REDWOOD MORTGAGE INVESTORS VI
(a California Limited Partnership)
Index to Form 10-K
December 31, 2007
Part I | ||
Page No. | ||
Item 1 – Business | 4 | |
Item 2 – Properties | 9 | |
Item 3 – Legal Proceedings | 9 | |
Item 4 – Submission of Matters to a Vote of Security Holders (Partners) | 9 | |
Part II | ||
Item 5 – Market for the Registrant’s “Limited Partnership Units” and Related Unitholder Matters | 9 | |
Item 6 – Selected Financial Data | 10 | |
Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
Item 7a – Quantitative and Qualitative Disclosures About Market Risk | 19 | |
Item 8 – Financial Statements and Supplementary Data | 22 | |
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 47 | |
Item 9a – Controls and Procedures | 47 | |
Item 9b – Other Information | 47 | |
Part III | ||
Item 10 – Directors, Executive Officers and Corporate Governance | 47 | |
Item 11 – Executive Compensation | 48 | |
Item 12 – Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters | 49 | |
Item 13 – Certain Relationships and Related Transactions, and Director Independence | 49 | |
Item 14 – Principal Accountant Fees and Services | 49 | |
Part IV | ||
Item 15 – Exhibits, Financial Statements and Schedules | 50 | |
Signatures | 51 | |
Certifications | 52 |
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2007
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 000-17573
REDWOOD MORTGAGE INVESTORS VI,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California | 94-3031211 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification) |
900 Veterans Blvd., Suite 500, Redwood City, CA | 94063 |
(address of principal executive offices) | (zip code) |
(650) 365-5341 |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: | NONE |
Securities registered pursuant to Section 12 (g) of the Act: | Limited Partnership Units |
2
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.
Yes | No | XX |
Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section 15(d) of the Securities Act of 1934, as amended.
Yes | No | XX |
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | XX | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer | X |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes | No | XX |
As of June 30, 2007, the aggregate value of limited partnership Units held by non-affiliates was $6,181,674. This calculation is based on the capital account balance of the limited partners and excludes partnership Units held by the general partners.
Documents incorporated by reference:
Portions of the Prospectus for Redwood Mortgage Investors VI, included as part of the form S-11 Registration Statement, SEC File No. 33-12519 dated September 3, 1987 and Supplement No. 6 dated May 16, 1989, are incorporated in Parts II, III, and IV.
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Part I
Item 1 – Business
Redwood Mortgage Investors VI is a California Limited Partnership (the “Partnership”). Michael R. Burwell, an individual, and Gymno Corporation, a California corporation, are the general partners. The address of the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership’s primary purpose is to invest its capital in first and second deeds of trust secured by California properties. Loans are arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnership’s objectives are to make investments which will: (i) provide the maximum possible cash returns which limited partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have earnings credited to their capital accounts and used to invest in Partnership activities; and (ii) preserve and protect the Partnership’s capital. The Partnership’s general business is more fully described under the section entitled “Investment Objectives and Criteria”, pages 23-26 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated by reference.
The Partnership was formed in September 1987, with an approved 120,000 Units of $100 each ($12,000,000). The Units were offered on a “best efforts” basis through broker/dealer member firms of the Financial Industry Regulatory Agency (FINRA). It immediately began issuing Units and began investing in loans in October 1987. The offering terminated in September 1989, and as of that date 97,725.94 limited partner Units were sold realizing proceeds of $9,772,594. At December 31, 2007, the Partnership had a balance of secured loans totaling $4,944,898 with interest rates thereon ranging from 8.50% to 10.50%.
Currently first, second and third mortgage loans comprise 55.91%, 40.05% and 4.04% respectively, of the total amount of secured loan portfolio. Single Family (1-4 units) homes comprise 57.67% of the secured mortgage loans, down from 79.1% in 2006. Commercial secured loans comprise 31.70% of the portfolio, an increase of 17.04% from 2006. The major concentration of secured loans, comprising 52.14% of the total secured loans, is in the nine counties that comprise the San Francisco Bay Area. The remaining balance is primarily in counties adjacent to the San Francisco Bay Area and in Northern California (32.63%) and in Southern California (15.23%). Currently secured loan amounts average $206,037. Some of the secured loans are fractionalized between affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction, which is our loan plus any senior loans, divided by the property’s appraised value, subtracted from 100%, stood at 42.00%, based on senior loans and appraised values at the inception of our loan. Generally, the greater the equity, the greater the protection for the lender. The Partnership’s loan portfolio did not have any property in foreclosure as of the end of December 2007.
Delinquencies are discussed under Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2007 and 2006 the Partnership did not take back any collateral from defaulted borrowers.
For the years 2005, 2006 and 2007, the Partnership’s revenues were $522,282, $484,648 and $511,604, respectively. The changes in revenues were the result of the combination of varying average loan balances, and the related average interest rates. For 2005, 2006 and 2007 these combinations were $4,876,596 and 9.13%, $4,830,820 and 9.20% and $4,912,259 and 9.62%, respectively. Cash flow generated from mortgage interest and loan pay-downs and pay-offs was used to meet limited partner capital and earnings liquidations and the excess was used to make mortgage loans or for other proper Partnership purposes. Withdrawals by limited partners were $457,825, $468,966 and $527,873 for the three years ended December 31, 2005, 2006 and 2007, respectively.
During the year 2007, the Partnership’s annualized yield on compounding accounts was 6.25% and on monthly distributing accounts it was 6.08%.
4
Competition and General Economic Conditions.
The Partnership’s major competitors in providing mortgage loans are banks, savings and loan associations, thrifts, conduit lenders, mortgage brokers, and other entities both larger and smaller than the Partnership. Many of these lenders are not portfolio lenders and rely upon their ability to sell notes they have funded in order to provide further capital resources to continue their lending operations. In addition, many competitors, due to their size, are unable to regularly entertain loan requests at or above $1,000,000, thus reducing the competition and allowing the Partnership to provide higher quality loans and/or higher returns.
From 2004 through 2006, competition for real estate loans was strong, particularly among residential lenders. Partly due to competitive factors, underwriting standards decreased and innovative loan products developed. As a result, many borrowers who previously had a difficult time obtaining real estate financing were able to obtain real estate loans. In 2007, real estate purchase volumes continued to decline from their highs in 2005. Accompanying lower purchase volumes, loan demand decreased, values began to decline and loan delinquencies began to increase. Together, these factors, as well as others, contributed to a reduced demand for mortgage backed securities. Lenders reliant upon the sale of their notes to provide additional capital for lending faced a credit squeeze, pressure on capital, and earnings. During 2007, over 250 lenders ceased to do business in the United States, resulting in diminished competition in the lending industry. The general partners believe the lower level of competition may provide an opportunity for the Partnership to seek well-qualified borrowers with desirable security for its lending operations. It is possible that coupon rates may rise as competition lessens, and as interest rate spreads increase a clearer risk return equation may develop.
During 2007, the national economy itself has decelerated. Real Gross Domestic Product, the output of goods and services produced by labor and property located in the United States increased at an annual rate of 0.6% in the fourth quarter of 2007 as compared to 2.1% in the fourth quarter of 2006. For the first through fourth quarters of 2007, Real Gross Domestic Product was 0.6%, 3.8%, 4.9% and 0.6% as compared to 4.8%, 2.4%, 1.1% and 2.1% for the first through fourth quarters of 2006. The Federal Reserve is not forecasting a recession but does anticipate slow growth for this year and higher unemployment.
The unemployment rate for the United States increased in the fourth quarter of 2007 to 5.0% as compared to 4.7% for the third quarter, 4.7% for the second quarter and 4.5% for the first quarter. In January and February of 2008, the national unemployment rate fell to 4.9% and 4.8%, respectively. On a comparison basis, the annual unemployment rates for the United States were 4.6% for 2007, 4.6% for 2006, 5.1% for 2005 and 5.5% for 2004. In California, unemployment rates increased 1% year over year from 4.9% in December 2006 to 5.9% as of December 2007. Unemployment is a significant indicator of a borrower’s ability to make payments.
Month to month, inflation has been volatile throughout 2006 and 2007. The cost of oil, a component in inflation, has fluctuated but followed a significant upward trend rising to $110 per barrel in March of 2008. The Consumer Price Index for All Urban Consumers decreased in December of 2007 by 0.1% before seasonal adjustment, but was up by 4.1% for the year. Consumer Price Index increases were 2.5% for 2006, 3.4% for 2005 and 1.9% for 2004. At the same time, interest rates have been declining as the Federal Reserve has exhibited strong resolve in attempting to stimulate the economy through a variety of means, including lowering the Federal Funds Rate. After having left the Federal Funds Rate unchanged at 5.25% for more than two years, in September 2007 the Federal Reserve acted to decrease the Federal Funds Rate by 0.50%, then again by 0.25% in October 2007, 0.25% in December 2007, 1.25% in January 2008, and 0.75% in March 2008 to a level of 2.25%. Long term interest rates, represented by the 10 year treasury bonds, have responded somewhat to the lowered Federal Funds Rates. However, as long term rates are not directly related to the Federal Funds Rate, it is likely to take some time before the lowering of the Federal Funds Rate will have its full effect. As of September 30, 2007, the 10 year Treasury yield was 4.61%, at December 31, 2007 it was 4.04%, and at March 22, 2008 it was 3.34%. The lowering of the Federal Funds Rate has also had an effect of lowering interest rates on longer term maturities. These lower interest rates help the affordability of owning real estate.
5
Mortgage rates have responded slowly to the Federal Reserves actions to lower interest rates. Freddie Mac reports average interest rates for 30 year fixed rate conforming loans were 6.16% for March of 2007, 6.66% for June of 2007, 6.38% for September of 2007, 6.10% for December of 2007 and 5.87% on March 20, 2008. Historically, the annual average rate for 30 year fixed rate conforming mortgages has been 6.34% in 2007, 6.41% in 2006, 5.87% in 2005, and 5.83% in 2004. The recent downward trend in interest rates on real estate loans should begin to stimulate real estate sales volumes, which have been declining since their high point in 2005.
On a national level, both residential sales volumes and median home prices dropped in 2007. Sales of existing homes as reported by the National Association of Realtors declined from 7,076,000 in 2005 to 6,478,000 in 2006 and to 5,652,000 in 2007. The median national sales price of existing homes was $219,000 in 2005. It increased to $221,900 in 2006 and then declined to $219,000 in 2007.
The Partnership is expecting a reduced number of lenders in the marketplace along with strengthened underwriting standards throughout the industry. Each of these factors is expected to lead to increased lending opportunities. Nevertheless, in many of our lending areas, residential real estate values have been declining, which will require the Partnership to be diligent in determining appropriate loan to value parameters. In addition, the slowing economy will create less demand and perhaps further increases in unemployment, which might make it more difficult for borrowers to meet their monetary obligations. Lowered interest rates and the Federal Reserve’s efforts to further stimulate the economy could mitigate these factors and have positive effects on the Partnership and borrowers’ abilities to meet their financial obligations.
