9) A 100% tax will apply to any “redetermined rents,” “redetermined deductions,” “excess interest,” and “redetermined TRS service income” (in each case, as defined under the Code).
If the Company fails to qualify as a REIT in any year, it would be subject to U.S. federal income tax in the same manner as a C corporation. Further, unless entitled to relief under specific statutory provisions, the Company would be disqualified from taxation as a REIT for the four taxable years following the year during which the Company loses its qualification as a REIT. It is not possible to predict whether the Company would be entitled to such statutory relief.
Prior to the Company qualifying as a REIT, the Company was classified as a partnership for U.S. federal income tax purposes and was generally not subject to entity-level U.S. federal income taxes. Accordingly, no provision for income taxes besides the minimum state franchise taxes and the LLC gross receipts fees are reflected in the Company’s financial statements for the periods in which it is taxed as a partnership. Instead, each investor holding interest in the Company was required to take into account their respective share of the Company items of income, gain, loss and deduction in computing their U.S. federal income tax liability as if the investor had earned such income directly, even if no cash distributions are made to the investor. Prior to the REIT Election, a pro rata distribution of cash by the Company to an investor was generally not taxable for U.S. federal income tax purposes unless the amount of cash distributed is in excess of the investor’s adjusted tax basis in the Company.
Certain legal matters relating to the Senior Notes being offered hereby are being passed upon for the Company by Buchalter, a Professional Corporation, Portland, Oregon.
The financial statements of the Company as of and for each of the two years ended December 31, 2020, and 2019, have been audited by Armanino LLP, the Company’s independent auditors, as stated in their report appearing herein.
The Company has filed with the SEC an Offering Statement under Regulation A of the Act, with respect to securities offered hereby. This Offering Circular does not contain all of the information set forth in the Offering Statement and the exhibits thereto. For further information with respect to the Company and the securities offered hereby, reference is hereby made to the Offering Statement and the exhibits filed therewith, which may be obtained from the SEC’s website that contains information regarding issuers that file electronically with the SEC (http://www.sec.gov). We also file annual reports, quarterly reports, current reports, proxy statements, and other information with the SEC.
All inquiries regarding the Offering Circular should be directed to the Managing Directors:
Iron Bridge Management Group, LLC
Attn: Gerard Stascausky, CFA
9755 SW Barnes Road, Suite 420
Portland, OR 97225
Ph. 503-225-0300
invest@ironbridgelending.com
No dealer, salesman, or any other person has been authorized to give any information or to make any representation not contained in this Offering Circular in connection with the offer made by this Offering Circular; and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Offering Circular does not constitute an offer of any securities, other than those to which it relates, or an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized, or an offer to sell or a solicitation of an offer to buy to any person in any jurisdiction where such an offer would be unlawful.
67 |
Table of Contents |
Iron Bridge Mortgage Fund, LLC
(An Oregon Limited Liability Company)
Financial Statements
December 31, 2021, and 2020
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| F-1 - F-2 |
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| F-3 |
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| F-4 |
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| F-5 |
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| F-6 - F-24 |
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68 |
Table of Contents |
INDEPENDENT AUDITOR’S REPORT
Board of Directors
Iron Bridge Mortgage Fund, LLC
Portland, Oregon
Opinion
We have audited the accompanying financial statements of Iron Bridge Mortgage Fund, LLC (an Oregon limited liability Company) (the “Fund”), which comprise the balance sheets as of December 31, 2021 and 2020, and the related statements of income and changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Iron Bridge Mortgage Fund, LLC as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Iron Bridge Mortgage Fund, LLC and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Fund's ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
F-1 |
Table of Contents |
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with auditing standards generally accepted in the United States of America will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with auditing standards generally accepted in the United States of America, we:
| · | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| · | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| · | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control. Accordingly, no such opinion is expressed. |
| · | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
| · | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Fund’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit.
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| Armanino LLP |
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| San Ramon, California |
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March 4, 2022
F-2 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
(An Oregon Limited Liability Company)
Balance Sheets
December 31, 2021 and 2020
ASSETS | ||||||||
|
| 2021 |
|
| 2020 |
| ||
Cash and cash equivalents |
| $ | 549,211 |
|
| $ | 424,361 |
|
Mortgage interest receivable |
|
| 912,251 |
|
|
| 847,165 |
|
Mortgage loans receivable, net |
|
| 113,303,926 |
|
|
| 90,908,306 |
|
Real estate held for sale |
|
| 2,889,930 |
|
|
| 1,881,701 |
|
Rental property, net |
|
| - |
|
|
| 733,355 |
|
Total assets |
| $ | 117,655,318 |
|
| $ | 94,794,888 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities |
| $ | 125,136 |
|
| $ | 107,415 |
|
Servicer fees payable |
|
| 315,103 |
|
|
| 232,400 |
|
Incentive fees payable |
|
| - |
|
|
| 873 |
|
Interest payable |
|
| 245,876 |
|
|
| 319,363 |
|
Notes payable - junior notes |
|
| - |
|
|
| 23,843,628 |
|
Notes payable - senior notes |
|
| 29,467,505 |
|
|
| 24,229,442 |
|
Line of credit, net |
|
| 36,361,430 |
|
|
| 22,201,226 |
|
Deferred interest |
|
| 1,621,810 |
|
|
| 2,135,113 |
|
Total liabilities |
|
| 68,136,860 |
|
|
| 73,069,460 |
|
|
|
|
|
|
|
|
|
|
Members’ equity |
|
| 49,518,458 |
|
|
| 21,725,428 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and members’ equity |
| $ | 117,655,318 |
|
| $ | 94,794,888 |
|
The accompanying notes are an integral part of these financial statements.
