UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2012
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 000-17248
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact Name of Registrant as Specified In Its Charter)
California | 68-0023931 | |
(State or Other Jurisdiction | (I.R.S. Employer Identification No.) | |
of Incorporation or Organization) | ||
2221 Olympic Boulevard | ||
Walnut Creek, California | 94595 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(925) 935-3840 | ||
Registrant’s Telephone Number, Including Area Code |
NOT APPLICABLE |
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
2
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | ||
Page | ||
Item 1. | Financial Statements | 4 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 41 |
Item 4. | Controls and Procedures | 58 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 58 |
Item 5. | Other Information | 58 |
Item 6. | Exhibits | 59 |
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 101
3
Part I. FINANCIAL INFORMATION
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Consolidated Balance Sheets
September 30, 2012 and December 31, 2011
(UNAUDITED)
September 30, | December 31, | ||||||
2012 | 2011 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 17,326,670 | $ | 12,232,121 | |||
Restricted cash | 3,948,000 | 3,969,000 | |||||
Certificates of deposit | 996,858 | 1,994,055 | |||||
Loans secured by trust deeds, net of allowance for losses of $24,941,076 in 2012 and $24,541,897 in 2011 | 40,215,214 | 44,879,979 | |||||
Interest and other receivables | 2,057,419 | 1,455,846 | |||||
Vehicles, equipment and furniture, net of accumulated depreciation of $553,478 in 2012 and $444,902 in 2011 | 195,858 | 279,778 | |||||
Other assets, net of accumulated amortization of $818,824 in 2012 and $751,065 in 2011 | 2,311,560 | 1,328,586 | |||||
Investment in limited liability company | 2,191,130 | 2,140,036 | |||||
Real estate held for sale | 68,709,511 | 13,970,673 | |||||
Real estate held for investment, net of accumulated depreciation and amortization of $6,138,268 in 2012 and $6,458,712 in 2011 | 68,179,936 | 131,620,987 | |||||
Total Assets | $ | 206,132,156 | $ | 213,871,061 | |||
LIABILITIES AND PARTNERS’ CAPITAL | |||||||
LIABILITIES: | |||||||
Accrued distributions payable | $ | — | $ | 73,584 | |||
Due to general partner | 282,502 | 329,002 | |||||
Accounts payable and accrued liabilities | 3,600,271 | 3,211,321 | |||||
Deferred gains | 644,007 | 1,448,936 | |||||
Note payable | 10,125,755 | 10,242,431 | |||||
Total Liabilities | 14,652,535 | 15,305,274 | |||||
PARTNERS’ CAPITAL (subject to redemption): | |||||||
General partner | 1,873,243 | 1,848,993 | |||||
Limited partners | 181,547,215 | 179,196,966 | |||||
Total Owens Mortgage Investment Fund partners’ capital | 183,420,458 | 181,045,959 | |||||
Noncontrolling interests | 8,059,163 | 17,519,828 | |||||
Total partners’ capital | 191,479,621 | 198,565,787 | |||||
Total Liabilities and Partners’ Capital | $ | 206,132,156 | $ | 213,871,061 |
The accompanying notes are an integral part of these consolidated financial statements.
4
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2012 and 2011
(UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | ||||||||||||
September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | ||||||||||
REVENUES: | |||||||||||||
Interest income on loans secured by trust deeds | $ | 859,636 | $ | 1,867,100 | $ | 2,009,445 | $ | 4,669,755 | |||||
Gain on sale of real estate, net | 1,859,230 | — | 1,847,613 | — | |||||||||
Recognition of deferred gain on sale of real estate | — | 6,635 | 804,929 | 19,515 | |||||||||
Rental and other income from real estate properties | 3,427,716 | 3,546,324 | 10,105,320 | 9,280,469 | |||||||||
Income from investment in limited liability company | 37,921 | 37,486 | 116,094 | 114,378 | |||||||||
Other income | 1,574 | 18,177 | 5,168 | 23,151 | |||||||||
Total revenues | 6,186,077 | 5,475,722 | 14,888,569 | 14,107,268 | |||||||||
EXPENSES: | |||||||||||||
Management fees to general partner | 405,324 | 544,490 | 1,301,201 | 1,830,326 | |||||||||
Servicing fees to general partner | 41,158 | 62,511 | 123,300 | 218,426 | |||||||||
Administrative/accounting | 78,634 | 48,881 | 241,786 | 160,085 | |||||||||
Legal and professional | 276,251 | 128,448 | 838,550 | 412,115 | |||||||||
Rental and other expenses on real estate properties | 2,997,994 | 3,562,432 | 9,632,391 | 9,996,288 | |||||||||
Interest expense | 131,360 | 133,367 | 392,735 | 397,187 | |||||||||
Environmental remediation expense | — | — | 100,000 | — | |||||||||
Provision for loan losses | 551,570 | 730,239 | 399,179 | 1,518,969 | |||||||||
Impairment losses on real estate properties | 614,786 | 5,193,321 | 1,033,266 | 5,484,923 | |||||||||
Other | 15,821 | 23,362 | 68,272 | 77,240 | |||||||||
Total expenses | 5,112,898 | 10,427,051 | 14,130,680 | 20,095,559 | |||||||||
Net income (loss) | $ | 1,073,179 | $ | (4,951,329 | ) | $ | 757,889 | $ | (5,988,291 | ) | |||
Less: Net loss (income) attributable to non-controlling interests | 41,149 | (195,495 | ) | (515,289 | ) | (681,244 | ) | ||||||
Net income (loss) attributable to Owens Mortgage Investment Fund | $ | 1,114,328 | $ | (5,146,824 | ) | $ | 242,600 | $ | (6,669,535 | ) | |||
Net income (loss) allocated to general partner | $ | 11,381 | $ | (50,875 | ) | $ | 2,513 | $ | (68,619 | ) | |||
Net income (loss) allocated to limited partners | $ | 1,102,947 | $ | (5,095,949 | ) | $ | 240,087 | $ | (6,600,916 | ) | |||
Net income (loss) allocated to limited partners per weighted average limited partnership unit | $ | 0.004 | $ | (0.018 | ) | $ | 0.001 | $ | (0.023 | ) | |||
Weighted average limited partnership units | 278,606,000 | 281,575,000 | 278,606,000 | 287,242,000 |
The accompanying notes are an integral part of these consolidated financial statements.