6
Secured Loan Portfolio
As of December 31, 2007, a summary of the Partnership’s secured loan portfolio is set forth below.
Loans as a Percentage of Appraised Value |
First Trust Deed Loans | $ | 2,764,524 | ||
Second Trust Deed Loans | 1,980,374 | |||
Third Trust Deed Loans | 200,000 | |||
Total loans | $ | 4,944,898 | ||
Priority Positions due other Lenders at Time of Loan | 5,715,592 | |||
Total Debt | $ | 10,660,490 | ||
Appraised Property Value at time of loan | $ | 18,380,414 | ||
Total Secured Loans as a % of Appraisal based on | ||||
appraisals and prior liens at date of loan | 58.00 | % |
Number of Secured Loans Outstanding | 24 |
Average Secured Loan | 206,037 | |||
Average Secured Loan as a % of Partners’ Capital | 3.37 | % | ||
Largest Secured Loan Outstanding | 400,000 | |||
Largest Secured Loan as a % of Partners’ Capital | 6.54 | % | ||
Largest secured Loan as a % of Total Assets | 6.53 | % |
Secured Loans as a Percentage of Total Loans | Percent | |||
First Trust Deeds | 55.91 | % | ||
Second Trust Deeds | 40.05 | % | ||
Third Trust Deeds | 4.04 | % | ||
Total | 100.00 | % |
Secured Loans by Type of Property | Amount | Percent | ||||
Single Family (1-4 units) | $ | 2,851,528 | 57.67 | % | ||
Commercial | 1,567,745 | 31.70 | % | |||
Apartments | 525,625 | 10.63 | % | |||
Total | $ | 4,944,898 | 100.00 | % |
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The following is a distribution of secured loans outstanding as of December 31, 2007 by California Counties:
Total | ||||||
Secured | ||||||
California County | Loans | Percent | ||||
San Francisco Bay Area Counties | ||||||
San Francisco | $ | 1,100,625 | 22.26 | % | ||
Alameda | 905,488 | 18.31 | % | |||
Solano | 355,245 | 7.18 | % | |||
Contra Costa | 216,981 | 4.39 | % | |||
Napa | — | — | ||||
San Mateo | — | — | ||||
Marin | — | — | ||||
Santa Clara | — | — | ||||
Sonoma | — | — | ||||
2,578,339 | 52.14 | % | ||||
San Francisco Bay Area Adjacent Counties | ||||||
San Joaquin | 437,500 | 8.85 | % | |||
Monterey | 349,383 | 7.07 | % | |||
Mariposa | 121,671 | 2.46 | % | |||
Stanislaus | 107,543 | 2.17 | % | |||
1,016,097 | 20.55 | % | ||||
Other California Counties | ||||||
Los Angeles | 296,988 | 6.01 | % | |||
Butte | 289,569 | 5.86 | % | |||
Orange | 249,207 | 5.04 | % | |||
San Bernardino | 206,863 | 4.18 | % | |||
El Dorado | 200,000 | 4.04 | % | |||
Shasta | 107,835 | 2.18 | % | |||
1,350,462 | 27.31 | % | ||||
Total | $ | 4,944,898 | 100.00 | % |
Number of Loans in Foreclosure | 0 | $ | — |
Scheduled maturity dates of secured loans as of December 31, 2007 are as follows:
Prior to December 31, 2008 | $ | 939,569 | ||
Between January 1, 2009 and December 31, 2009 | 992,745 | |||
Between January 1, 2010 and December 31, 2010 | 596,140 | |||
Between January 1, 2011 and December 31, 2011 | 1,556,694 | |||
Between January 1, 2012 and December 31, 2012 | 859,750 | |||
Thereafter | — | |||
$ | 4,944,898 |
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The Partnership’s largest loan in the principal amount of $400,000 represents 8.09% of outstanding secured loans and 6.53% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans.
The scheduled maturities for 2008 includes no loans past maturity at December 31, 2007. The Partnership occasionally allows borrowers to continue to make the regular interest payments on debt past maturity for periods of time. In many instances the interest rate on these past maturity loans is higher than currently existing interest rates. It is the Partnership’s experience loans can be refinanced or repaid before and after the maturity date. Therefore, the table of scheduled maturities is not a forecast of future cash receipts.
Item 2 – Properties
The Partnership did not take back any collateral security from borrowers in 2007 and 2006.
The Partnership owns, through previous foreclosures, one property: an undeveloped parcel of land located in East Palo Alto, California. The land is owned with two other affiliated partnerships. The Partnership’s net investment in the land at December 31, 2007 is $130,215. The property is currently listed for sale.
Item 3 – Legal Proceedings
In the normal course of business, the Partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust. None of these actions would typically be of any material importance. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Item 4 – Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
Part II
Item 5 – Market for the Registrant’s “Limited Partnership Units” and Related Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through broker-dealer member firms of the Financial Industry Regulatory Authority (FINRA) on a “best efforts” basis (as indicated in Part I item 1). All Units were sold to California residents. Investors have the option of withdrawing earnings on a monthly, quarterly or annual basis or having their earnings retained in the Partnership. Limited partners may withdraw from the Partnership in accordance with the terms of the partnership agreement subject to possible early withdrawal penalties. There is no established public trading market for the Units. As of December 31, 2007, 342 limited partners had a total capital balance of $6,106,854.
A description of the Partnership’s Units, transfer restrictions, and withdrawal provisions is more fully described under the section entitled “Description of Units” and “Summary of the Limited Partnership Agreement”, pages 38-42 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated herein by reference.
During the years 2005, 2006 and 2007, the Partnership’s annualized yield on compounding accounts was 6.15%, 6.13% and 6.25%, respectively. During the years 2005, 2006 and 2007, the Partnership’s annualized yield on monthly distributing accounts was 5.99%, 5.96% and 6.08%, respectively.
9
Item 6 – Selected Financial Data
Redwood Mortgage Investors VI began operations in October, 1987. Its financial condition and results of operation as of and for the five years ended December 31, 2007 were:
Balance Sheets
December 31, |
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Cash | $ | 515,852 | $ | 161,114 | $ | 4,361,983 | $ | 1,090,027 | $ | 32,160 | ||||||||||
Loans | ||||||||||||||||||||
Loans, secured by deeds of trust | 4,944,898 | 5,493,828 | 2,021,973 | 5,225,128 | 5,255,620 | |||||||||||||||
Loans, unsecured, net | 769,858 | 712,643 | 144,098 | 261,276 | 242,462 | |||||||||||||||
Interest and other receivables | ||||||||||||||||||||
Accrued interest and late fees | 77,320 | 68,329 | 22,138 | 61,364 | 54,562 | |||||||||||||||
Advances on loans | 578 | 1,004 | 51 | 2,890 | 4,091 | |||||||||||||||
Receivable from affiliate | 12,003 | 3,414 | — | — | — | |||||||||||||||
Less allowances for loan losses | (323,916 | ) | (294,507 | ) | (315,379 | ) | (315,751 | ) | (279,865 | ) | ||||||||||
Real estate held, net | 130,215 | 130,215 | 130,215 | 128,902 | 1,312,773 | |||||||||||||||
Total assets | $ | 6,126,808 | $ | 6,276,040 | $ | 6,365,079 | $ | 6,453,836 | $ | 6,621,803 |
Liabilities and Partners’ Capital
December 31, |
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Liabilities | ||||||||||||||||||||
Accounts payable | $ | — | $ | — | $ | — | $ | 11,487 | $ | 13,064 | ||||||||||
Payable to affiliates | 10,193 | 10,194 | 8,572 | 12,541 | 12,496 | |||||||||||||||
Total liabilities | 10,193 | 10,194 | 8,572 | 24,028 | 25,560 | |||||||||||||||
Partners’ capital | ||||||||||||||||||||
Limited partners’ capital, subject | ||||||||||||||||||||
to redemption | 6,106,854 | 6,256,085 | 6,346,746 | 6,420,047 | 6,586,482 | |||||||||||||||
General partners’ capital | 9,761 | 9,761 | 9,761 | 9,761 | 9,761 | |||||||||||||||
Total partners’ capital | 6,116,615 | 6,265,846 | 6,356,507 | 6,429,808 | 6,596,243 | |||||||||||||||
Total liabilities | ||||||||||||||||||||
and partners’ capital | $ | 6,126,808 | $ | 6,276,040 | $ | 6,365,079 | $ | 6,453,836 | $ | 6,621,803 |
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Statements of Income
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Gross revenue | $ | 511,604 | $ | 484,648 | $ | 522,282 | $ | 538,737 | $ | 491,640 | ||||||||||
Expenses | 129,140 | 102,522 | 133,874 | 191,585 | 158,524 | |||||||||||||||
Net income | $ | 382,464 | $ | 382,126 | $ | 388,408 | $ | 347,152 | $ | 333,116 | ||||||||||
Net income: | ||||||||||||||||||||
to general partners (1%) | $ | 3,822 | $ | 3,821 | $ | 3,884 | $ | 3,472 | $ | 3,331 | ||||||||||
to limited partners (99%) | 378,642 | 378,305 | 384,524 | 343,680 | 329,785 | |||||||||||||||
$ | 382,464 | $ | 382,126 | $ | 388,408 | $ | 347,152 | $ | 333,116 | |||||||||||
Net income per $1,000 invested | ||||||||||||||||||||
by limited partners for | ||||||||||||||||||||
entire period: | ||||||||||||||||||||
- where income is compounded | $ | 62 | $ | 61 | $ | 62 | $ | 54 | $ | 50 | ||||||||||
- where partner receives income | ||||||||||||||||||||
in monthly distributions | $ | 61 | $ | 60 | $ | 60 | $ | 53 | $ | 49 |
Annualized yields when income is compounded or distributed monthly for the years 2003 through 2007 are outlined in the table below:
Compounded | Distributed | |||||||
2003 | 5.00 | % | 4.89 | % | ||||
2004 | 5.40 | % | 5.27 | % | ||||
2005 | 6.15 | % | 5.99 | % | ||||
2006 | 6.13 | % | 5.96 | % | ||||
2007 | 6.25 | % | 6.08 | % |
The average annualized yield, when income is compounded from inception through December 31, 2007 was 6.84%. The average annualized yield, when income is distributed monthly, from inception through December 31, 2007 was 6.64%.
Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses during the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate acquired through foreclosure. At December 31, 2007, we owned one real property that we had acquired through foreclosure in a prior year.
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Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. 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 values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.