F-3 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
(An Oregon Limited Liability Company)
Statements of Income and Changes in Members’ Equity
For the Years Ended December 31, 2021 and 2020
|
| 2021 |
|
| 2020 |
| ||
Revenues |
|
|
|
|
|
| ||
Mortgage interest income |
| $ | 13,326,103 |
|
| $ | 10,771,323 |
|
Rental property income |
|
| 34,843 |
|
|
| 620,845 |
|
Other income |
|
| 279,964 |
|
|
| 1,844,696 |
|
Total revenues |
|
| 13,640,910 |
|
|
| 13,236,864 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Interest expense |
|
| 2,949,531 |
|
|
| 4,174,573 |
|
Servicer fees |
|
| 3,345,804 |
|
|
| 2,595,138 |
|
Incentive fees |
|
| 895 |
|
|
| 112,690 |
|
Provision for losses on loans |
|
| 1,353,866 |
|
|
| 1,070,990 |
|
Professional fees |
|
| 471,333 |
|
|
| 280,765 |
|
Real estate holding costs |
|
| 38,158 |
|
|
| 662,178 |
|
Other |
|
| 437,804 |
|
|
| 444,637 |
|
Total operating expenses |
|
| 8,597,391 |
|
|
| 9,340,971 |
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
Loss on sale of real estate held for sale |
|
| (33,499 | ) |
|
| (1,606,091 | ) |
Total other expense |
|
| (33,499 | ) |
|
| (1,606,091 | ) |
|
|
|
|
|
|
|
|
|
Income before income tax and LLC fees |
|
| 5,010,020 |
|
|
| 2,289,802 |
|
Income tax and LLC fees |
|
| 3,385 |
|
|
| 12,296 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 5,006,635 |
|
|
| 2,277,506 |
|
|
|
|
|
|
|
|
|
|
Members’ equity, beginning of year |
|
| 21,725,428 |
|
|
| 21,183,026 |
|
Members’ contributions |
|
| 39,780,540 |
|
|
| 2,578,419 |
|
Members’ earning distributions |
|
| (513,950 | ) |
|
| (118,690 | ) |
Members’ capital withdrawals |
|
| (16,480,195 | ) |
|
| (4,194,833 | ) |
|
|
|
|
|
|
|
|
|
Members’ equity, end of year |
| $ | 49,518,458 |
|
| $ | 21,725,428 |
|
The accompanying notes are an integral part of these financial statements.
F-4 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
(An Oregon Limited Liability Company)
Statements of Cash Flows
For the Years Ended December 31, 2021 and 2020
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 5,006,635 |
|
| $ | 2,277,506 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Provision for losses on loans |
|
| 1,353,866 |
|
|
| 1,070,990 |
|
Amortization of deferred loan origination fees |
|
| (2,497,174 | ) |
|
| (2,047,832 | ) |
Depreciation |
|
| 5,525 |
|
|
| 240,873 |
|
Loss on sales of real estate held for sale |
|
| 33,499 |
|
|
| 1,606,091 |
|
Junior notes interest expense converted to debt |
|
| 200,753 |
|
|
| 1,313,138 |
|
Senior notes interest expense converted to debt |
|
| 919,564 |
|
|
| 753,502 |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
Mortgage interest receivable |
|
| (124,419 | ) |
|
| (1,920,038 | ) |
Accounts payable and other accrued liabilities |
|
| 17,721 |
|
|
| 30,498 |
|
Servicer fees payable |
|
| 82,703 |
|
|
| 1,650 |
|
Incentive fees payable |
|
| (873 | ) |
|
| (38,811 | ) |
Interest payable |
|
| (73,487 | ) |
|
| (58,143 | ) |
Deferred interest |
|
| (513,303 | ) |
|
| 1,727,514 |
|
Net cash provided by operating activities |
|
| 4,411,010 |
|
|
| 4,956,938 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities Loans funded |
|
| (206,665,400 | ) |
|
| (142,348,421 | ) |
Principal collected on loans |
|
| 185,222,920 |
|
|
| 141,025,753 |
|
Improvement costs on real estate held for sale |
|
| (64,397 | ) |
|
| (182,651 | ) |
Improvement costs on rental property |
|
| - |
|
|
| (64,917 | ) |
Proceeds from sales of real estate held for sale |
|
| - |
|
|
| 6,072,020 |
|
Net cash (used in) provided by investing activities |
|
| (21,506,877 | ) |
|
| 4,501,784 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities Borrowings on notes payable - junior notes |
|
| 48,250 |
|
|
| 985,811 |
|
Repayments on notes payable - junior notes |
|
| (3,329,949 | ) |
|
| (3,379,399 | ) |
Borrowings on notes payable - senior notes |
|
| 21,988,379 |
|
|
| 16,310,266 |
|
Repayments on notes payable - senior notes |
|
| (17,669,880 | ) |
|
| (13,749,315 | ) |
Net borrowings on line of credit |
|
| 14,160,204 |
|
|
| (8,346,826 | ) |
Members’ contributions |
|
| 19,017,858 |
|
|
| 2,578,419 |
|
Members’ earnings distributions |
|
| (513,950 | ) |
|
| (118,690 | ) |
Members’ capital withdrawals |
|
| (16,480,195 | ) |
|
| (4,194,833 | ) |
Net cash provided by (used in) financing activities |
|
| 17,220,717 |
|
|
| (9,914,567 | ) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 124,850 |
|
|
| (455,844 | ) |
Cash and cash equivalents, at beginning of year |
|
| 424,361 |
|
|
| 880,205 |
|
Cash and cash equivalents, at end of year |
| $ | 549,211 |
|
| $ | 424,361 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 3,023,018 |
|
| $ | 4,232,716 |
|
Cash paid for income tax and LLC fees |
| $ | 3,385 |
|
| $ | 12,296 |
|
Supplemental disclosure of non-cash investing and financing transactions |
|
|
|
|
|
|
|
|
Mortgage loans receivable converted to real estate held for sale |
| $ | 884,499 |
|
| $ | 1,396,135 |
|
Mortgage interest receivable transferred to real estate held for sale |
| $ | 59,333 |
|
| $ | 2,686 |
|
Sale of real estate financed with mortgage loan receivable |
| $ | 694,331 |
|
| $ | - |
|
Junior notes payable converted to members’ equity |
| $ | 20,762,682 |
|
| $ | - |
|
Members’ equity converted to notes payable |
| $ | 689,539 |
|
| $ | 1,071,722 |
|
The accompanying notes are an integral part of these financial statements.