5
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Consolidated Statements of Partners’ Capital
For the Nine Months Ended September 30, 2012 and 2011
(UNAUDITED)
General | Limited partners | Total OMIF | Total | ||||||||||||||||
Partners’ | Noncontrolling | Partners' | |||||||||||||||||
partner | Units | Amount | capital | interests | capital | ||||||||||||||
Balances, December 31, 2010 | $ | 2,259,916 | 290,019,136 | $ | 216,841,448 | $ | 219,101,364 | $ | 16,467 | $ | 219,117,831 | ||||||||
Net (loss) income | (68,619 | ) | 55,745 | (6,600,916 | ) | (6,669,535 | ) | 681,244 | (5,988,291 | ) | |||||||||
Noncontrolling interests of newly consolidated LLC’s | — | — | — | — | 16,257,427 | 16,257,427 | |||||||||||||
Contribution from noncontrolling interest | — | — | — | — | 135,944 | 135,944 | |||||||||||||
Partners’ capital distributions | (87,705 | ) | (8,499,999 | ) | (8,499,997 | ) | (8,587,702 | ) | — | (8,587,702 | ) | ||||||||
Partners’ income distributions | (14,911 | ) | — | (1,389,180 | ) | (1,404,091 | ) | (14,092 | ) | (1,418,183 | ) | ||||||||
Balances, September 30, 2011 | $ | 2,088,681 | 281,574,882 | $ | 200,351,355 | $ | 202,440,036 | $ | 17,076,990 | $ | 219,517,026 | ||||||||
Balances, December 31, 2011 | $ | 1,848,993 | 278,605,524 | $ | 179,196,966 | $ | 181,045,959 | $ | 17,519,828 | $ | 198,565,787 | ||||||||
Net income | 2,513 | — | 240,087 | 242,600 | 515,289 | 757,889 | |||||||||||||
Change in ownership interests in consolidated LLC (Note 5) | 28,150 | — | 2,731,617 | 2,759,767 | (9,959,767 | ) | (7,200,000 | ) | |||||||||||
Partners’ income distributions | (6,413 | ) | — | (621,455 | ) | (627,868 | ) | (16,187 | ) | (644,055 | ) | ||||||||
Balances, September 30, 2012 | $ | 1,873,243 | 278,605,524 | $ | 181,547,215 | $ | 183,420,458 | $ | 8,059,163 | $ | 191,479,621 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2012 and 2011
(UNAUDITED)
September 30, | September 30, | ||||||
2012 | 2011 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income (loss) | $ | 757,889 | $ | (5,988,291 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Gain on sale of real estate, net | (1,847,613 | ) | (19,515 | ) | |||
Recognition of deferred gain on sale of real estate | (804,929 | ) | — | ||||
Income from investment in limited liability company | (116,094 | ) | (114,378 | ) | |||
Provision for loan losses | 399,179 | 1,518,969 | |||||
Bad debt expense | 1,500 | 3,774 | |||||
Impairment losses on real estate properties | 1,033,266 | 5,484,923 | |||||
Depreciation and amortization | 1,846,158 | 2,251,984 | |||||
Changes in operating assets and liabilities: | |||||||
Interest and other receivables | (603,073 | ) | (352,091 | ) | |||
Other assets | (1,050,734 | ) | (297,025 | ) | |||
Accounts payable and accrued liabilities | 485,770 | (1,931,878 | ) | ||||
Due to general partner | (46,500 | ) | (262,695 | ) | |||
Net cash provided by operating activities | 54,819 | 293,777 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Principal collected on loans | 5,585,586 | 16,260,782 | |||||
Investment in real estate properties | (2,436,773 | ) | (846,827 | ) | |||
Net proceeds from disposition of real estate properties | 8,866,691 | — | |||||
Purchases of vehicles, equipment and furniture | (24,656 | ) | (27,028 | ) | |||
Maturities of certificates of deposit | 1,993,197 | 2,008,099 | |||||
Purchases of certificates of deposit | (996,000 | ) | (1,996,360 | ) | |||
Transfer from restricted to unrestricted cash | 21,000 | 269,000 | |||||
Distribution received from investment in limited liability company | 65,000 | 65,000 | |||||
Net cash provided by investing activities | 13,074,045 | 15,732,666 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Repayments on note payable | (116,676 | ) | (112,222 | ) | |||
Distributions to noncontrolling interests | (16,187 | ) | (14,092 | ) | |||
Contribution from noncontrolling interest | — | 135,944 | |||||
Partners’ capital distributions | — | (8,587,702 | ) | ||||
Purchase of member’s interest in consolidated LLC | (7,200,000 | ) | — | ||||
Partners’ income distributions | (701,452 | ) | (1,271,974 | ) | |||
Net cash used in financing activities | (8,034,315 | ) | (9,850,046 | ) | |||
Net increase in cash and cash equivalents | 5,094,549 | 6,176,397 | |||||
Cash and cash equivalents at beginning of period | 12,232,121 | 1,089,060 | |||||
Cash and cash equivalents at end of period | $ | 17,326,670 | $ | 7,265,457 | |||
Supplemental Disclosures of Cash Flow Information | |||||||
Cash paid during the period for interest | $ | 394,671 | $ | 399,125 |
See notes 2, 5 and 6 for supplemental disclosure of non-cash investing activities.