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 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 management to have serious doubts about the collectibility 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.
Real estate held includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the property, plus any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell.
The Partnership periodically compares the carrying value of real estate to expected future undiscounted 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 fair value.
Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan and real estate owned losses. Actual results could vary from the aforementioned provisions for losses.
Forward-Looking Statements.
Certain statements in this Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals, 2008 annualized yield estimates, additional foreclosures in 2008, expectations regarding the Partnership’s level of delinquency, plans to develop certain properties, beliefs relating to the impact on the Partnership from current conditions and trends in the “sub prime” lending markets, beliefs regarding the Partnership recovering the full value of its investment in certain properties, the expectation that borrower foreclosures will not have a material effect on liquidity, the use of excess cash flow and the intention not to sell the Partnership’s loan portfolio. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the Company has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-K are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partners, which arranges, services and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate and general partners are paid pursuant to the partnership agreement and are determined at the sole discretion of the general partner subject to limitations imposed by the partnership agreement. In the past the general partners have elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated.
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· | Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. For the years ended December 31, 2007, 2006 and 2005 loan brokerage commissions paid by the borrowers were $42,839, $124,116, and $52,248, respectively. |
· | Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnership’s loans are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Mortgage servicing fees of $0, $34,885 and $56,508 were incurred for the years ended December 31, 2007, 2006 and 2005, respectively. In 2007 and 2006, Redwood Mortgage Corp. waived mortgage servicing fees totaling $48,506 and $9,824, respectively. |
These servicing fees, including the 2007 and 2006 waived amounts, were charged at 1%, on an annual basis, of the outstanding principal balances. If the maximum mortgage servicing fee of 1.5%, on an annual basis, had been charged to the Partnership, then net income would have been reduced by approximately $24,253, $22,355 and $28,254 in 2007, 2006 and 2005, respectively. Reducing net income reduces the annualized yields. An increase or decrease in this fee within the limits set by the Partnership’s agreement directly impacts the yield to the limited partners.
· | Asset Management Fees The general partners receive monthly fees for managing the Partnership’s portfolio and operations up to 1/32 of 1% of the ‘net asset value’ (3/8 of 1% on an annual basis). For the years ended December 31, 2007, 2006 and 2005 management fees totaled $7,785, $5,942 and $12,031 respectively. The general partners waived $15,571, $15,867 and $12,061 of additional asset management fees during 2007, 2006 and 2005, respectively. |
· | Other Fees The partnership agreement provides that the general partners or their affiliates may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. |
· | Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall not exceed 1%. |
· | Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. |
· | Contributed Capital The general partners jointly and severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offerings are received from the limited partners. As of December 31, 2007 and 2006, a general partner, Gymno Corporation, had contributed $9,761 as capital in accordance with Section 4.02(a) of the partnership agreement. |
13
Results of Operations – For the years ended December 31, 2007, 2006 and 2005
Changes in the Partnership’s operating results for the years ended December 31, 2007 and 2006 are discussed below.
Changes for the years ended December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Dollars | Percent | Dollars | Percent | |||||||||||||
Revenue | ||||||||||||||||
Interest on loans | $ | 28,079 | 6.32 | % | $ | (45,639 | ) | (9.32 | )% | |||||||
Interest-interest bearing accounts | (8,982 | ) | (26.44 | )% | 17,227 | 102.85 | % | |||||||||
Late fee and other income | 7,859 | 122.76 | % | (9,222 | ) | (59.02 | )% | |||||||||
26,956 | 5.56 | % | (37,634 | ) | (7.21 | )% | ||||||||||
Expenses | ||||||||||||||||
Mortgage servicing fees | (34,885 | ) | (100.00 | )% | (21,623 | ) | (38.27 | )% | ||||||||
Asset management fees | 1,843 | 31.02 | % | (6,089 | ) | (50.61 | )% | |||||||||
Clerical costs through Redwood Mortgage Corp. | (1,216 | ) | (14.47 | )% | (806 | ) | (8.75 | )% | ||||||||
Provisions for losses on loans and real estate held | 50,615 | 242.50 | % | (19,187 | ) | (1,138.69 | )% | |||||||||
Professional services | 3,090 | 5.58 | % | 13,673 | 32.78 | % | ||||||||||
Other | 7,171 | 38.18 | % | 2,680 | 16.64 | % | ||||||||||
26,618 | 25.96 | % | (31,352 | ) | (23.420 | % | ||||||||||
Net income | $ | 338 | 0.09 | % | $ | (6,282 | ) | (1.62 | )% |
Please refer to the above table throughout the discussions of Results of Operations.
The increase in interest on loans for 2007 was due to an increase in the average loan portfolio balance to $4,912,259 during 2007 from an average of $4,830,820 in 2006. The increase in income was also enhanced by an increase in the average interest rate earned from 9.20% in 2006 to 9.62% for 2007. The decrease in interest on loans for 2006 was due to the decline in the average loan portfolio balance to $4,830,820 in 2006 from an average loan portfolio balance of $4,876,596 in 2005 and to the Partnership collecting $43,021 in additional interest in 2005 from a loan previously categorized as impaired. This loan was paid off in 2005.
Interest from interest bearing accounts decreased in 2007 due a reduction in the average account balances from $1,490,983 in 2006 to $885,637 for 2007. The increase in 2006 represents interest earned on a larger average balance, which increased to $1,490,983 for 2006 from an average balance of $1,220,447 in 2005. Average interest rates for the years ended December 31, 2007, 2006 and 2005 were 2.82%, 2.28%, and 1.37%, respectively.
The increase in late fees and other income for 2007 was due to increases of $1,173 for late fees, $3,364 for early withdrawal penalties and $3,322 for miscellaneous items. The decrease for 2006 was due to decreases of miscellaneous fees of $5,709, early withdrawal penalties of $1,197 and reduction in late charges of $2,316.
The decrease in mortgage servicing fees for 2007 was due to a waiver of these fees by Redwood Mortgage Corp. The decrease in mortgage servicing fees for 2006 was due to 2005 results being boosted by the payment of servicing fees of $9,439 on an impaired loan, and Redwood Mortgage waiving part of their mortgage servicing fees totaling $9,824 in 2006. The average loan portfolio balance also decreased in 2006 to $4,830,820 from an average loan portfolio balance of $4,876,596 in 2005.
14
The slight increase in asset management fees for 2007 is due to a waiver in 2006 of $1,891 by the general partners. The decrease in asset management fees for 2006 was primarily due to the Partnership paying the full 3/8% asset management fee during the final three months of 2005 instead of a reduced fee of 1/8% as agreed upon by the general partners. In 2006 the Partnership paid asset management fees at a reduced rate of 1/8% for three quarters only and waived $1,891 for one quarter, resulting in total waived asset management fees of $15,867 in 2006. The reduction was also due to a reduction in limited partners’ capital from $6,346,746 in 2005 to $6,256,085 in 2006.
The decrease in clerical costs for both 2007 and 2006 was primarily attributable to reduced clerical costs in servicing this Partnership.
Provisions for loan losses increased in 2007. Management increased the allowance for loan losses in light of the increase in loans under workout agreements from one ($152,698) in 2006 to three ($423,045) at year end 2007, the increase in the number of delinquent loans to three ($541,952) in 2007 from two ($552,698) in 2006, and due to the weaker overall real estate economic conditions. Also, in 2006, there was a recovery of $ 20,872 in the provision. The decrease in the provision for losses on loans and real estate held for 2006 was due to the Partnership not allocating any additional provision and recording a recovery of $20,872 in 2006. The general partners believed the reserve for loan losses of $323,916 and $294,507 as of December 31, 2007 and 2006, respectively, was considered to be adequate.
The increase in professional services for 2007 and 2006 was due to increased fees and the timing of professional services in 2006. The increases were in both general accounting and attorney costs.
The increase in other expenses for both 2007 and 2006 was primarily due to costs associated with the upkeep of existing real estate properties held. In 2007, 2006 and 2005 the upkeep costs were $18,687, $12,125, and $8,507, respectively.
As of September 2, 1989, the date the offering of the Partnership’s limited partner Units was formally closed, the Partnership had sold 97,725.94 limited partner Units and its contributed capital totaled $9,772,594 of the approved $12,000,000 issue, in Units of $100 each. On December 31, 2007 the net capital of limited and general partners totaled $6,116,615.
The Partnership began funding loans in October 1987. The Partnership’s secured loans outstanding as of December 31, 2007, 2006 and 2005 were $4,944,898, 5,493,828 and $2,021,973, respectively. The average loan balances over this time period have remained relatively stable until November, 2005 when two loans totaling $3,060,100 were paid off and the loan portfolio balance reduced to $2,021,973. It took a number of months to find and select appropriate loan investments to replace the large loan repayments in late 2005. The Partnership utilized income, loan pay offs and proceeds from the sale of real estate held properties to meet limited partner capital liquidations and make additional loans. During the years ended December 31, 2007, 2006 and 2005, loan principal collections and sale proceeds of the properties exceeded limited partner liquidations and Partnership expenses.
In 2007, the Partnership funded $1,654,246 in new loans versus pay-offs of $2,203,176. The Partnership was unable to immediately invest all of the pay-offs back into new loans. Therefore, loans funded in 2007 appear substantially less than loan pay-offs. Cash held by the Partnership generated from these loan pay-offs is invested in interest bearing accounts until a new loan opportunity is presented.
The Partnership’s operating results and delinquencies are within the normal range of the general partners’ expectations, based upon their experience in managing similar partnerships over the last twenty years. Foreclosures are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity.
Cash is continually being generated from interest earnings, late charges, prepayment penalties, amortization of principal, proceeds from sale of real estate held and loan pay-offs. Currently, this amount exceeds Partnership expenses and earnings and partner liquidation requirements. As loan opportunities become available, excess cash and available funds are invested in new loans.
15
Allowance for Losses.
The general partners periodically review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these loans, real estate held expenses, sales activities, and borrower’s payment records and other data relating to the loan portfolio. Data on the local real estate market and on the national and local economy are studied. Based upon this and other information, the allowance for loan losses is increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect we will on occasion take back real estate security. At December 31, 2007 the Partnership had three loans past due 90 days or more in interest payments totaling $541,952. As of December 31, 2007 the Partnership had no loans, past maturity in excess of 90 days. The Partnership had no filed notices of default at December 31, 2007. The Partnership occasionally enters into workout agreements with borrowers who are past maturity or delinquent in their regular payments. The Partnership had three workout agreements as of December 31, 2007, totaling $423,045. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and/or allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. Management expects the number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. These workouts and delinquencies have been considered when management arrived at an appropriate allowance for loan losses and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of possible swings and the general partners’ inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners.