F-5 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
1. | Organization |
Iron Bridge Mortgage Fund, LLC (the “Fund”) is an Oregon limited liability company that was organized to engage in business as a mortgage lender for the purpose of making and arranging various types of loans to the general public and businesses, acquiring existing loans and selling loans, all of which are or will be secured, in whole or in part, by real or personal property throughout the United States. The Fund is managed by Iron Bridge Management Group, LLC, an Oregon limited liability company (the “Manager”). The Fund receives certain operating and administrative services from the Manager, some of which are not reimbursed to the Manager. The Fund’s financial position and results of operations would likely be different absent this relationship with the Manager.
Term of the Fund
The Fund will continue in perpetuity, at the sole discretion of the Manager, unless dissolved under provisions of the operating agreement at an earlier date.
2. | Summary of Significant Accounting Policies |
Management estimates and related risks
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Such estimates relate principally to the determination of the allowance for loan losses and fair value of real estate owned. Although these estimates reflect management’s best estimates, it is at least reasonably possible that a material change to these estimates could occur.
The fair value of real estate, in general, is impacted by current real estate and financial market conditions. Should these markets experience significant declines, the resulting collateral values of the Fund’s loans will likely be negatively impacted. The impact to such values could be significant and as a result, the Fund’s actual loan losses and proceeds from the sales of real estate held could differ significantly from management’s current estimates.
F-6 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
2. | Summary of Significant Accounting Policies (continued) |
Cash and cash equivalents
The Fund considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Cash on deposit occasionally exceeds federally insured limits. The Fund believes that it mitigates this risk by maintaining deposits with major financial institutions.
Mortgage loans receivable
Mortgage loans, which the Fund has the intent and ability to hold to maturity, generally are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned. Mortgage loans receivable make up the only class of financing receivables within the Fund’s lending portfolio. As a result, further segmentation of the loan portfolio is not considered necessary.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of estimated future cash flows discounted at the loan’s effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral.
Interest is accrued daily based on the principal of the loans. If events and or changes in circumstances cause management to have serious doubts about the further collectability of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances.
Allowance for loan losses
Loans and the related accrued interest are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, accrued interest and advances on loans. As a collateral- based lender, the Fund does not consider credit risks which may be inherent in a further segmented loan portfolio as a basis for determining the adequacy of its allowance for loan losses but rather focuses solely on the underlying collateral value of the loans in its portfolio to do so. As a result, the Fund does not consider further segmentation of its loan portfolio and related disclosures necessary. The Fund writes off uncollectible loans and related receivables directly to the allowance for loan losses once it is determined that the full amount is not collectible.
F-7 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
2. | Summary of Significant Accounting Policies (continued) |
Rental property
Rental property is recorded at cost and allocated between land and building based upon their relative fair values at acquisition. Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Investment costs are capitalized while activities are ongoing to prepare an asset for its intended use. Expenditures for repairs and maintenance are charged to expense when incurred.
Depreciation begins once the asset is ready to be placed into service and is recorded on a straight- line basis over the estimated useful lives of the assets. Buildings and improvements are depreciated over periods ranging from 15 to 27.5 years.
Impairment of long-lived assets
The Fund continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Fund assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total future cash flows is less than the carrying amount of those assets, the Fund records an impairment charge based on the excess of the carrying amount over the fair value, less selling costs, of the asset.
Fair value measurements
Fair value is defined 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. The Fund determines the fair values of its assets and liabilities based on a fair value hierarchy that includes three levels of inputs that may be used to measure fair value (Level 1, Level 2 and Level 3).
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Fund 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. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the Fund’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 Fund’s own data.
F-8 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
2. | Summary of Significant Accounting Policies (continued) |
Fair value measurements (continued)
The Fund does not record loans at fair value on a recurring basis but uses fair value measurements of collateral security in the determination of its allowance for loan losses. The fair value for real estate owned and impaired secured loans is determined using the sales comparison, income and other commonly used valuation approaches.