The accompanying notes are an integral part of these consolidated financial statements.
7
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the management of Owens Mortgage Investment Fund, a California Limited Partnership, (the “Partnership”) the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. Certain information and footnote disclosures presented in the Partnership’s annual consolidated financial statements are not included in these interim financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2012. The Partnership evaluates subsequent events up to the date it files its Form 10-Q with the SEC.
Basis of Presentation |
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership and its majority- and wholly-owned limited liability companies (see notes 5 and 6). All significant inter-company transactions and balances have been eliminated in consolidation. The Partnership is in the business of providing mortgage lending services and manages its business as one operating segment. Due to foreclosure activity, the Partnership also owns and manages real estate assets.
Certain reclassifications, not affecting previously reported net income or total partner capital, have been made to the previously issued consolidated financial statements to conform to the current year presentation.
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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans, the valuation of real estate held for sale and investment, and the estimate of the environmental remediation liability (see notes 3, 4, 11 and 12). Fair value estimates are derived from information available in the real estate markets including similar property and often require the experience and judgment of third parties such as real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves or write-downs. Such estimates are inherently imprecise and actual results could differ significantly from such estimates.
Significant Accounting Policies
Loans secured by trust deeds are stated at the principal amount outstanding. The Partnership’s portfolio consists primarily of commercial real estate loans generally collateralized by first, second and third deeds of trust. Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.
8
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
Allowance for Loan Losses
Loans and the related accrued interest and advances are analyzed by management on a periodic basis for ultimate recovery. The allowance for loan losses is an estimate of credit losses inherent in the Partnership’s loan portfolio that have been incurred as of the balance sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired.
Regardless of a loan type, a loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. All loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, management estimates impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or estimates of the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. These valuations are generally updated during the fourth quarter but may be updated during interim periods if deemed appropriate by management.
A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Partnership, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDR’s are considered impaired and measured for impairment as described above.
The determination of the general reserve for loans that are not impaired is also based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Partnership’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Partnership’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
The Partnership maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include commercial real estate, improved and unimproved land, condominium, and single-family (1-4 units) loans. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Partnership’s overall allowance, which is included on the consolidated balance sheet. The reserve for loans that are not impaired consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses, and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.
Improved and Unimproved Land – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified costs and time lines. Trends in the construction industry significantly impact the credit quality of these loans as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Commercial Real Estate and Condominiums – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except improved and unimproved land. Adverse economic developments or an overbuilt market impact commercial and condominium real estate projects and may result in troubled loans. Trends in vacancy rates of properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
9
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
Real Estate Operations
Revenue Recognition
The Partnership leases multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease.
Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
Real Estate Held for Sale
Real estate held for sale includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. Real estate held for sale is recorded at acquisition at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or at the property’s estimated fair value less estimated costs to sell, as applicable. Any excess of the recorded investment in the loan over the net realizable value is charged against the allowance for loan losses.
After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, real estate held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged to impairment losses on real estate properties. Any recovery in the fair value subsequent to such a write down is recorded (not to exceed the net realizable value at acquisition) as an offset to impairment losses on real estate properties. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
Real Estate Held for Investment
Real estate held for investment includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions. Real estate held for investment is recorded at acquisition at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable.
After acquisition, costs incurred relating to the development and improvement of the property are capitalized, whereas costs relating to operating or holding the property are expensed. Subsequent to acquisition, management periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.
Depreciation of real estate properties held for investment is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements (5-39 years). Depreciation of tenant improvements is provided on the straight-line method over the lives of the related leases.
The Partnership reclassifies real estate properties from held for investment to held for sale in the period in which all of the following criteria are met: 1) Management commits to a plan to sell the property; 2) The property is available for immediate sale in its present condition; 3) An active program to locate a buyer has been initiated; 4) The sale of the property is probable and the transfer of the property is expected to qualify for recognition as a completed sale, within one year; and 5) Actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.
10
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
If circumstances arise that previously were considered unlikely, and, as a result, the Partnership decides not to sell a real estate property classified as held for sale, the property is reclassified to held for investment. The property is then measured individually at the lower of its carrying amount, adjusted for depreciation or amortization expense that would have been recognized had the property been continuously classified as held for investment or its fair value at the date of the subsequent decision not to sell.
Environmental Remediation Liability |
Liabilities related to future environmental remediation costs are recorded when remediation or monitoring or both are probable and the costs can be reasonably estimated. The Partnership’s environmental remediation liability related to the property located in Santa Clara, California (held within 1850 De La Cruz, LLC – see Notes 4 and 12) was recorded based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.
Income Taxes
No provision for federal and state income taxes is made in the consolidated financial statements since the Partnership is not a taxable entity. Accordingly, any income or loss is included in the tax returns of the partners.
In accordance with the provisions of ASC 740-10, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Partnership has elected to record interest and penalties related to unrecognized tax benefits, if any, in other expenses. The total amount of unrecognized tax benefits, including interest and penalties, at September 30, 2012 is zero. The amount of tax benefits that would impact the effective rate, if recognized, is expected to be zero. The Partnership does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months. With few exceptions, the Partnership is no longer subject to federal and state income tax examinations by tax authorities for years before 2007.
Recently Adopted Accounting Standards
ASU No. 2011-04
In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820)”. The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance resulted in expanded disclosures of the fair value hierarchy for all financial instruments and descriptions of unobservable inputs and were effective in the Partnership’s interim period ended March 31, 2012.