As of December 31, 2007, 2006 and 2005 the Partnership’s real estate held balance was $130,215 in each year. The Partnership has not taken back any collateral security from borrowers in 2006 or 2007. The Partnership’s real estate held inventory consists of one property, an undeveloped piece of land. The land is located in East Palo Alto, California. The Partnership has held its interest in this land since April, 1993. The land is owned with two other affiliated partnerships. The general partners believe the current market value of the property significantly exceeds the Partnership’s and its affiliates’ net investment in the property. This property is currently listed for sale.
Management provided $29,743 and recorded ($20,872) as (recovery)/provision for loan losses for the years ended December 31, 2007 and 2006, respectively. As of December 31, 2007, the allowance for loan losses totaling $323,916 is considered to be adequate. The Partnership may restructure loans. This is done through the modification of an existing loan or by re-writing a whole new loan. It could involve, among other changes, an extension in maturity date, a reduction in repayment amount, a reduction in interest rate, or granting an additional loan. In 2002, the Partnership restructured four previously impaired loans into two new secured loans with a lower interest rate, and two unsecured loans. The amount restructured was $3,060,100. The two secured restructured loans were paid off in November, 2005. During 2002, Redwood Mortgage Corp. provided an indemnity to the Partnership whereby it has agreed to indemnify and hold harmless, the Partnership from any expenses or losses (in excess of the then established reserves) incurred by the Partnership with respect to these four restructured loans. A partial paydown has been received against the two unsecured loans. The balance remaining is reserved for in the Partnership’s allowance for loan losses.
Borrower Liquidity and Capital Resources.
The Partnership relies upon loan payoffs and borrowers’ mortgage payments for the source of funds for loans. Over the past several years, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnership’s loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has historically made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could see significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest may cause a dilution of the Partnership’s yield on loans, thereby lowering the Partnership’s overall yield to the limited partners. Cash is constantly being generated from borrower payments of interest, principal and loan payoffs. Currently, cash flow exceeds Partnership expenses and earnings distribution requirements.
16
At the time of subscription to the Partnership, limited partners must elect either to receive monthly, quarterly or annual cash distributions from the Partnership, or to compound earnings in their capital account. If one initially elects to receive monthly, quarterly or annual distributions, such election, once made, is irrevocable. Earnings allocable to limited partners who elect to compound earnings in their capital account, will be retained by the Partnership for making further loans or for other proper Partnership purposes, and such amounts will be added to such limited partners’ capital accounts.
For the years ended December 31, 2007, 2006 and 2005, the Partnership made distributions of earnings to limited partners of $153,305, $152,775 and $146,271, respectively. Distribution of earnings to limited partners for the years ended December 31, 2007, 2006 and 2005 to limited partners’ capital accounts and not withdrawn was $225,337, $225,530, and $238,253, respectively. As of December 31, 2007, 2006 and 2005 limited partners electing to withdraw earnings represented 40%, 40% and 40%, respectively, of the limited partners’ outstanding capital accounts.
The Partnership also allows the limited partners to withdraw their capital account subject to certain limitations and penalties (see liquidation provisions of Partnership Agreement). For the years ended December 31, 2007, 2006 and 2005, $55,174, $13,239 and $30,322, respectively, were liquidated subject to the 10% and/or 8% penalty for early withdrawal. These withdrawals are within the normally anticipated range the general partners would expect in their experience in this and other partnerships. The general partners expect a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% and/or 8% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate investments to raise cash. The demand the Partnership is experiencing in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of December 31, 2007, 2006 and 2005, respectively, and is expected by the general partners to commonly occur at these levels.
Additionally, for the years ended December 31, 2007, 2006 and 2005, $319,396, $302,952, and $281,232, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. Once the initial five-year hold period has passed, the general partners expect to see an increase in liquidations due to the ability of limited partners to withdraw without penalty. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, at which time the bulk of those limited partners who have sought withdrawal will have been liquidated. After year eleven, liquidation generally subsides.
Actual liquidation of both capital and earnings for the three years ended December 31, 2007 was:
Years ended December 31, |
2007 | 2006 | 2005 | ||||||||||
Earnings | $ | 153,305 | $ | 152,775 | $ | 146,271 | ||||||
Capital* | 374,568 | 316,191 | 311,554 | |||||||||
Total | $ | 527,873 | $ | 468,966 | $ | 457,825 |
*These amounts represent gross of early withdrawal penalties.
17
In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners’ interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors’ capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a “reporting” number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner’s capital account value divided by $1.00. Each investor’s capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners’ right or interest in cash flow or any other economic benefit in the Partnership. Each investor’s capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor’s capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any FINRA member client account statement in providing a per Unit estimated value of the client’s investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership’s Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled “Risk Factors - Purchase of Units is a long term investment”).
Current Economic Conditions.
The Partnership makes loans secured by California real estate. The health of the California economy and real estate market is of primary concern to the Partnership as we rely upon the equity securing our loans for repayment. The majority of our loans are secured by property located in Northern California, dominated by loans made in the nine counties of the San Francisco Bay Area. As of December 31, 2007, approximately 52.14% of the loans held by the Partnership were located in the nine counties which comprise the San Francisco Bay Area region.
The California economy like the overall U.S. economy has slowed during the latter part of 2007. California unemployment decreased from 5.1% in December of 2005, to 4.9% in December of 2006 and then steadily increased throughout 2007 to a rate of 5.9% as of December 2007. According to UCLA Anderson Forecast Economists Ryan Ratcliff and Jerry Nickelsburg, California’s economy is expected to experience a slightly slower and prolonged period of sluggishness, but no recession. They expect unemployment to peak at 6.1% in late 2008, with non-farm payroll growth remaining below 1% through the end of next year. Real growth in Gross State Product and Personal Income is expected to be in the 1-2% range over the same period.
Residential real estate values are important to the Partnership as they provide the security behind our loans. During 2006, residential real estate sales volumes began to decline from their highs in 2005. The reduction in sales volumes continued throughout 2007. In 2006 California residential real estate sales volumes declined 15.3% from 2005 and sales volumes further declined 26% compared to 2006 according to the California Association of Realtors (CAR). In spite of these lower sales volumes, CAR reported the median sales price of a single family home in California increased in 2007 by 0.3%, from $556,430 to $558,100. These numbers indicate a relatively stable market, but residential real estate values are very much locally driven. CAR indicated regional price reductions in their median price value. Examples include the California High Desert, Central Valley, and Sacramento regions experiencing price reductions between 6% and 10% in 2007. Larger metropolitan regions such as the San Francisco Bay Area, Los Angeles, Santa Clara and Santa Barbara experienced price increases of 0.7% to 7.0%. The slow down in residential real estate appreciation and the price depreciation in various regions is of concern to the Partnership as depreciation erodes the value of the real estate assets securing our loans.
18
Commercial real estate has fared well in 2007. Rents continued to remain stable or escalate. As reported by NAI BT Commercial, the San Francisco Bay Area as a whole reported a 40 basis-point decrease in vacancy from 2006 to push vacancy rates to 11.25% at the close of 2007. This marked the lowest vacancy level for the Bay Area’s office market since the second quarter of 2001. The overall average asking rate increased almost $0.50 during 2007 closing the year at $2.98 per square foot full service. This represented a 19% increase from 2006 and a 44% increase from $2.07 nearly four years ago. Strong commercial rents and occupancy combined to keep values strong and stable a healthy result for the commercial portion of the Partnership’s portfolio.
For the Partnership loans outstanding at December 31, 2007, the Partnership had an average loan-to-value of 58.00% computed based on appraised values and senior liens as of the date the loan was made. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal on senior indebtedness through amortization of payments after the loan was made. Management believes low loan-to value ratios will assist the partnership in weathering loan delinquencies and foreclosures when they occur.
Contractual Obligations Table. – None
Item 7a – Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money market accounts, and loans held in the Partnership’s portfolio as of December 31, 2007. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2008 through 2012 and separately aggregates the information for all maturities arising after 2012. The carrying values of these assets and liabilities approximate their fair values as of December 31, 2007:
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||
Money market accounts | $ | 192,971 | $ | 192,971 | ||||||||||||||||||||||||
Average interest rate | 2.30 | % | 2.30 | % | ||||||||||||||||||||||||
Unsecured loans | $ | 639,338 | $ | 130,520 | $ | 769,858 | ||||||||||||||||||||||
Average interest rate | 0 | % | 0 | % | 0 | % | ||||||||||||||||||||||
Loans secured by deeds | ||||||||||||||||||||||||||||
of trust | $ | 939,569 | $ | 992,745 | $ | 596,140 | $ | 1,556,694 | $ | 859,750 | $ | — | $ | 4,944,898 | ||||||||||||||
Average interest rate | 9.43 | % | 10.05 | % | 9.25 | % | 9.25 | % | 9.34 | % | 0.00 | % | 9.46 | % |
Unsecured loans include two loans that have no stated rate of interest, for which the Partnership is imputing interest. One other loan, which has become unsecured, with a coupon rate of 9.25% has been placed by the Partnership on nonaccrual status. As such, the average interest rate for unsecured loans has been reflected as 0%.
Market Risk.
The Partnership’s primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership’s mortgage loans earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership’s investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnership’s existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact the Partnership does not intend to sell its loan portfolio, rather such loans are held until they are paid off. If interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value.
19
The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes.
PORTFOLIO REVIEW – For the years ended December 31, 2007, 2006 and 2005
Loan Portfolio
The Partnership’s loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of December 31, 2007, 2006 and 2005, the Partnership’s loans secured by real property collateral in the nine San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda, Napa, Contra Costa, Marin, Solano and Sonoma) represented $2,578,339 (52.14%) $3,462,918 (63.04%) and $1,478,632 (73%), respectively, of the outstanding secured loan portfolio. The remainder of loans held was secured primarily by real estate located in counties adjacent to the San Francisco Bay Area and in Northern California.