The following table reflects the Fund’s assets measured at fair value on a non-recurring basis during the year ended December 31, 2021:
Item |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Real estate held for sale |
| $ | - |
|
| $ | - |
|
| $ | 2,889,930 |
|
| $ | 2,889,930 |
|
The following table reflects the Fund’s assets measured at fair value on a non-recurring basis during the year ended December 31, 2020:
Item |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Real estate held for sale |
| $ | - |
|
| $ | - |
|
| $ | 1,881,701 |
|
| $ | 1,881,701 |
|
The following methods and assumptions were used to estimate the fair value of assets and liabilities:
| (a) | Secured loans (Level 2 and Level 3). For loans in which a specific allowance is established based on the fair value of the collateral, the Fund records the loan as nonrecurring Level 2 if the fair value of the collateral is based on an observable market price or a current appraised value. If an appraised value is not available or the fair value of the collateral is considered impaired below the appraised value and there is no observable market price, the Fund records the loan as nonrecurring Level 3. |
|
|
|
| (b) | Real estate held for sale (Level 2 and Level 3). At the time of foreclosure, real estate held for sale is recorded at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable. The Fund periodically compares the carrying value of real estate held for use to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value. If the future undiscounted cash flows of real estate held for use exceed the carrying value or the fair value less estimated costs to sell for other than held for use real estate exceeds the carrying value, the asset value is recaptured to the estimated fair value, but not to exceed the original basis in the property after reversion. The Fund records real estate held for sale as nonrecurring Level 2 if the fair value of the real estate held for sale is based on an observable market price or a current appraised value. If an appraised value is not available and there is no observable market price, the Fund records real estate held for sale as nonrecurring Level 3. |
F-9 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
2. | Summary of Significant Accounting Policies (continued) |
Real estate held for sale
Real estate acquired through or in lieu of loan foreclosure that is to be held for any purpose other than use in operations, is initially recorded at the lower of the recorded investment in the loan, plus any senior indebtedness, or at fair value less estimated selling cost at the date of foreclosure if the plan of disposition is by way of sale. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, real estate held for sale is carried at the lower of the new cost basis or fair value less estimated costs to sell.
Costs of real estate improvements are capitalized, whereas costs relating to holding real estate are expensed. The portion of interest costs relating to development of real estate is capitalized.
Impairment losses of real estate held and held for sale are measured as the amount by which the carrying amount of a property exceeds its fair value less estimated costs to sell. Impairment losses of real estate held for use are determined by comparing the expected future undiscounted cash flows of the property, including any costs that must be incurred to achieve those cash flows, to the carrying amount of the property. If those net cash flows are less than the carrying amount of the property, impairment is measured as the amount by which the carrying amount of the asset exceed sits fair value. Valuations are periodically performed by management, and any subsequent write- downs are recorded as a charge to operations.
Deferred loan origination fees
The Fund will capitalize loan origination fees and recognize the fees as an adjustment of the yield on the related loan. Deferred loan origination fees are amortized to income over the life of the loan under the effective interest method. Deferred loan origination fees of $698,654 and $634,060, at December 31, 2021 and 2020, respectively, have been included in mortgage loans receivable, net, on the accompanying balance sheets. Deferred loan origination fees of $2,497,174 and $2,047,832, in 2021 and 2020, respectively, were amortized into income during each applicable year.
Line of credit origination fees
The Fund has capitalized the related costs incurred in connection with its borrowings under the line of credit. These costs are being amortized using the straight-line method through maturity of the line of credit. The prepaid loan fees related to the line of credit are presented in the balance sheets as a direct deduction from the carrying amount of the line of credit.
F-10 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
2. | Summary of Significant Accounting Policies (continued) |
Subscription liability
The Fund accepts subscription agreements and funds from prospective investors who wish to become members of the Fund. If approved for admittance into the Fund, the subscription funds are maintained in a separate subscription account until such time as the funds are needed in the normal course of the Fund’s operations. Due to the calculation of the incentive fee, the Fund does not allow mid-month contributions or withdrawals. If the subscription funds are needed in the normal course of the Fund’s operations on any day other than the first day of the month, the subscription funds will be borrowed at an annual rate of 6% for the odd days within the month the borrowing took place. After the monthly distribution is processed, the subscription fund borrowings, plus any interest accrued thereon, will be recognized as member contributions on behalf of the subscribing member. There were no subscription fund borrowings as of December 31, 2021 and 2020.
Income taxes
The Fund is a limited liability company for federal and state income tax purposes. Under the laws pertaining to income taxation of limited liability companies, no federal income tax is paid by the Fund as an entity. Individual members report on their federal and state income tax returns their share of Fund income, gains, losses, deductions and credits, whether or not any actual distribution is made to such member during a taxable year. Accordingly, no provision for income taxes besides the applicable minimum state tax or fees would be reflected in the accompanying financial statements.
The Fund has evaluated its current tax positions and has concluded that as of December 31, 2021 and 2020, the Fund does not have any significant uncertain tax positions for which a reserve would be necessary.
Reclassification
Certain amounts presented in the prior year financial statements have been reclassified to conform to the current year presentation.
Subsequent events
The Fund has evaluated subsequent events through March 4, 2022, the date the financial statements were available to be issued. No subsequent events have occurred that would have a material impact on the presentation of the Fund’s financial statements.
F-11 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
3. | Fund Provisions |
The Fund is an Oregon limited liability company. The rights, duties and powers of the members of the Fund are governed by the operating agreement. The following description of the Fund’s operating agreement provides only general information. Members should refer to the Fund’s operating agreement and offering circular for a more complete description of the provisions.
The Manager is in complete control of the Fund business, 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 Fund.
Members may remove the Manager if: (i) the Manager commits an act of willful misconduct which materially adversely damages the Fund; or (ii) holders of at least seventy five percent of the outstanding membership interests, excluding the membership interests held by the Manager, vote in favor of such removal.