11
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 2 - LOANS SECURED BY TRUST DEEDS
Loans secured by trust deeds as of September 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | ||||||
By Property Type: | |||||||
Commercial | $ | 25,956,848 | $ | 29,552,531 | |||
Condominiums | 10,129,631 | 10,369,534 | |||||
Single family homes (1-4 units) | 250,000 | 250,000 | |||||
Improved and unimproved land | 28,819,811 | 29,249,811 | |||||
$ | 65,156,290 | $ | 69,421,876 | ||||
By Deed Order: | |||||||
First mortgages | $ | 50,860,254 | $ | 48,710,380 | |||
Second and third mortgages | 14,296,036 | 20,711,496 | |||||
$ | 65,156,290 | $ | 69,421,876 |
Scheduled maturities of loans secured by trust deeds as of September 30, 2012 and the interest rate sensitivity of such loans are as follows:
Fixed | Variable | |||||||||
Interest Rate | Interest Rate | Total | ||||||||
Year ending September 30: | ||||||||||
2012 (past maturity) | $ | 46,746,630 | $ | — | $ | 46,746,630 | ||||
2013 | 1,700,000 | 2,000,000 | 3,700,000 | |||||||
2014 | 4,285,015 | 9,000,000 | 13,285,015 | |||||||
2015 | — | — | — | |||||||
2016 | — | — | — | |||||||
2017 | — | — | — | |||||||
Thereafter (through 2022) | 104,645 | 1,320,000 | 1,424,645 | |||||||
$ | 52,836,290 | $ | 12,320,000 | $ | 65,156,290 |
Variable rate loans use as indices the one-year, five-year and 10-year Treasury Constant Maturity Index (0.17%, 0.62% and 1.65%, respectively, as of September 30, 2012), the prime rate (3.25% as of September 30, 2012) or the weighted average cost of funds index for Eleventh District savings institutions (1.07% as of September 30, 2012) or include terms whereby the interest rate is adjusted at a specific later date. Premiums over these indices have varied from 2.0% to 6.5% depending upon market conditions at the time the loan is made.
12
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following is a schedule by geographic location of loans secured by trust deeds as of September 30, 2012 and December 31, 2011:
September 30, 2012 | Portfolio | December 31, 2011 | Portfolio | ||||||||
Balance | Percentage | Balance | Percentage | ||||||||
Arizona | $ | 7,535,000 | 11.57% | $ | 7,535,000 | 10.86% | |||||
California | 45,278,449 | 69.49% | 50,624,132 | 72.92% | |||||||
Hawaii | 2,000,000 | 3.07% | 2,000,000 | 2.88% | |||||||
Louisiana | 1,320,000 | 2.03% | — | —% | |||||||
Pennsylvania | 4,021,946 | 6.17% | 4,021,946 | 5.79% | |||||||
Utah | 2,594,632 | 3.98% | 2,834,535 | 4.08% | |||||||
Washington | 2,406,263 | 3.69% | 2,406,263 | 3.47% | |||||||
$ | 65,156,290 | 100.00% | $ | 69,421,876 | 100.00% |
As of September 30, 2012 and December 31, 2011, the Partnership’s loans secured by deeds of trust on real property collateral located in Northern California totaled approximately 69% ($45,278,000) and 73% ($50,624,000), respectively, of the loan portfolio. The Northern California region (which includes Monterey, Fresno, Kings, Tulare and Inyo counties and all counties north) is a large geographic area which has a diversified economic base. The ability of borrowers to repay loans is influenced by the economic strength of the region and the impact of prevailing market conditions on the value of real estate. In addition, as of September 30, 2012, approximately 81% of the Partnership’s mortgage loans were secured by real estate located in the states of California and Arizona, which have experienced dramatic reductions in real estate values over the past three years.
During the quarter ended September 30, 2012, the Partnership executed extension and modification agreements on two impaired loans with aggregate principal balances totaling approximately $3,485,000. The interest rates on both loans were lowered from 11% to 8% and 5%, respectively, and the maturity dates were extended to April 2014. In addition, all past due interest and late charges on one of the loans of approximately $240,000 were waived. During the nine months ended September 30, 2012, the Partnership extended to December 31, 2013 the maturity date of one loan with a principal balance of $800,000.
During the nine months ended September 30, 2011, the Partnership extended, by one year or less, the maturity dates of two loans with aggregate principal balances totaling $3,494,000.
During the nine months ended September 30, 2012, the Partnership recognized $805,000 in deferred gain related to the sale of the Bayview Gardens property in 2006 as the carry back note with a remaining principal balance of approximately $4,891,000 was repaid in full by the buyer/borrower.
As of September 30, 2012 and December 31, 2011, approximately $65,052,000 (99.8%) and $64,402,000 (92.8%) of Partnership loans are interest-only and require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. To the extent that a borrower has an obligation to pay mortgage loan principal in a large lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial cash amount. As a result, these loans involve a higher risk of default than fully amortizing loans. In recent years, many borrowers on Partnership loans have been unable to pay the full amount due at the maturity date. The Partnership has allowed some of these borrowers to continue make the regularly scheduled monthly interest payments for certain periods of time to assist the borrower in meeting the balloon payment obligation without formally filing a notice of default. These loans for which the principal is due and payable, but the borrower has failed to make such payment of principal are referred to as “past maturity loans”. As of September 30, 2012 and December 31, 2011, the Partnership had fourteen and sixteen past maturity loans totaling approximately $46,747,000 and $46,666,000, respectively.
13
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
As of September 30, 2012 and December 31, 2011, the Partnership had seventeen and eighteen loans, respectively, that were impaired totaling approximately $51,646,000 (79%) and $52,327,000 (75%), respectively. This included thirteen and fourteen past maturity loans totaling $46,057,000 (71%) and $45,176,000 (65%), respectively. In addition, one and two loans totaling approximately $690,000 (1%) and $1,490,000 (2%), respectively, were past maturity but current in monthly payments as of September 30, 2012 and December 31, 2011, respectively (combined total of impaired and past maturity loans of $52,336,000 (80%) and $53,817,000 (78%), respectively). Of the impaired and past maturity loans, approximately $30,225,000 (46%) and $8,050,000 (12%), respectively, were in the process of foreclosure and $4,493,000 (7%) and $24,203,000 (35%), respectively, involved borrowers who were in bankruptcy as of September 30, 2012 and December 31, 2011.