As of December 31, 2007, 2006 and 2005 the Partnership held 24, 26 and 9 secured loans, respectively, in the following categories:
December 31, |
2007 | 2006 | 2005 |
Single family (1-4 units) | $ | 2,851,528 | 57.67 | % | $ | 4,345,689 | 79.10 | % | $ | 1,703,472 | 84.25 | % | ||||||||||||
Apartments (5+ units) | 525,625 | 10.63 | % | 342,500 | 6.24 | % | — | — | ||||||||||||||||
Commercial | 1,567,745 | 31.70 | % | 805,639 | 14.66 | % | 318,501 | 15.75 | % | |||||||||||||||
Total | $ | 4,944,898 | 100.00 | % | $ | 5,493,828 | 100.00 | % | $ | 2,021,973 | 100.00 | % |
As of December 31, 2007, the Partnership held 24 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the loans held by the Partnership as of December 31, 2007:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of December 31, 2007
# of Loans | Amount | Percent | ||||||||||
1st Mortgages | 12 | $ | 2,764,524 | 55.91 | % | |||||||
2nd Mortgages | 11 | 1,980,374 | 40.05 | % | ||||||||
3rd Mortgages | 1 | 200,000 | 4.04 | % | ||||||||
Total | 24 | $ | 4,944,898 | 100.00 | % | |||||||
Maturing 12/31/08 and prior | 3 | $ | 939,569 | 19.00 | % | |||||||
Maturing between 01/01/09 and 12/31/09 | 4 | 992,745 | 20.08 | % | ||||||||
Maturing between 01/01/10 and 12/31/10 | 3 | 596,140 | 12.05 | % | ||||||||
Maturing after 12/31/10 | 14 | 2,416,444 | 48.87 | % | ||||||||
Total | 24 | $ | 4,944,898 | 100.00 | % | |||||||
Average Loan | $ | 206,037 | 4.17 | % | ||||||||
Largest Loan | 400,000 | 8.09 | % | |||||||||
Smallest Loan | 63,981 | 1.29 | % | |||||||||
Average Loan-to-Value, based upon appraisals | ||||||||||||
and senior liens at date of inception of loan | 58.00 | % |
20
The Partnership’s largest loan in the principal amount of $400,000 represents 8.09% of outstanding secured loans and 6.53% of Partnership assets. Larger loans can sometimes represent over 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and also as a result of the restructuring several loans into one loan.
At December 31, 2007 and 2006, the Partnership had unsecured loans totaling $769,858 and $712,643, respectively. Two of the loans are noninterest bearing and are due in monthly installments of $2,078 through May, 2009. These monthly payments escalate at various times through the loan maturity date. Interest has been imputed on these loans at interest rates for comparable loans made during the same periods. During 2006, a loan in the amount of $571,494 became unsecured. The Partnership has placed the loan on nonaccrual status. The Partnership is pursuing collection efforts against the borrower for the entire amount of outstanding principal, advances and past due interest. The general partners have established an allowance for loan losses for its unsecured loans as a protection against amounts that may ultimately prove uncollectible.
ASSET QUALITY
A consequence of lending activities is occasionally losses will be experienced and the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment.
The conclusion a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices. Rather, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of December 31, 2007 the general partners have determined the allowance for loan losses of $323,916 (5.30% of partners’ capital) is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners’ inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of December 31, 2007, there were no secured loans matured 90 days or more, and three secured loans delinquent in interest payments over 90 days, that were not matured, totaling $541,952.
The Partnership may also make loans requiring periodic disbursements of funds. These loans include ground up construction of buildings and loans for rehabilitation of existing structures. Interest on these loans is computed at simple interest method and only on the amounts disbursed on a daily basis. As of December 31, 2007 there were no such loans.
21
Item 8 – Financial Statements and Supplementary Data
A – Financial Statements
The following financial statements of Redwood Mortgage Investors VI are included in Item 8:
· | Report of Independent Registered Public Accounting Firm |
· | Balance Sheets – December 31, 2007 and 2006 |
· | Statements of Income for the years ended December 31, 2007, 2006 and 2005 |
· | Statements of Changes in Partners’ Capital for the years ended December 31, 2007, 2006 and 2005 |
· | Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
· | Notes to Financial Statements |
B – Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Investors VI are included in Item 8:
· | Schedule II – Valuation and Qualifying Accounts |
· | Schedule IV – Mortgage Loans on Real Estate |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
22
REDWOOD MORTGAGE INVESTORS VI
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
AND SUPPLEMENTAL INFORMATION
AS OF DECEMBER 31, 2007 AND 2006
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2007
23
TABLE OF CONTENTS
Page No. | ||
Report of Independent Registered Public Accounting Firm | 25 | |
Balance Sheets | 26 | |
Statements of Income | 27 | |
Statements of Changes in Partners’ Capital | 28 | |
Statements of Cash Flows | 29 | |
Notes to Financial Statements | 30 | |
Supplemental Schedules | ||
Schedule II - Valuation and Qualifying Accounts | 44 | |
Schedule IV - Mortgage Loans on Real Estate | ||
Rule 12-29 Loans on Real Estate | 45 |
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Redwood Mortgage Investors VI
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage Investors VI (a California limited partnership) as of December 31, 2007 and 2006 and the related statements of income, changes in partners’ capital and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of Redwood Mortgage Investors VI’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Redwood Mortgage Investors VI is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Redwood Mortgage Investors VI’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redwood Mortgage Investors VI as of December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
March 28, 2008
25
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Balance Sheets
December 31, 2007 and 2006
ASSETS
2007 | 2006 | |||||||
Cash and cash equivalents | $ | 515,852 | $ | 161,114 | ||||
Loans | ||||||||
Loans, secured by deeds of trust | 4,944,898 | 5,493,828 | ||||||
Loans, unsecured, net of discount of $85,627 and | ||||||||
$97,860 in 2007 and 2006, respectively | 769,858 | 712,643 | ||||||
Allowance for loan losses | (323,916 | ) | (294,507 | ) | ||||
Net loans | 5,390,840 | 5,911,964 | ||||||
Interest and other receivables | ||||||||
Accrued interest and late fees | 77,320 | 68,329 | ||||||
Advances on loans | 578 | 1,004 | ||||||
Receivable from affiliate | 12,003 | 3,414 | ||||||
Total interest and other receivables | 89,901 | 72,747 | ||||||
Real estate held, net | 130,215 | 130,215 | ||||||
Total assets | $ | 6,126,808 | $ | 6,276,040 |
LIABILITIES AND PARTNERS’ CAPITAL
Liabilities | ||||||||
Payable to affiliate | $ | 10,193 | $ | 10,194 | ||||
Total liabilities | 10,193 | 10,194 | ||||||
Partners’ capital | ||||||||
Limited partners’ capital, subject to redemption | 6,106,854 | 6,256,085 | ||||||
General partners’ capital | 9,761 | 9,761 | ||||||
Total partners’ capital | 6,116,615 | 6,265,846 | ||||||
Total liabilities and partners’ capital | $ | 6,126,808 | $ | 6,276,040 |
The accompanying notes are an integral part of these financial statements |
26
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Income
For the Years Ended December 31, 2007, 2006 and 2005
2007 | 2006 | 2005 | ||||||||||
Revenues | ||||||||||||
Interest on loans | $ | 472,348 | $ | 444,269 | $ | 489,908 | ||||||
Interest - interest bearing accounts | 24,995 | 33,977 | 16,750 | |||||||||
Late fees, prepayment penalties and fees | 14,261 | 6,402 | 15,624 | |||||||||
511,604 | 484,648 | 522,282 | ||||||||||
Expenses | ||||||||||||
Mortgage servicing fees | | 34,885 | 56,508 | |||||||||
Asset management fees | 7,785 | 5,942 | 12,031 | |||||||||
Clerical costs from Redwood Mortgage Corp. | 7,190 | 8,406 | 9,212 | |||||||||
Provisions for (recovery of) losses on loans | ||||||||||||
and real estate held | 29,743 | (20,872 | ) | (1,685 | ) | |||||||
Professional services | 58,469 | 55,379 | 41,706 | |||||||||
Other | 25,953 | 18,782 | 16,102 | |||||||||
129,140 | 102,522 | 133,874 | ||||||||||
Net income | 382,464 | 382,126 | 388,408 | |||||||||
Net income | ||||||||||||
General partners (1%) | $ | 3,822 | $ | 3,821 | $ | 3,884 | ||||||
Limited partners (99%) | 378,642 | 378,305 | 384,524 | |||||||||
$ | 382,464 | $ | 382,126 | $ | 388,408 | |||||||
Net income per $1,000 invested by limited partners | ||||||||||||
for entire period | ||||||||||||
Where income is reinvested | $ | 62 | $ | 61 | $ | 62 | ||||||
Where partner receives income in | ||||||||||||
monthly distributions | $ | 61 | $ | 60 | $ | 60 |
The accompanying notes are an integral part of these financial statements |
27
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Changes in Partners’ Capital
For the Years Ended December 31, 2007, 2006 and 2005
Limited | General | |||||||||||
Partners | Partners | Total | ||||||||||
Balances at December 31, 2004 | $ | 6,420,047 | $ | 9,761 | $ | 6,429,808 | ||||||
Net income | 384,524 | 3,884 | 388,408 | |||||||||
Early withdrawal penalties | (2,256 | ) | — | (2,256 | ) | |||||||
Partners’ withdrawals | (455,569 | ) | (3,884 | ) | (459,453 | ) | ||||||
Balances at December 31, 2005 | 6,346,746 | 9,761 | 6,356,507 | |||||||||
Net income | 378,305 | 3,821 | 382,126 | |||||||||
Early withdrawal penalties | (1,059 | ) | — | (1,059 | ) | |||||||
Partners’ withdrawals | (467,907 | ) | (3,821 | ) | (471,728 | ) | ||||||
Balances at December 31, 2006 | 6,256,085 | $ | 9,761 | $ | 6,265,846 | |||||||
Net income | 378,642 | 3,822 | 382,464 | |||||||||
Early withdrawal penalties | (4,423 | ) | — | (4,423 | ) | |||||||
Partners’ withdrawals | (523,450 | ) | (3,822 | ) | (527,272 | ) | ||||||
Balances at December 31, 2007 | $ | 6,106,854 | $ | 9,761 | $ | 6,116,615 |
The accompanying notes are an integral part of these financial statements |
28
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 2007, 2006 and 2005
2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 382,464 | $ | 382,126 | $ | 388,408 | ||||||
Adjustments to reconcile net income to | ||||||||||||
net cash provided by operating activities | ||||||||||||
Provision for (recovery of) losses on loans | ||||||||||||
and real estate held | 29,743 | (20,872 | ) | (1,685 | ) | |||||||
Early withdrawal penalties credited to income | (4,423 | ) | (1,059 | ) | (2,256 | ) | ||||||
Change in discount on unsecured loans | (12,233 | ) | (9,174 | 13,212 | ||||||||
Change in operating assets and liabilities | ||||||||||||
Loans, unsecured | (44,982 | ) | 9,319 | 103,966 | ||||||||
Accrued interest and late fees | (9,325 | ) | (80,937 | ) | 39,226 | |||||||
Advances on loans | 426 | (3,338 | ) | 2,839 | ||||||||
Receivable from affiliate | (8,589 | ) | (3,414 | ) | — | |||||||
Accounts payable | — | — | (11,487 | ) | ||||||||
Payable to affiliate | (1 | ) | 1,622 | (3,969 | ) | |||||||
Net cash provided by operating activities | 333,080 | 274,273 | 528,254 | |||||||||
Cash flows from investing activities | ||||||||||||
Principal collected on loans | 2,203,176 | 1,150,206 | 5,061,405 | |||||||||
Loans originated | (1,654,246 | ) | (5,153,620 | ) | (1,858,250 | ) | ||||||
Proceeds from disposition of real estate | — | — | — | |||||||||
Net cash provided by (used in) investing activities | 548,930 | (4,003,414 | ) | 3,203,155 | ||||||||
Cash flows from financing activities | ||||||||||||
Partners’ withdrawals | (527,272 | ) | (471,728 | ) | (459,453 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 354,738 | (4,200,869 | ) | 3,271,956 | ||||||||
Cash and cash equivalents at beginning of year | 161,114 | 4,361,983 | 1,090,027 | |||||||||
Cash and cash equivalents at end of year | $ | 515,852 | $ | 161,114 | $ | 4,361,983 |
The accompanying notes are an integral part of these financial statements |
29
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2007, 2006 and 2005
1. | Organization and General |
Redwood Mortgage Investors VI (the “Partnership”), a California Limited Partnership, was organized in 1987. The general partners are Michael R. Burwell, an individual, and Gymno Corporation, a California corporation whose stockholders are Michael R. Burwell and two trusts, both of whose trustee is Michael R. Burwell. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners.