Recapitalization
As of January 31, 2021, the Fund had one class of equity, a bank line of credit, and two forms of private debt outstanding: the junior notes and the senior notes.
Effective February 1, 2021, the Fund adopted second amended and restated operating agreement, which among other changes, created four classes of equity membership interests consisting of Class A, Class B, Class C and Class D Units.
The Class A Units were issued to employees of the Manager and/or their tax-advantaged accounts. The return on these Class A Units is intended to replace the right of the Manager to receive “Incentive Fees” under the first amended operating agreement.
The only class of equity units under the first amended operating agreement was exchanged for Class B Units.
The Fund’s junior notes were, subject to applicable approvals, prepaid and the holders of the junior notes were offered the opportunity to reinvest the outstanding principal amount and unpaid and accrued interest owed under their junior notes in exchange for Class C Units of the Fund.
F-12 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
3. | Fund Provisions (continued) |
Profits and losses
Profits and losses accrued during any accounting period shall be allocated among the members in accordance with their respective membership interests maintained throughout that accounting period.
Election to receive distributions
Members are entitled, on a non-compounding basis, payable monthly in arrears, to 9% (Series B Equity) or 6% (Series C Equity) per annum non-guaranteed priority return (“Priority Return”) on their invested capital. The Manager will share in any such distribution to the extent it acquires and holds membership interests.
Once all accrued Priority Return distributions have been made, remaining net income from operations generally shall be distributed 10% to the Fund’s members, including the Manager to the extent it holds memberships interests, and 90% to Series A Equity.
Reinvestment
Members have the option to compound their proportionate share of the Fund’s monthly earnings.
Liquidity, capital withdrawals and early withdrawals
There is no public market for units of the Fund and none is expected to develop in the foreseeable future. There are substantial restrictions on transferability of membership interests. Any transferee must be a person that would have been qualified to purchase a member unit in the offering and a transferee may not become a substituted member without the consent of the Manager.
A member may withdraw its investment in the Fund and may receive a return of capital provided that the following conditions have been met: (i) the member provides the Fund with a written request for a return of capital at least 60 days prior to such withdrawal; and (ii) the member requests a full withdrawal of all membership interest if their capital balance is less than 50,000 units. The Fund will use its best efforts to honor requests for a return of capital subject to, among other things, the Fund’s then cash flow, financial condition, compliance with regulatory and other limitations, such as ERISA and ‘publicly traded partnership’ thresholds, and prospective loans. If the Manager determines that there is available cash, the Manager shall honor such withdrawal request in accordance with the conditions stated above.
F-13 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
4. | Mortgage Loans Receivable, Net |
Mortgage loans receivable, net, consisted of the following at December 31, 2021:
Outstanding mortgage loans receivable |
| $ | 115,701,463 |
|
Unamortized deferred loan origination fees |
|
| (698,654 | ) |
Allowance for loan losses |
|
| (1,698,883 | ) |
Mortgage loans receivable, net |
| $ | 113,303,926 |
|
Mortgage loans receivable, net, consisted of the following at December 31, 2020:
Outstanding mortgage loans receivable |
| $ | 92,048,404 |
|
Unamortized deferred loan origination fees |
|
| (634,060 | ) |
Allowance for loan losses |
|
| (506,038 | ) |
Mortgage loans receivable, net |
| $ | 90,908,302 |
|
Activity in the allowance for loan losses was as follows for the years ended December 31, 2020 and 2021:
2020 Beginning balance |
| $ | 1,045,668 |
|
|
|
|
|
|
Provision for loan losses |
|
| 1,070,990 |
|
Write-offs |
|
| (1,610,620 | ) |
|
|
|
|
|
2020 Ending balance |
| $ | 506,038 |
|
|
|
|
|
|
Provision for loan losses |
|
| 1,353,866 |
|
Write-offs |
|
| (161,021 | ) |
|
|
|
|
|
2021 Ending balance |
| $ | 1,698,833 |
|
Allocation of the allowance for loan losses by collateral type as of December 31, 2021 consisted of the following (allocation of allowance is not an indication of expected future use):
Single family residential (1 - 4 units) |
| $ | 1,431,681 |
|
Land/Construction |
|
| 195,289 |
|
Commercial |
|
| 29,183 |
|
Multi-family residential (5 or more units) |
|
| 42,730 |
|
Total |
| $ | 1,698,883 |
|
F-14 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
4. | Mortgage Loans Receivable, Net (continued) |
Allocation of the allowance for loan losses by collateral type as of December 31, 2020 consisted of the following (allocation of allowance is not an indication of expected future use):
Single family residential (1 - 4 units) |
| $ | 424,295 |
|
Land/Construction |
|
| 32,184 |
|
Commercial |
|
| 16,670 |
|
Multi-family residential (5 or more units) |
|
| 32,889 |
|
Total |
| $ | 506,038 |
|
5. | Notes Payable - Junior Notes |
The junior note program is a private debt offering by the Fund. Between April and September 2017, the Fund refinanced all junior notes from an interest rate of 10.0% to 8.0%. Between March and October 2019, the Fund refinanced all junior notes from an interest rate of 8.0% to 7.0%. The Fund began refinancing all junior notes from an interest rate of 7.0% to 6.0% in October 2020. The junior notes are secured by all assets of the Fund and are junior to the senior notes (see Note 6) and the line of credit balance held (see Note 7). The junior noteholders are given the option to reinvest their earned interest back into the note on a monthly basis. All junior notes hold a six-month maturity. Upon maturity, all junior noteholders have the option to renew their notes for another six-month term. Effective February 1, 2021, all junior notes were converted to Series C Equity. As of December 31, 2021 and 2020, the notes payable within the junior note program held balances of $0 and $23,843,628, respectively.