During the nine months ended September 30, 2012, the Partnership foreclosed on no loans. During the nine months ended September 30, 2011, the Partnership foreclosed on eight loans with aggregate principal balances totaling approximately $45,610,000 and obtained the properties via the trustee’s sales. During the nine months ended September 30, 2012, one delinquent and past maturity loan with a principal balance of $430,000 was paid off in full by the borrower.
In October 2012 (subsequent to quarter end), the Partnership foreclosed on an impaired loan with a principal balance of $2,000,000 and obtained the property via the trustee’s sale. In addition, in October 2012 the borrower, on two Partnership loans secured by the same property with an aggregate principal balance of $1,863,000, had their bankruptcy lifted by the court and the Partnership’s trustee’s sale is scheduled to be held in November 2012.
During the nine months ended September 30, 2011, the Partnership assigned two first mortgage loans secured by the same property with an aggregate principal balance totaling $3,500,000 to a new wholly owned LLC entity (Broadway & Commerce, LLC). These loans were then foreclosed upon by the new LLC entity and the property was obtained via the trustee’s sale. In addition, during the nine months ended September 30, 2011, the Partnership assigned one first mortgage loan that was purchased by the Partnership at a discount in 2010, with a principal balance of approximately $602,000, to a new wholly owned LLC entity (Bensalem Primary Fund, LLC).
The Partnership has four delinquent loans with aggregate principal balances totaling approximately $24,203,000 that were originally secured by first, second and third deeds of trust on 29 parcels of land with entitlements for a 502,267 square foot resort development located in South Lake Tahoe, California known as Chateau at Lake Tahoe (the “Project”). In July 2012, the Partnership signed purchase agreements totaling $6,600,000 to acquire seven parcels in the Project that are contiguous to parcels securing the Partnership’s loans. These seven parcels had provided partial security for the Partnership’s existing loans which were junior to loans held by senior lenders that foreclosed on the property in 2010 and early 2011. While these parcels were originally part of the security for the Partnership’s loans, management chose not to advance the funds to acquire the parcels at the foreclosure sales due to the bankruptcy of the borrower and the uncertainty surrounding the Project. As a result, there are multiple owners of the contiguous parcels. For similar reasons, in July 2012, the Partnership also signed a letter of intent to acquire the senior note for $1,400,000 secured by two parcels on which the Partnership holds second and third deeds of trust. In addition, the Partnership will advance $200,000 to obtain a release of the deed of trust that is senior to the Partnership’s loan on a single parcel in the second phase of the Project, and advance $100,000 for the option to acquire a note for $700,000 which is senior to the Partnership’s loan.
As of September 30, 2012, the Partnership has paid $600,000 in deposits for the purchase of the parcels. The purchases are expected to close escrow in December 2012. The Partnership expects to pay a total of $4,000,000 in total out of cash reserves for the above purchases. The sellers of the parcels and notes are expected to provide financing for the balance of the purchase price which totals $5,000,000 at 5% interest with interest only, semi-annual payments until the note becomes due in four years from the close of escrow. Once these acquisitions are completed, it is anticipated that the Partnership will then foreclose on all of the deeds of trust and gain ownership of the related parcels. The Partnership will then own a total of 20 parcels which will include all of the parcels necessary to complete the first phase of the Project. Management made the decision to purchase these parcels and notes in order to protect the Partnership’s existing investment in the loans by securing controlling ownership of the first phase of the Project, which will enable the Partnership to move ahead with the sale or potential development of the Project. As of September 30, 2012 and December 31, 2011, the Partnership had recorded a specific loan allowance on these loans of approximately $19,095,000 and $17,735,000, respectively.
14
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 3 – ALLOWANCE FOR LOAN LOSSES
The following table shows the allocation of the allowance for loan losses as of and for the three and nine months ended September 30, 2012 by portfolio segment and by impairment methodology:
Commercial Real Estate | Condominiums | Single Family Homes | Improved and Unimproved Land | ||||||||
2012 | Total | ||||||||||
Allowance for loan losses: | |||||||||||