The Partnership is scheduled to terminate on December 31, 2027, unless sooner terminated as provided in the Partnership Agreement.
2. | Summary of Significant Accounting Policies |
Management estimates
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 dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held. Actual results could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned.
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 is reduced to the present value of 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 management to have serious doubts about the collectibility 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. At December 31, 2007 and 2006 there was one unsecured loan totaling $639,338 and $571,494, respectively, that was considered impaired by the Partnership. The average recorded investment in impaired loans was $319,669 and $285,747 for the years ended December 31, 2007 and 2006, respectively.
30
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
2. | Summary of Significant Accounting Policies (continued) |
Loans, secured by deeds of trust (continued)
At December 31, 2007 and 2006, the Partnership had three secured loans respectively, past maturity or past due 90 days or more in interest payments or principal, totaling $541,952 and $802,698, respectively. In addition, accrued interest, late charges and advances on these secured loans totaled $28,007 and $25,829 at December 31, 2007 and 2006, respectively. The Partnership does not consider any of these secured loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership, and is still accruing interest on these loans. At December 31, 2007 and 2006, as presented in Note 9, the average loan to appraised value of security based upon appraised values and prior indebtedness at the time the loans were consummated was 58.00% and 64.22% respectively. When loans are considered impaired the allowance for loan losses are updated to reflect the change in the valuation of collateral security. However, a low loan to value ratio tends to minimize reductions for impairment.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. 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 values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.
31
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
2. | Summary of Significant Accounting Policies (continued) |
Allowance for loan losses (continued)
The composition of the allowance for loan losses was as follows:
December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Amount | Percent of loans in each category to total loans | Amount | Percent of loans in each category to total loans | |||||||||||||
Balance at End of Year | ||||||||||||||||
Applicable to: | ||||||||||||||||
Domestic | ||||||||||||||||
Real estate - mortgage | ||||||||||||||||
Single family (1-4 units) | $ | 75,283 | 57.67 | % | $ | 54,559 | 79.10 | % | ||||||||
Apartments | 3,942 | 10.63 | % | 2,569 | 6.24 | % | ||||||||||
Commercial | 19,597 | 31.70 | % | 11,144 | 14.66 | % | ||||||||||
Total real estate - mortgage | $ | 98,822 | 100.00 | % | $ | 68,272 | 100.00 | % | ||||||||
Unsecured loans | $ | 225,094 | 100.00 | % | $ | 226,235 | 100.00 | % | ||||||||
Total unsecured loans | $ | 225,094 | 100.00 | % | $ | 226,235 | 100.00 | % | ||||||||
Total allowance for loan losses | $ | 323,916 | 100.00 | % | $ | 294,507 | 100.00 | % |
32
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
2. | Summary of Significant Accounting Policies (continued) |
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows:
Years Ended December 31, |
2007 | 2006 | 2005 | ||||||||||
Balance at beginning of year | $ | 294,507 | $ | 315,379 | $ | 315,751 | ||||||
Charge-offs | ||||||||||||
Domestic | ||||||||||||
Real estate - mortgage | ||||||||||||
Single family (1-4 units) | (334 | ) | — | — | ||||||||
Apartments | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
(334 | ) | — | — | |||||||||
Recoveries | ||||||||||||
Domestic | ||||||||||||
Real estate - mortgage | ||||||||||||
Single family (1-4 units) | — | — | — | |||||||||
Apartments | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
— | — | — | ||||||||||
Net charge-offs | (334 | ) | — | — | ||||||||
Additions/(recovery) charge to operations | 29,743 | (20,872 | ) | (1,685 | ) | |||||||
Transfer from real estate held reserve | — | — | 1,313 | |||||||||
Balance at end of year | $ | 323,916 | $ | 297,507 | $ | 315,379 | ||||||
Ratio of net charge-offs during the period to | ||||||||||||
average secured loans outstanding during | ||||||||||||
the period | 0.00 | % | 0.00 | % | 0.00 | % |
33
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
2. | Summary of Significant Accounting Policies (continued) |
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, Partnership cash balances exceed federally insured limits.
Real estate held
Real estate held includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the property, plus any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable.
The Partnership periodically compares the carrying value of real estate to expected future undiscounted 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 fair value.
Income taxes
No provision for federal and state income taxes, except for a minimum state tax of $800, is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who held their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the limited partners’ pro rata share of partners’ capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment past due. During 2007, 2006 and 2005, late fee revenue of $6,041, $4,868, and $7,184, respectively, was recorded. The Partnership has a late fee receivable at December 31, 2007 and 2006 of $2,349 and $1,818, respectively.
34
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
2. | Summary of Significant Accounting Policies (continued) |
Recently issued accounting pronouncements
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140” (SFAS 156), which permits, but does not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights) at fair value, with the changes in fair value recorded in the statement of income. SFAS 156 is effective in the first quarter of 2007. The adoption of SFAS 156 is not expected to have a material impact on the Partnership’s financial condition and results of operations.
On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Partnership’s financial statements issued for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the impact and timing of the adoption of SFAS 157 on the Partnership’s financial condition and results of operations.
On February 15, 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. SFAS 159 is effective for the Partnership’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the impact and timing of the adoption of SFAS 159 on the Partnership’s financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160). SFAS 160’s objective is to improve the relevance, comparability, and transparency of the financial information a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, along with the interim periods within those fiscal years. Early adoption is prohibited. Management is currently evaluating the impact and timing of the adoption of SFAS 160 on the Partnership’s financial condition.
On July 13, 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Partnership adopted FIN 48 in the first quarter of 2007. The adoption of FIN 48 did not have a material impact on the Partnership’s financial condition and results of operations.
On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 states that in evaluating the materiality of financial statement misstatements, an entity must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 was effective for the year ended December 31, 2006. The application of SAB 108 did not have an impact on the Partnership’s financial condition and results of operations.
35
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and powers of the general and limited partners of the Partnership are governed by the limited partnership agreement and Sections 15611 et seq. of the California Corporations Code.
The general partners are in complete control of the Partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the Partnership.
A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the Partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the Partnership and (iv) remove or replace one or all of the general partners.
The approval of the majority of limited partners is required to elect a new general partner to continue the Partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, a compounding investor may subsequently change his election, but an investor’s election to have cash distributions is irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units and accordingly an investment in the Partnership is non-liquid. Limited partners had no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of Partnership units.
In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn as stated in the notice of withdrawal and will be deducted from the capital account.
36
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
After five years from the date of purchase of the units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally, this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partner’s capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty.
The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnership’s capacity to return a limited partner’s capital account is restricted to the availability of Partnership cash flow. Furthermore, no more than 20% of the total limited partners’ capital accounts outstanding at the beginning of any year shall be liquidated during any calendar year.
4. | General Partners and Related Parties |
The following are commissions and fees that are paid to the general partners and affiliates:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. In 2007, 2006 and 2005, loan brokerage commissions paid by the borrowers were $42,839, $124,116, and $52,248, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general partners, based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional service fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $0, $34,885 and $56,508, were incurred for 2007, 2006 and 2005, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $10,193 and $10,194 at December 31, 2007 and 2006, respectively. During 2007 and 2006, Redwood Mortgage Corp. waived $48,506 and $9,824 of mortgage servicing fees, respectively.
37
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
4. | General Partners and Related Parties (continued) |
Asset management fee
The general partners receive monthly fees for managing the Partnership’s loan portfolio and operations of up to 1/32 of 1% of the “net asset value” (3/8 of 1% annually). Asset management fees of $7,785, $5,942, and $12,031, were incurred for 2007, 2006 and 2005, respectively. During 2007 2006 and 2005, the general partners waived $15,571, $15,867 and $12,061 of asset management fees, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. These fees are incurred by the borrowers and paid to the general partners or affiliates.
Operating expenses
The Partnership receives certain operating and administrative services from Redwood Mortgage Corp. Redwood Mortgage Corp. may be reimbursed by the Partnership for operating expenses incurred on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. During 2007, 2006 and 2005, operating expenses totaling $7,190, $8,406 and $9,212, respectively, were reimbursed to Redwood Mortgage Corp. To the extent that some operating and administrative services were not reimbursed, the financial position and results of Partnership operation may be different.
5. | Real Estate Held |
The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell, as of December 31, 2007 and 2006:
2007 | 2006 | |||||||
Costs of properties | $ | 130,215 | $ | 130,215 | ||||
Reduction in value | — | — | ||||||
Real estate held, net | $ | 130,215 | $ | 130,215 |
38
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
6. | Income Taxes |
The following reflects a reconciliation of partners’ capital reflected in the financial statements to the tax basis of Partnership capital:
2007 | 2006 | |||||||
Partners’ capital per financial statements | $ | 6,116,615 | $ | 6,265,846 | ||||
Allowance for loan losses and real estate | 323,916 | 294,507 | ||||||
Partners’ capital tax basis | $ | 6,440,531 | $ | 6,560,353 |
In 2007 and 2006, approximately 73% and 72%, respectively, of taxable income was allocated to tax-exempt organizations (e.g., retirement plans).