Interest expense on these notes amounted to $127,489 and $1,668,162 for the years ended December 31, 2021 and 2020, respectively.
6. | Notes Payable – Senior Notes |
On March 1, 2018, the Fund commenced a private debt offering of 6.0% Senior Secured Demand Notes. The offering was qualified by the Security and Exchange Commission in February 2018. On November 25, 2020, the Fund refinanced all of the Senior Notes from 6.0% to 5.5%. On February 23, 2021, the Fund refinanced all of the Senior Notes from 5.5% to 5.0%.
As of December 31, 2021 and 2020, the notes payable within the senior note program held a balance of $29,467,505 and $24,229,442, respectively.
Interest expense on these notes amounted to $1,452,530 and $1,418,145 for the years ended December 31, 2021 and 2020, respectively.
F-15 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
7. | Line of Credit, Net |
On January 31, 2013, the Fund entered into a revolving line of credit agreement with a financial institution that included a maximum borrowing limit of $5,000,000. The agreement was subject to a borrowing base calculation and was secured by substantially all of the Fund’s assets. On April 30, 2014, the line of credit was extended and increased to include a maximum borrowing limit of $10,000,000. On December 11, 2015, the line of credit was extended and increased to include a maximum borrowing limit of $12,000,000. The annual interest rate was equal to the greater of 4.75% plus the 90-day LIBOR rate from time to time in effect or 5.75%. The interest rate as of December 31, 2015 was 5.50%.
During December 2015, the Fund refinanced its previous line of credit and entered into a new revolving line of credit agreement with a financial institution that included a maximum borrowing limit of $20,000,000. The credit agreement took effect on January 5, 2016. On March 20, 2017, the line of credit was amended to increase the borrowing limit to $25,000,000. The agreement is subject to a borrowing base calculation and is secured by substantially all of the Fund’s assets. The annual interest rate was equal to the greater of 4.50% plus the one-month LIBOR rate from time to time in effect or 4.75%. On January 1, 2018, the line of credit was extended to January 1, 2020, the maximum borrowing limit was increased from $25,000,000 to $40,000,000, and the interest rate was lowered from one-month LIBOR plus 4.50% to one-month LIBOR plus 4.00%. On January 24, 2019, the line of credit was amended to lower the interest rate from one-month LIBOR plus 4.0% to one-month LIBOR plus 3.5%. On April 16, 2019, the line of credit was amended to lower the interest rate from one-month LIBOR plus 3.5% to one-month LIBOR plus 3.125%. On December 5, 2019, the Fund extended the line of credit to March 1, 2020. On February 24, 2020, the Fund extended the line of credit to March 1, 2022.
During May 2021, the Fund refinanced its line of credit and entered into a new revolving line of credit agreement with a financial institution that included a maximum borrowing limit of $40,000,000. The credit agreement took effect on May 7, 2021. On August 10, 2021, the line of credit was amended to increase the borrowing limit to $50,000,000. The agreement is subject to a borrowing base calculation and is secured by substantially all of the Fund’s assets. As of December 31, 2021, the interest rate on the line of credit reached its floor of 4.00%, which is the greater of 4.00% or 1-Month LIBOR plus 2.75%.
As of December 31, 2021, and 2020 the outstanding balance on the line of credit was $36,472,360 and $22,296,965, respectively. The interest rate as of December 31, 2021 and 2020 was 4.00% and 4.75%, respectively. Interest expense on the line of credit amounted to $1,369,512 and $1,088,266, for the years ended December 31, 2021 and 2020, respectively.
The line of credit agreement contains certain covenants and restrictions. The Fund was in compliance with these covenants and restrictions at December 31, 2021 and 2020.
F-16 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
7. | Line of Credit, Net (continued) |
Line of credit, net, consisted of the following at December 31, 2021:
Line of credit |
| $ | 36,472,360 |
|
Line of credit unamortized origination fees |
|
| (110,930 | ) |
Line of credit, net |
| $ | 36,361.430 |
|
Line of credit, net, consisted of the following at December 31, 2020:
Line of credit |
| $ | 22,296,965 |
|
Line of credit unamortized origination fees |
|
| (95,739 | ) |
Line of credit, net |
| $ | 22,201,226 |
|
8. | Related Party Transactions |
Servicing fees
Servicing fees of .25% (3% annually) of the principal amount of monthly to the Manager. Servicing fees earned by the Manager each Fund loan are payable amounted to $3,345,804 and $2,595,138, for the years ended December 31, 2021 and 2020, respectively. Servicing feespayable to the Manager amounted to $315,103 and $232,400 as of December 31, 2021 and 2020, respectively.
Incentive fees
As described in Note 3, prior to the Fund’s recapitalization on February 1, 2021, the Manager was eligible to receive incentive fees after payment to members of a Priority Return. Incentive fees amounted to $895 and $112,690 for the years ended December 31, 2021 and 2020, respectively. The Fund had a payable to the Manager for incentive fees of $0 and $873 at December 31, 2021 and 2020, respectively.
Operating expenses
For the years ended December 31, 2021 and 2020, the Manager elected to absorb all operating expenses of the Fund besides those which have been recorded in the Fund’s statements of income and changes in members’ equity.