Three Months Ended September 30, 2012 | |||||||||||
Beginning balance | $ | 2,369,287 | $ | 3,855,281 | $ | — | $ | 18,164,938 | $ | 24,389,506 | |
Charge-offs | — | — | — | — | — | ||||||
(Reversal) Provision | (167,073 | ) | (211,200 | ) | — | 929,843 | 551,570 | ||||
Ending Balance | $ | 2,202,214 | $ | 3,644,081 | $ | — | $ | 19,094,781 | $ | 24,941,076 | |
Nine Months Ended September 30, 2012 | |||||||||||
Beginning balance | $ | 2,951,543 | $ | 3,855,281 | $ | — | $ | 17,735,073 | $ | 24,541,897 | |
Charge-offs | — | — | — | — | — | ||||||
(Reversal) Provision | (749,329 | ) | (211,200 | ) | — | 1,359,708 | 399,179 | ||||
Ending balance | $ | 2,202,214 | $ | 3,644,081 | $ | — | $ | 19,094,781 | $ | 24,941,076 | |
Ending balance: individually evaluated for impairment | $ | 424,214 | $ | 3,644,081 | $ | — | $ | 19,094,781 | $ | 23,163,076 | |
Ending balance: collectively evaluated for impairment | $ | 1,778,000 | $ | — | $ | — | $ | — | $ | 1,778,000 | |
Loans: | |||||||||||
Ending balance | $ | 25,956,848 | $ | 10,129,631 | $ | 250,000 | $ | 28,819,811 | $ | 65,156,290 | |
Ending balance: individually evaluated for impairment | $ | 12,446,848 | $ | 10,129,631 | $ | 250,000 | $ | 28,819,811 | $ | 51,646,290 | |
Ending balance: collectively evaluated for impairment | $ | 13,510,000 | $ | — | $ | — | $ | — | $ | 13,510,000 | |
15
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following table shows the allocation of the allowance for loan losses for the three and nine months ended September 30, 2011 and as of December 31, 2011 by portfolio segment and by impairment methodology:
Commercial Real Estate | Condo-miniums | Single Family Homes | Improved and Unimproved Land | ||||||||
2011 | Total | ||||||||||
Allowance for loan losses: | |||||||||||
Three Months Ended September 30, 2011 | |||||||||||
Beginning balance | $ | 3,972,925 | $ | 5,530,473 | $ | — | $ | 16,716,118 | $ | 26,219,516 | |
Charge-offs | — | (1,116,561 | ) | — | (428,314 | ) | (1,544,875 | ) | |||
(Reversal) Provision | (87,238 | ) | 6,691 | — | 810,786 | 730,239 | |||||
Ending Balance | $ | 3,885,687 | $ | 4,420,603 | $ | — | $ | 17,098,590 | $ | 25,404,880 | |
Nine Months Ended September 30, 2011 | |||||||||||
Beginning balance | $ | 4,453,677 | $ | 15,706,726 | $ | — | $ | 15,908,112 | $ | 36,068,515 | |
Charge-offs | — | (11,754,290 | ) | — | (428,314 | ) | (12,182,604 | ) | |||
(Reversal) Provision | (567,990 | ) | 468,167 | — | 1,618,792 | 1,518,969 | |||||
Ending balance | $ | 3,885,687 | $ | 4,420,603 | $ | — | $ | 17,098,590 | $ | 25,404,880 | |
As of December 31, 2011 | |||||||||||
Ending balance: individually evaluated for impairment | $ | 701,543 | $ | 3,855,281 | $ | — | $ | 17,735,073 | $ | 22,291,897 | |
Ending balance: collectively evaluated for impairment | $ | 2,250,000 | $ | — | $ | — | $ | — | $ | 2,250,000 | |
Ending balance | $ | 2,951,543 | $ | 3,855,281 | $ | — | $ | 17,735,073 | $ | 24,541,897 | |
Loans: | |||||||||||
Ending balance | $ | 29,552,531 | $ | 10,369,5344 | $ | 250,000 | $ | 29,249,811 | $ | 69,421,876 | |
Ending balance: individually evaluated for impairment | $ | 12,457,708 | $ | 10,369,534 | $ | 250,000 | $ | 29,249,811 | $ | 52,327,053 | |
Ending balance: collectively evaluated for impairment | $ | 17,094,823 | $ | — | $ | — | $ | — | $ | 17,094,823 | |
16
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following tables show an aging analysis of the loan portfolio by the time past due as of September 30, 2012 and December 31, 2011:
Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 or More Days Past Due | ||||||||||
Total Past Due Loans | Current Loans | Total Loans | ||||||||||
September 30, 2012 | ||||||||||||
Commercial real estate | $ | — | $ | — | $ | 12,446,848 | $ | 12,446,848 | $ | 13,510,000 | $ | 25,956,848 |
Condominiums | — | — | 10,129,631 | 10,129,631 | — | 10,129,631 | ||||||
Single family homes | — | — | 250,000 | 250,000 | — | 250,000 | ||||||
Improved and unimproved land | — | — | 28,819,811 | 28,819,811 | — | 28,819,811 | ||||||
$ | — | $ | — | $ | 51,646,290 | $ | 51,646,290 | $ | 13,510,000 | $ | 65,156,290 |
Loans 30-59 Days Past Due | Loans 60-89 Days Past Due | Loans 90 or More Days Past Due | ||||||||||
Total Past Due Loans | Current Loans | Total Loans | ||||||||||
December 31, 2011 | ||||||||||||
Commercial real estate | $ | — | $ | — | $ | 12,457,708 | $ | 12,457,708 | $ | 17,094,823 | $ | 29,552,531 |
Condominiums | — | — | 10,369,534 | 10,369,534 | — | 10,369,534 | ||||||
Single family homes | — | — | 250,000 | 250,000 | — | 250,000 | ||||||
Improved and unimproved land | — | — | 29,249,811 | 29,249,811 | — | 29,249,811 | ||||||
$ | — | $ | — | $ | 52,327,053 | $ | 52,327,053 | $ | 17,094,823 | $ | 69,421,876 |
All of the loans that are 90 or more days past due as listed above are on non-accrual status as of September 30, 2012 and December 31, 2011.