7. | Fair Value of Financial Instruments |
The following methods and assumptions were used to estimate the fair value of financial instruments:
(a) | Cash and cash equivalents - The carrying amount equals fair value. All amounts, including interest-bearing accounts are subject to immediate withdrawal. |
(b) | Secured loans carrying value was $4,944,898 and $5,493,828 at December 31, 2007 and 2006, respectively. The fair value of these loans $4,899,012 and $5,567,904, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. |
(c) Unsecured loans carrying value was $769,858 and $712,643 at December 31, 2007 and 2006, respectively. The fair value of these loans approximates their carrying value after consideration of the allowance for loan losses established by the general partners on these loans. |
39
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
8. | Non-Cash Transactions |
During 2006, a previously secured loan became unsecured which resulted in a decrease to secured loans, advances and accrued interest of $531,559, $2,385 and $34,745, respectively, and an increase to unsecured loans of $568,689.
9. | Loan Concentrations and Characteristics |
Most loans are secured by recorded deeds of trust. At December 31, 2007 and 2006, there were 24 and 26 secured loans outstanding respectively, with the following characteristics:
2007 | 2006 | |||||||
Number of secured loans outstanding | 24 | 26 | ||||||
Total secured loans outstanding | $ | 4,944,898 | $ | 5,493,828 | ||||
Average secured loan outstanding | $ | 206,037 | $ | 211,301 | ||||
Average secured loan as percent of total secured loans | 4.17 | % | 3.85 | % | ||||
Average secured loan as percent of partners’ capital | 3.37 | % | 3.37 | % | ||||
Largest secured loan outstanding | $ | 400,000 | $ | 500,000 | ||||
Largest secured loan as percent of total secured loans | 8.09 | % | 9.10 | % | ||||
Largest secured loan as percent of partners’ capital | 6.54 | % | 7.98 | % | ||||
Largest secured loan as percent of total assets | 6.53 | % | 7.97 | % | ||||
Number of counties where security | ||||||||
is located (all California) | 14 | 15 | ||||||
Largest percentage of secured loans in one county | 22.26 | % | 19.29 | % | ||||
Number of secured loans in foreclosure | — | 1 | ||||||
Amounts of secured loans in foreclosure | $ | — | $ | 400,000 |
40
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
9. | Loan Concentrations and Characteristics (continued) |
The following categories of secured loans were held at December 31, 2007 and 2006:
2007 | 2006 | |||||||
First trust deeds | $ | 2,764,524 | $ | 3,365,234 | ||||
Second trust deeds | 1,980,374 | 2,128,594 | ||||||
Third trust deeds | 200,000 | — | ||||||
Total loans | 4,944,898 | 5,493,828 | ||||||
Prior liens due other lenders at time of loan | 5,715,592 | 5,177,399 | ||||||
Total debt | $ | 10,660,490 | $ | 10,671,227 | ||||
Appraised property value at time of loan | $ | 18,380,414 | $ | 16,617,341 | ||||
Average secured loan to appraised value | ||||||||
of security based on appraised values and prior | ||||||||
liens at time loan was consummated | 58.00 | % | 64.22 | % | ||||
Loans by type of property | ||||||||
Single family (1-4 units) | $ | 2,851,528 | $ | 4,345,689 | ||||
Apartments | 525,625 | 342,500 | ||||||
Commercial | 1,567,745 | 805,639 | ||||||
$ | 4,944,898 | $ | 5,493,828 |
Interest rates on the loans range from 8.50% to 10.50% at December 31, 2007 and 2006.
Scheduled maturity dates of secured loans as of December 31, 2007 are as follows:
Year Ending December 31, | ||||
2008 | $ | 939,569 | ||
2009 | 992,745 | |||
2010 | 596,140 | |||
2011 | 1,556,694 | |||
2012 | 859,750 | |||
Thereafter | — | |||
$ | 4,944,898 |
41
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
9. | Loan Concentrations and Characteristics (continued) |
The scheduled maturities for 2008 had no loans which were past maturity at December 31, 2007. Occasionally, the Partnership allows borrowers to continue to make the payments on loans past maturity for periods of time. It is the Partnership’s experience loans can be refinanced or repaid before the maturity date. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.
10. | Commitments and Contingencies |
Workout agreements
The Partnership periodically negotiates various contractual workout agreements with borrowers. The Partnership is not obligated to fund additional money as of December 31, 2007. There are three loans in a workout agreement as of December 31, 2007.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.
42
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Notes to Financial Statements |
December 31, 2007, 2006 and 2005 |
11. Selected Financial Information (Unaudited)
Calendar Quarter |
First | Second | Third | Fourth | Annual | ||||||
Revenues | ||||||||||
2007 | $ 130,633 | $ 120,180 | $ 128,359 | $ 132,432 | $ 511,604 | |||||
2006 | $ 79,665 | $ 133,238 | $ 137,961 | $ 133,784 | $ 484,648 | |||||
Expenses | ||||||||||
2007 | $ 34,199 | $ 24,210 | $ 33,066 | $ 37,665 | $ 129,140 | |||||
2006 | $ (14,355) | $ 39,440 | $ 40,648 | $ 36,789 | $ 102,522 | |||||
Net income allocated | ||||||||||
to general partners | ||||||||||
2007 | $ 964 | $ 960 | $ 953 | $ 945 | $ 3,822 | |||||
2006 | $ 940 | $ 938 | $ 973 | $ 970 | $ 3,821 | |||||
Net income allocated | ||||||||||
to limited partners | ||||||||||
2007 | $ 95,470 | $ 95,010 | $ 94,340 | $ 93,822 | $ 378,642 | |||||
2006 | $ 93,080 | $ 92,860 | $ 96,340 | $ 96,025 | $ 378,305 | |||||
Net income per $1,000 invested | ||||||||||
Where income is | ||||||||||
Reinvested | ||||||||||
2007 | $ 15 | $ 15 | $ 16 | $ 16 | $ 62 | |||||
2006 | $ 15 | $ 15 | $ 15 | $ 16 | $ 61 | |||||
Withdrawn | ||||||||||
2007 | $ 15 | $ 15 | $ 15 | $ 16 | $ 61 | |||||
2006 | $ 15 | $ 15 | $ 15 | $ 15 | $ 60 |
43
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Schedule II |
Valuation and Qualifying Accounts |
For the Years Ended December 31, 2007, 2006 and 2005 |
B | C - Additions | E | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance | |||||||||||||||||||
A | Beginning | Costs and | Other | D | at End of | |||||||||||||||||
Description | of Period | Expenses | Accounts | Deductions | Period | |||||||||||||||||
Year Ended December 31, 2005 | ||||||||||||||||||||||
Deducted from asset accounts | ||||||||||||||||||||||
Allowance for loan losses | $ | 315,751 | $ | (1,685 | ) | $ | 1,313 | $ | — | $ | 315,379 | |||||||||||
Cumulative write-down of | ||||||||||||||||||||||
real estate held (REO) | 1,313 | — | (1,313 | ) | — | — | ||||||||||||||||
$ | 317,064 | $ | (1,685 | ) | $ | — | $ | — | $ | 315,379 | ||||||||||||
Year Ended December 31, 2006 | ||||||||||||||||||||||
Deducted from asset accounts | ||||||||||||||||||||||
Allowance for loan losses | $ | 315,379 | $ | (20,872 | ) | $ | — | $ | — | $ | 294,507 | |||||||||||
Cumulative write-down of | ||||||||||||||||||||||
real estate held (REO) | — | — | — | — | — | |||||||||||||||||
$ | 315,379 | $ | (20,872 | ) | $ | — | $ | — | $ | 294,507 | ||||||||||||
Year Ended December 31, 2007 | ||||||||||||||||||||||
Deducted from asset accounts | ||||||||||||||||||||||
Allowance for loan losses | $ | 294,507 | $ | 29,743 | $ | — | $ | (334 | ) | $ | 323,916 | |||||||||||
Cumulative write-down of | ||||||||||||||||||||||
real estate held (REO) | — | — | — | — | — | |||||||||||||||||
$ | 294,507 | $ | 29,743 | $ | — | $ | (334 | ) | $ | 323,916 | ||||||||||||
Note (a) - Represents sales of REO. |
44
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Schedule IV |
Mortgage Loans on Real Estate |
Rule 12-29 Loans on Real Estate |
December 31, 2007 |
Col. H | |||||||||||||||||||||||||||
Principal | |||||||||||||||||||||||||||
Col. F | Amount of | ||||||||||||||||||||||||||
Face | Col. G | Loans | |||||||||||||||||||||||||
Col. C | Col. D | Amount | Carry | Subject to | Col. J | ||||||||||||||||||||||
Col. B | Final | Periodic | Col. E | of Mortgage | Amount of | Delinquent | Col. I | California | |||||||||||||||||||
Col. A | Interest | Maturity | Payment | Prior | Original | Mortgage | Principal | Type of | Geographic | ||||||||||||||||||
Description | Rate | Date | Terms | Liens | Amount | Investment | or Interest | Lien | Location | ||||||||||||||||||
Res. | 8.50 | % | 03/01/08 | 1,771 | — | 250,000 | 250,000 | — | 1st | Monterey | |||||||||||||||||
Res. | 9.25 | % | 06/01/10 | 2,057 | 198,779 | 250,000 | 245,515 | — | 2nd | Alameda | |||||||||||||||||
Comm. | 9.50 | % | 02/01/09 | 2,078 | — | 262,500 | 262,500 | — | 1st | San Joaquin | |||||||||||||||||
Res. | 9.63 | % | 03/01/08 | 2,326 | — | 290,000 | 289,569 | 289,569 | 1st | Butte | |||||||||||||||||
Res. | 9.63 | % | 04/01/11 | 1,062 | 173,882 | 125,000 | 121,671 | — | 2nd | Mariposa | |||||||||||||||||
Comm. | 9.88 | % | 04/01/08 | 3,292 | — | 400,000 | 400,000 | — | 1st | Alameda | |||||||||||||||||
Res. | 8.88 | % | 04/01/11 | 517 | 580,000 | 64,644 | 63,981 | — | 2nd | Contra Costa | |||||||||||||||||
Res. | 9.63 | % | 05/01/11 | 850 | — | 100,000 | 99,021 | — | 1st | Los Angeles | |||||||||||||||||
Res. | 9.75 | % | 06/01/11 | 601 | 75,015 | 70,000 | 69,481 | — | 2nd | San Bernardino | |||||||||||||||||
Res. | 9.75 | % | 06/01/11 | 859 | 255,618 | 100,000 | 99,383 | 99,383 | 2nd | Monterey | |||||||||||||||||
Res. | 8.88 | % | 07/01/11 | 2,958 | 866,667 | 400,000 | 400,000 | — | 2nd | San Francisco | |||||||||||||||||
Res. | 9.00 | % | 06/01/11 | 1,609 | 1,020,306 | 200,000 | 197,967 | — | 2nd | Los Angeles | |||||||||||||||||
Apts. | 9.25 | % | 01/01/10 | 1,932 | 424,606 | 242,500 | 250,625 | — | 2nd | San Francisco | |||||||||||||||||
Res. | 9.75 | % | 10/01/11 | 932 | — | 108,500 | 107,835 | — | 1st | Shasta | |||||||||||||||||
Res. | 9.00 | % | 12/06/11 | 1,950 | — | 260,000 | 259,973 | — | 1st | Alameda | |||||||||||||||||
Res. | 10.00 | % | 01/01/12 | 1,275 | — | 153,000 | 153,000 | 153,000 | 1st | Contra Costa | |||||||||||||||||
Res. | 9.75 | % | 12/01/11 | 1,186 | — | 138,000 | 137,382 | — | 1st | San Bernardino | |||||||||||||||||
Apts. | 9.25 | % | 01/01/10 | 771 | — | 100,000 | 100,000 | — | 1st | San Francisco | |||||||||||||||||
Res. | 9.75 | % | 05/01/12 | 926 | 163,230 | 107,800 | 107,543 | — | 2nd | Stanislaus | |||||||||||||||||
Res. | 9.25 | % | 06/01/12 | 2,057 | 445,918 | 250,000 | 249,207 | — | 2nd | Orange | |||||||||||||||||
Comm. | 10.50 | % | 07/01/09 | 3,212 | — | 450,000 | 355,245 | — | 1st | Solano | |||||||||||||||||
Comm. | 9.00 | % | 07/01/12 | 2,625 | — | 350,000 | 350,000 | — | 1st | San Francisco | |||||||||||||||||
Comm. | 10.00 | % | 03/01/09 | 1,667 | 475,698 | 200,000 | 200,000 | — | 3rd | El Dorado | |||||||||||||||||
Apts. | 10.00 | % | 02/01/09 | 1,458 | 1,035,873 | 175,000 | 175,000 | — | 2nd | San Joaquin | |||||||||||||||||
Total | $ | 39,971 | $ | 5,715,592 | $ | 5,046,944 | $ | 4,944,898 | $ | 541,952 |
Note: Most loans have balloon payments due at maturity. |
45
REDWOOD MORTGAGE INVESTORS VI |
(A California Limited Partnership) |
Schedule IV |
Mortgage Loans on Real Estate |
Rule 12-29 Loans on Real Estate (Continued) |
Reconciliation of carrying amount (cost) of loans at close of periods |
Year ended December 31, |
2007 | 2006 | 2005 | ||||||||||
Balance at beginning of year | $ | 5,493,828 | $ | 2,021,973 | $ | 5,225,128 | ||||||