F-17 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
9. | Loan Concentrations and Characteristics |
The loans are secured by recorded deeds of trust or mortgages. At December 31, 2021, there were 310 secured loans outstanding with 159 borrowers with the following characteristics:
Number of secured loans outstanding |
|
| 310 |
|
Total secured loans outstanding |
| $ | 115,701,463 |
|
Average secured loan outstanding |
| $ | 373,231 |
|
Average secured loan as percent of total secured loans |
|
| 0.32 | % |
Average secured loan as percent of members’ equity |
|
| 0.75 | % |
Largest secured loan outstanding |
| $ | 1,987,500 |
|
Largest secured loan as percent of total secured loans |
|
| 1.72 | % |
Largest secured loan as percent of members’ equity |
|
| 4.01 | % |
Number of secured loans over 90 days past due and still accruing interest |
|
| - |
|
Approximate investment in secured loans over 90 days past due interest and still accruing interest |
| $ | - |
|
Number of secured loans in foreclosure |
| $ | - |
|
Approximate principal of secured loans in foreclosure |
| $ | - |
|
Approximate investment in secured loans on non-accrual status |
| $ | 630,000 |
|
Number of secured loans considered to be impaired |
|
|
| |
Approximate investment in secured loans considered to be impaired |
| $ | - |
|
Average investment in secured loans considered to be impaired |
| $ | - |
|
Approximate amount of foregone interest on loans considered to be impaired |
| $ | - |
|
Estimated amount of impairment on loans considered to be impaired (included in the allowance for loan losses) |
| $ | - |
|
Number of secured loans over 90 days past maturity |
|
| - |
|
Approximate principal of secured loans over 90 days past maturity |
|
| - |
|
Number of states where security is located |
|
| 14 |
|
Number of counties where security is located |
|
| 86 |
|
F-18 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
9. | Loan Concentrations and Characteristics (continued) |
At December 31, 2021, all of the Fund’s loans are secured by recorded deeds of trust or mortgages in a first lien position on real property located throughout the United States. The various states within the United States in which secured property is located are as follows at December 31, 2021:
State |
| Loan Balances |
|
| Percentage |
| ||
California |
| $ | 53,115,227 |
|
|
| 45.90 | % |
Texas |
|
| 14,846,409 |
|
|
| 12.80 | % |
Colorado |
|
| 11,938,111 |
|
|
| 10.30 | % |
Oregon |
|
| 11,560,142 |
|
|
| 10.00 | % |
Other ** |
|
| 24,241,575 |
|
|
| 21.00 | % |
Totals |
| $ | 115,701,463 |
|
|
| 100.00 | % |
The various counties in which secured property is located are as follows at December 31, 2021:
County |
| Loan Balances |
|
| Percentage |
| ||
Santa Clara, California |
| $ | 13,737,259 |
|
|
| 11.887 | % |
Other ** |
|
| 101,964,205 |
|
|
| 88.13 | % |
Totals |
| $ | 115,701,463 |
|
|
| 100.00 | % |
** None of the states or counties included in the “Other” categories above include loan concentrations greater than 10%.
Loans by type of property
Single family residential (1 – 4 units) |
| $ | 94,394,695 |
|
Land/Construction |
|
| 13,300,025 |
|
Multi-family residential (5 or more units) |
|
| 5,096,599 |
|
Commercial |
|
| 2,910,144 |
|
|
| $ | 115,701,463 |
|
The schedule below reflects the balances of the Fund’s secured loans with regards to the aging of interest payments due at December 31, 2021:
Current (0 to 30 days) |
| $ | 115,069,966 |
|
31 to 90 days |
|
| 631,830 |
|
91 days and greater |
|
| - |
|
|
| $ | 115,701,463 |
|
F-19 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
9. | Loan Concentrations and Characteristics (continued) |
At December 31, 2021, all of the Fund’s loans carry a term of six to twelve months; therefore, the entire loan balance of $115,701,463 is scheduled to mature in 2022. The scheduled maturities for 2021 include 8 loans totaling approximately $3,070,000 which are past maturity at December 31, 2021.
The loans are secured by recorded deeds of trust or mortgages. At December 31, 2020, there were 276 secured loans outstanding with 175 borrowers with the following characteristics:
Number of secured loans outstanding |
|
| 276 |
|
Total secured loans outstanding |
| $ | 92,048,404 |
|
Average secured loan outstanding |
| $ | 333,509 |
|
Average secured loan as percent of total secured loans |
|
| 0.36 | % |
Average secured loan as percent of members’ equity |
|
| 1.54 | % |
Largest secured loan outstanding |
| $ | 2,500,000 |
|
Largest secured loan as percent of total secured loans |
|
| 2.72 | % |
Largest secured loan as percent of members’ equity |
|
| 11.51 | % |
Number of secured loans over 90 days past due and still accruing interest |
|
| 3 |
|
Approximate investment in secured loans over 90 days past due interest and still accruing interest |
| $ | 2,700,000 |
|
Number of secured loans in foreclosure |
|
| 1 |
|
Approximate principal of secured loans in foreclosure |
| $ | 530,000 |
|
Number of secured loans on non-accrual status |
|
| - |
|
Approximate investment in secured loans on non-accrual status |
| $ | - |
|
Number of secured loans considered to be impaired |
|
| - |
|
Approximate investment in secured loans considered to be impaired |
| $ | - |
|
Average investment in secured loans considered to be impaired |
| $ | - |
|
Approximate amount of foregone interest on loans considered to be impaired |
| $ | - |
|
Estimated amount of impairment on loans considered to be impaired (included in the allowance for loan losses) |
| $ | - |
|
F-20 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
9. | Loan Concentrations and Characteristics (continued) |
Number of secured loans over 90 days past maturity |
|
| 3 |
|
Approximate principal of secured loans over 90 days past maturity |
| $ | 2,700,000 |
|
Number of states where security is located |
|
| 18 |
|
Number of counties where security is located |
|
| 79 |
|
At December 31, 2020, all of the Fund’s loans are secured by recorded deeds of trust or mortgages in a first lien position on real property located throughout the United States. The various states within the United States in which secured property is located are as follows at December 31, 2020:
State |
| Loan Balances |
|
| Percentage |
| ||
California |
| $ | 45,258,345 |
|
|
| 49.17 | % |
Oregon |
|
| 14,405,301 |
|
|
| 15.65 | % |
Other ** |
|
| 32,384,758 |
|
|
| 35.18 | % |
Totals |
| $ | 92,048,404 |
|
|
| 100.00 | % |
The various counties in which secured property is located are as follows at December 31, 2020:
County |
| Loan Balances |
|
| Percentage |
| ||
Santa Clara, California |
| $ | 9,654,493 |
|
|
| 10.49 | % |
Other ** |
|
| 82,393,911 |
|
|
| 89.51 | % |
Totals |
| $ | 92,048,404 |
|
|
| 100.00 | % |
** None of the states or counties included in the “Other” categories above include loan concentrations greater than 10%.
Loans by type of property
Single family residential (1 – 4 units) |
| $ | 77,179,312 |
|
Commercial |
|
| 5,982,527 |
|
Land/Construction |
|
| 5,854,282 |
|
Multi-family residential (5 or more units) |
|
| 3,032,283 |
|
|
| $ | 92,048,404 |
|
F-21 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
9. | Loan Concentrations and Characteristics (continued) |
The schedule below reflects the balances of the Fund’s secured loans with regards to the aging of interest payments due at December 31, 2020:
Current (0 to 30 days) |
| $ | 89,348,906 |
|
31 to 90 days |
|
| - |
|
91 days and greater |
|
| 2,699,498 |
|
|
| $ | 92,048,404 |
|
At December 31, 2020, all of the Fund’s loans carry a term of six to twelve months; therefore, the entire loan balance of $92,048,404 is scheduled to mature in 2021. The scheduled maturities for 2021 include 4 loans totaling approximately $3,540,000 which are past maturity at December 31, 2020.
It is the Fund’s experience that often times mortgage loans are either extended or repaid before contractual maturity dates, refinanced at maturity or may go into default and not be repaid by the contractual maturity dates. Therefore, the above tabulation is not a forecast of future cash collections.
10. | Real Estate Held for Sale Concentrations and Characteristics |
The following schedule reflects the net costs of real estate properties acquired through or in lieu of foreclosure and held for sale, if any, and the recorded reductions to estimated fair values, including estimated costs to sell when applicable, and other related activity as of and for the year ended December 31, 2021:
Beginning balance |
| $ | 1,881,701 |
|
Costs of real estate acquired through or in lieu of foreclosure |
|
| 943,832 |
|
Improvement costs |
|
| 64,397 |
|
Sales of real estate |
|
| - |
|
Ending balance |
| $ | 2,889,930 |
|
F-22 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
10. | Real Estate Held for Sale Concentrations and Characteristics (continued) |
The following schedule reflects the net costs of real estate properties acquired through or in lieu of foreclosure and held for sale, if any, and the recorded reductions to estimated fair values, including estimated costs to sell when applicable, and other related activity as of and for the year ended December 31, 2020:
Beginning balance |
| $ | 1,776,281 |
|
Costs of real estate acquired through or in lieu of foreclosure |
|
| 1,398,821 |
|
Improvement costs |
|
| (182,651 | ) |
Sales of real estate |
|
| (1,476,052 | ) |
Ending balance |
| $ | 1,881,701 |
|
At December 31, 2021, the real estate held for sale properties residential properties Included two single family in Alameda County, California.
At December 31, 2020, the real estate held for sale properties residential property Included one single family in Alameda County, California.
11. | Rental Property |
The Fund sold two its two remaining rental properties during 2021.
The Fund rented four residential buildings during 2020 and sold two rental properties during 2020. Rental property consisted of the following at December 31, 2020:
Land |
| $ | 5,460 |
|
Buildings and building improvements |
|
| 762,460 |
|
|
|
| 767,920 |
|
Accumulated depreciation and amortization |
|
| (34,565 | ) |
|
| $ | 733,355 |
|
At December 31, 2021, there were no rental properties.
At December 31, 2020, the rental properties included two single family residential properties located in Cook County, Illinois.
Depreciation expense for the year ended December 31, 2021 amounted to $5,525.
Depreciation expense for the year ended December 31, 2020 amounted to $240,873.
F-23 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2021 and 2020
12. | Commitments and Contingencies |
Construction loans
At December 31, 2021, the Fund had 125 approved construction loans with a total borrowing limit of approximately $25,330,000. 92 loans had undisbursed construction funds, totaling approximately
$14,240,000. Disbursements are made at various completed phases of the construction project. Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
At December 31, 2020, the Fund had 114 approved construction loans with a total borrowing limit of approximately $16,400,000. 97 loans had undisbursed construction funds, totaling approximately
$10,100,000. Disbursements are made at various completed phases of the construction project. Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
Legal proceedings
The Fund is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a significant adverse effect on the results of operations or financial position of the Fund.
F-24 |