17
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following tables show information related to impaired loans as of and for the three and nine months ended September 30, 2012:
As of September 30, 2012 | |||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||
With no related allowance recorded: | |||||||
Commercial Real Estate | $ | 12,085,930 | $ | 11,368,096 | $ | — | |
Condominiums | 2,639,751 | 2,594,631 | — | ||||
Single family homes | 250,195 | 250,000 | — | ||||
Improved and unimproved land | 4,618,391 | 4,616,974 | — | ||||
With an allowance recorded: | |||||||
Commercial Real Estate | 1,079,699 | 1,078,752 | 424,214 | ||||
Condominiums | 7,983,281 | 7,535,000 | 3,644,081 | ||||
Single family homes | — | — | — | ||||
Improved and unimproved land | 24,704,084 | 24,202,837 | 19,094,781 | ||||
Total: | |||||||
Commercial Real Estate | $ | 13,165,629 | $ | 12,446,848 | $ | 424,214 | |
Condominiums | $ | 10,623,032 | $ | 10,129,631 | $ | 3,644,081 | |
Single family homes | $ | 250,195 | $ | 250,000 | $ | — | |
Improved and unimproved land | $ | 29,322,475 | $ | 28,819,811 | $ | 19,094,781 |
18
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | ||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||
With no related allowance recorded: | |||||||||
Commercial Real Estate | $ | 12,046,985 | $ | 381,610 | $ | 11,900,346 | $ | 468,943 | |
Condominiums | 2,639,751 | 45,000 | 2,692,772 | 105,000 | |||||
Single family homes | 250,195 | 2,292 | 250,195 | 16,044 | |||||
Improved and unimproved land | 4,618,391 | 76,125 | 4,761,683 | 236,917 | |||||
With an allowance recorded: | |||||||||
Commercial Real Estate | 1,079,419 | 13,484 | 1,079,043 | 13,484 | |||||
Condominiums | 7,983,281 | 44,850 | 7,983,281 | 178,107 | |||||
Single family homes | — | — | — | — | |||||
Improved and unimproved land | 24,704,084 | — | 24,586,721 | — | |||||
Total: | |||||||||
Commercial Real Estate | $ | 13,126,404 | $ | 395,094 | $ | 12,979,389 | $ | 482,427 | |
Condominiums | $ | 10,623,032 | $ | 89,850 | $ | 10,676,053 | $ | 283,107 | |
Single family homes | $ | 250,195 | $ | 2,292 | $ | 250,195 | $ | 16,044 | |
Improved and unimproved land | $ | 29,322,475 | $ | 76,125 | $ | 29,348,404 | $ | 236,917 |
19
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following tables show information related to impaired loans as of December 31, 2011 and for the three and nine months ended September 30, 2011:
As of December 31, 2011 | |||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||
With no related allowance recorded: | |||||||
Commercial Real Estate | $ | 11,617,607 | $ | 11,263,451 | $ | — | |
Condominiums | 2,873,107 | 2,834,534 | — | ||||
Single family homes | 250,195 | 250,000 | — | ||||
Improved and unimproved land | 5,048,329 | 5,046,974 | — | ||||
With an allowance recorded: | |||||||
Commercial Real Estate | 1,194,352 | 1,194,257 | 701,543 | ||||
Condominiums | 7,983,281 | 7,535,000 | 3,855,281 | ||||
Single family homes | — | — | — | ||||
Improved and unimproved land | 24,337,602 | 24,202,837 | 17,735,073 | ||||
Total: | |||||||
Commercial Real Estate | $ | 12,811,959 | $ | 12,457,708 | $ | 701,543 | |
Condominiums | $ | 10,856,388 | $ | 10,369,534 | $ | 3,855,281 | |
Single family homes | $ | 250,195 | $ | 250,000 | $ | — | |
Improved and unimproved land | $ | 29,385,931 | $ | 29,249,811 | $ | 17,735,073 |
20
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | ||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||
With no related allowance recorded: | |||||||||
Commercial Real Estate | $ | 12,583,155 | $ | 27,593 | $ | 21,127,040 | $ | 829,072 | |
Condominiums | 3,320,306 | 166,948 | 3,463,213 | 256,948 | |||||
Single family homes | 250,180 | 6,876 | 267,034 | 18,336 | |||||
Improved and unimproved land | 5,805,717 | 70,110 | 5,567,625 | 176,204 | |||||
With an allowance recorded: | |||||||||
Commercial Real Estate | 1,343,843 | 16,711 | 1,204,921 | 38,993 | |||||
Condominiums | 7,972,603 | 82,290 | 13,501,499 | 261,279 | |||||
Single family homes | — | — | — | — | |||||
Improved and unimproved land | 41,568,416 | — | 42,539,002 | — | |||||
Total: | |||||||||
Commercial Real Estate | $ | 13,926,998 | $ | 44,304 | $ | 22,331,961 | $ | 868,065 | |
Condominiums | $ | 11,292,909 | $ | 249,238 | $ | 16,964,712 | $ | 518,227 | |
Single family homes | $ | 250,180 | $ | 6,876 | $ | 267,034 | $ | 18,336 | |
Improved and unimproved land | $ | 47,374,133 | $ | 70,110 | $ | 48,106,627 | $ | 176,204 |
Interest income recognized on a cash basis for impaired loans approximates the interest income recognized as reflected in the tables above.
Troubled Debt Restructurings
The Partnership has allocated approximately $424,000 and $116,000 of specific reserves to borrowers whose loan terms have been modified in troubled debt restructurings as of September 30, 2012 and December 31, 2011. The Partnership has not committed to lend additional amounts to any of these borrowers.
During the three and nine months ended September 30, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: an extension of the maturity date and a reduction of the stated interest rate of the loan or a reduction in the monthly interest payments due under the loan with all deferred interest due at the extended maturity date.
Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 20 months to 7 years. Modifications involving a reduction in the monthly interest payment due and the extension of the maturity date were for periods ranging from 5 months to 1 year.