Additions during period | ||||||||||||
New loans | 1,654,246 | 5,153,620 | 1,858,250 | |||||||||
Other | — | — | — | |||||||||
Total additions | 1,654,246 | 5,153,620 | 1,858,250 | |||||||||
Deductions during period | ||||||||||||
Collections of principal | 2,203,176 | 1,150,206 | 5,061,405 | |||||||||
Foreclosures | — | — | — | |||||||||
Cost of loans sold | — | — | — | |||||||||
Amortization of premium | — | — | — | |||||||||
Other | — | 531,559 | — | |||||||||
Total deductions | 2,203,176 | 1,681,765 | 5,061,405 | |||||||||
Balance at close of year | $ | 4,944,898 | $ | 5,493,828 | $ | 2,021,973 |
46
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There were no disagreements with the Partnership’s independent registered public accounting firm during the years ended December 31, 2007 and 2006.
Item 9a – Controls and Procedures
The Partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the general partners concluded the Partnership’s disclosure controls and procedures were effective in timely alerting the general partners to material information related to the Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission.
There were no significant changes in the Partnership’s internal control over financial reporting during the Partnership’s fourth fiscal quarter that have materially affected, or are likely to materially affect, the Partnership’s internal control over financial reporting.
Item 9b – Other Information
None
Part III
Item 10 – Directors, Executive Officers and Corporate Governance
The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the two general partners, one of whom is an individual, Michael R. Burwell. The second general partner is Gymno Corporation, a California corporation, formed in 1986. Mr. Burwell is one of the three shareholders of Gymno Corporation, a California corporation, and has a 50% interest in the corporation. The remaining two shareholders are trusts as to which Mr. Burwell is the trustee of each trust.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 51, General Partner, past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-present); President, Director, Chief Financial Officer and Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California corporation formed in 1986 for the purpose of acting as a general partner of this Partnership and of other limited partnerships formed by the individual general partners. The shares in Gymno Corporation are held equally by Michael R. Burwell and two trusts, each of which Michael R. Burwell is the trustee. Michael R. Burwell is a director of Gymno and the director position held by D. Russell Burwell is currently vacant. Michael R. Burwell is its President, Chief Financial Officer and Secretary. Michael R. Burwell has a controlling interest in this company through his ownership of stock and as trustee of the Burwell trusts.
47
Financial Oversight by General Partners.
The Partnership does not have a board of directors or an audit committee. Accordingly, the general partners serve the equivalent function of an audit committee for, among other things, the following purposes: appointment, compensation, review and oversight of the work of our independent public accountants, and establishing the enforcing of the Code of Ethics. However, since the Partnership does not have an audit committee and the general partners are not independent of the partnership, the Partnership does not have an “audit committee financial expert.”
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the general partners and to any agents, employees or independent contractors engaged by the general partners to perform the functions of a principal financial officer, principal accounting officer or controller of the partnership, if any. You may obtain a copy of this Code of Ethics, without charge, upon request by calling our Investor Services Department at (650) 365-5341.
Item 11 – Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in item 10, the Partnership has no officers or directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus, pages 11-12, under the section “Compensation of the General Partners and the Affiliates”, which is incorporated by reference. Such compensation is summarized below.
The following compensation has been paid to the general partners and affiliates for services rendered during the year ended December 31, 2007. All such compensation is in compliance with the guidelines and limitations set forth in the partnership agreement.
Entity Receiving Compensation | Description of Compensation and Services Rendered | Amount | |||
I. Redwood Mortgage Corp. | Loan Servicing Fee for servicing loans | $ | 0 | ||
General Partners &/or Affiliates | Asset Management Fee for managing assets | $ | 7,785 | ||
General Partners | 1% interest in profits | $ | 3,822 |
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP)
Redwood Mortgage Corp. | Mortgage Brokerage Commissions for services in connection | ||||
with the review, selection, evaluation, negotiation, and extension | |||||
of the loans paid by the borrowers and not by the Partnership | $ | 42,839 | |||
Redwood Mortgage Corp. | Processing and Escrow Fees for services in connection with | ||||
notary, document preparation, credit investigation, and escrow | |||||
fees payable by the borrowers and not by the Partnership | $ | 3,562 | |||
Gymno Corporation | Reconveyance Fee | $ | 239 |
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . $7,190
48
Item 12 – Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
The general partners receive a combined total of a 1% interest in Partnership income and losses and distributions of cash available for distribution.
Item 13 – Certain Relationships and Related Transactions, and Director Independence
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which describes related party fees and data.
Also refer to sections of the Prospectus “Compensation of General Partners and Affiliates”, page 11, and “Conflicts of Interest”, page 13, as part of the above-referenced Registration Statement, which is incorporated by reference.
Since the Partnership does not have a board of directors and since the general partners are not considered independent of the Partnership, the Partnership does not have the equivalent of independent directors.
Item 14 – Principal Accountant Fees and Services
Fees for services performed for the Partnership by the principal accountant for 2007 and 2006 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31, 2007 and 2006 for professional services rendered for the audit of the Partnership’s annual financial statements included in the Partnership’s Annual Report on Form 10-K and review of financial statements included in the Partnership’s Quarterly Reports on Form 10-Q were $47,120 and $51,581, respectively.
Audit Related Fees There were no fees billed during the years ended December 31, 2007 and 2006 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended December 31, 2007 and 2006 were $4,338 and $4,138, respectively. These fees relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended December 31, 2007 and 2006.
All audit and non-audit services are approved by the general partner prior to the accountant being engaged by the Partnership.
49
Part IV
Item 15 – Exhibits, Financial Statements and Schedules
A. Documents filed as part of this report:
1. The Financial Statements are listed in Part II, Item 8 under A-Financial Statements.
2. The Financial Statement Schedules are listed in Part II, Item 8 under B-Financial Statement Schedules.
3. Exhibits.
Exhibit No | Description of Exhibits |
3.1 | Limited Partnership Agreement | |
3.2 | Form of Certificate of Limited Partnership Interest | |
3.3 | Certificate of Limited Partnership | |
10.1 | Escrow Agreement | |
10.2 | Servicing Agreement | |
10.3 | (a) | Form of Note secured by Deed of Trust which provides for principal and interest payments |
(b) | Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption | |
(c) | Form of Note secured by Deed of Trust which provides for interest only payments | |
(d) | Form of Note | |
10.4 | (a) | Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a) and (c) |
(b) | Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (b) | |
(c) | Deed of Trust to accompany Exhibit 10.3 (d) | |
10.5 | Promissory Note for Formation Loan | |
10.6 | Agreement to Seek a Lender | |
31.1 | Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
All of the above exhibits other than 31.1, 31.2, 32.1 and 32.2, were previously filed as the exhibits to Registrant’s Statement on Form S-11 (Registration No. 33-12519) and incorporated by reference herein.
B. See (A) 3 above
C. | See (A) 2 above. Additional reference is made to prospectus (S-11) dated September 3, 1987 to pages 56 through 59 and supplement #6 dated May 16, 1989 pages 16-18, for financial data related to Gymno Corporation, a general partner. |
50
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 31st day of March, 2008.
REDWOOD MORTGAGE INVESTORS VI |
By: | /S/ Michael R. Burwell | ||
Michael R. Burwell, General Partner | |||
By: | Gymno Corporation, General Partner | ||
By: | /S/ Michael R. Burwell | ||
Michael R. Burwell, President, Secretary & Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 31st day of March, 2008.
Signature | Title | Date |
/S/ Michael R. Burwell | ||||
Michael R. Burwell | General Partner | March 31, 2008 |
/S/ Michael R. Burwell | ||||
Michael R. Burwell | President, Secretary & Chief Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation | March 31, 2008 |
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Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, certify that: |
1. | I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the “Registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
(b) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(c) | disclosed in this report any change in the Registrant’s control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
/s/ Michael R. Burwell
____________________________
Michael R. Burwell, General Partner
March 31, 2008
52
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
(b) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(c) | disclosed in this report any change in the Registrant’s control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
/s/ Michael R. Burwell
___________________________
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2008
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the “Partnership”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, certify that to the best of my knowledge:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated. |
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
/s/ Michael R. Burwell
_____________________________
Michael R. Burwell, General Partner
March 31, 2008
54
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the “Partnership”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, certify that to the best of my knowledge:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated. |
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
/s/ Michael R. Burwell
_____________________________
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2008
55