21
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following tables show information related to loan modifications made by the Partnership during the three and nine months ended September 30, 2012 and 2011:
Modifications During the Three Months Ended September 30, 2012 | ||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||
Troubled Debt Restructurings | ||||||
Commercial real estate | 1 | $ | 655,485 | $ | 655,485 | |
Improved and unimproved land | 1 | 2,406,411 | 2,406,411 |
Modifications During the Nine Months Ended September 30, 2012 | ||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||
Troubled Debt Restructurings | ||||||
Commercial real estate | 1 | $ | 655,485 | $ | 655,485 | |
Improved and unimproved land | 2 | 5,367,180 | 5,367,180 |
Modifications During the Nine Months Ended September 30, 2011 | ||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||
Troubled Debt Restructurings | ||||||
Commercial real estate | 1 | $ | 236,652 | $ | 78,000 | |
Condominiums | 1 | 3,531,956 | 3,531,956 | |||
Improved and unimproved land | 3 | 5,801,418 | 5,801,418 | |||
Troubled Debt Restructurings | Number of Contracts | Recorded Investment | ||||
That Subsequently Defaulted | ||||||
Improved and unimproved land | 1 | 2,960,770 |
NOTE 4 – INVESTMENT IN LIMITED LIABILITY COMPANY
During 2008, the Partnership entered into an Operating Agreement of 1850 De La Cruz LLC, a California limited liability company (“1850”), with Nanook Ventures LLC (“Nanook”), an unrelated party. The purpose of the joint venture is to acquire, own and operate certain industrial land and buildings located in Santa Clara, California that were owned by the Partnership. The property was subject to a Purchase and Sale Agreement dated July 24, 2007 (the “Sale Agreement”), as amended, between the Partnership, as seller, and Nanook, as buyer. During the course of due diligence under the Sale Agreement, it was discovered that the property is contaminated and that remediation and monitoring may be required. The parties agreed to enter into the Operating Agreement to restructure the arrangement as a joint venture. At the time of closing in July 2008, the two properties were separately contributed to two new limited liability companies, Nanook Ventures One LLC and Nanook Ventures Two LLC, that are wholly owned by 1850. The Partnership and Nanook are the Members of 1850 and NV Manager, LLC is the Manager. (See Note 12 for further discussion of the Partnership’s environmental remediation obligation with respect to the properties owned by 1850.)
22
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The Partnership received capital distributions from 1850 of approximately $65,000 during the nine months ended September 30, 2012 and 2011. The net income to the Partnership from its investment in 1850 De La Cruz was approximately $38,000 and $37,000 during the three months ended September 30, 2012 and 2011, respectively, and $116,000 and $114,000 during the nine months ended September 30, 2012 and 2011, respectively.
NOTE 5 - REAL ESTATE HELD FOR SALE
Real estate properties held for sale as of September 30, 2012 and December 31, 2011 consists of the following properties acquired through foreclosure:
2012 | 2011 | ||||||
Manufactured home subdivision development, Ione, California | $ | 82,875 | $ | 244,400 | |||
Manufactured home subdivision development, Lake Charles, Louisiana (held within Dation, LLC) – see Note 6 | — | 2,003,046 | |||||
Golf course, Auburn, California (held within DarkHorse Golf Club, LLC) – transferred from held for investment | 1,844,146 | — | |||||
Eight townhomes, Santa Barbara, California (held within Anacapa Villas, LLC) – transferred from held for investment | 7,851,451 | — | |||||
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) | 408,000 | 432,000 | |||||
Nineteen condominium units, San Diego, California (held within 33rd Street Terrace, LLC) – transferred from held for investment | 1,626,375 | — | |||||
Industrial building, Sunnyvale, California (held within Wolfe Central, LLC) – transferred from held for investment | 3,250,375 | — | |||||
Commercial buildings, Sacramento, California | 3,890,968 | 3,890,968 | |||||
45 condominium and 2 commercial units, Oakland, California (held within 1401 on Jackson, LLC) – transferred from held for investment | 8,517,932 | — | |||||
169 condominium units and 160 unit unoccupied apartment building, Miami, Florida (held within TOTB Miami, LLC) – transferred from held for investment | 33,837,130 | — | |||||
1/7th interest in single family home, Lincoln City, Oregon | 85,259 | 85,259 | |||||
Industrial land, Pomona, California (held within 1875 West Mission Blvd., LLC) | 7,315,000 | 7,315,000 | |||||
$ | 68,709,511 | $ | 13,970,673 |
During the second quarter of 2012, the Partnership transferred the properties located in Auburn, Santa Barbara, San Diego, Sunnyvale, Oakland and Chico, California and Miami, Florida from held for investment to held for sale as they are now being actively marketed for sale and sales are expected within the next year.
23
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
During the quarter ended September 30, 2012, the Partnership sold the industrial building located in Chico, California for net sales proceeds of approximately $8,514,000 resulting in a gain to the Partnership of approximately $1,863,000. In addition, during the quarter ended September 30, 2012, the Partnership sold one of the manufactured homes located in Ione, California for net sales proceeds of approximately $57,000 resulting in a loss to the Partnership of approximately $4,000.
In October 2012 (subsequent to quarter end), the Partnership sold the nineteen condominium units located in San Diego, California for net sales proceeds of approximately $2,181,000 resulting in a gain to the Partnership of approximately $555,000.
During the three and nine months ended September 30, 2012, the Partnership recorded the following impairment losses on real estate held for sale based on updated appraisals obtained:
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||
Manufactured home subdivision development, Ione, California | $ | 100,830 | $ | 100,830 | ||||
Golf course, Auburn, California (held within DarkHorse Golf Club, LLC) | — | 328,240 | ||||||
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) | 24,000 | 24,000 | ||||||
$ | 124,830 | $ | 453,070 |
During the quarter ended September 30, 2011, the Partnership recorded an impairment loss of approximately $19,000 on the property held within The Last Resort & Marina, LLC as a result of an updated appraisal obtained on the property.
Foreclosure Activity
During the quarter ended September 30, 2011, the Partnership and a third party lender who participated in a first mortgage loan secured by industrial land located in Pomona, California with a principal balance to the Partnership of approximately $5,078,000 contributed their interests in the loan to a new limited liability company, 1875 West Mission Blvd., LLC (“1875”). The lenders then foreclosed on the subject loan and obtained the property via the trustee’s sale within the new LLC. See further details below under 1875 West Mission Blvd., LLC.
During the nine months ended September 30, 2011, the Partnership foreclosed on a first mortgage loan secured by a 1/7th interest in a single family home located in Lincoln City, Oregon in the amount of approximately $75,000 and obtained the property interest via the trustee’s sale. In addition, accrued interest and advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $10,000 were capitalized to the basis of the property.
TOTB Miami, LLC
During the nine months ended September 30, 2011, the Partnership and two co-lenders (which included Owens Financial Group, Inc., or the General Partner, and PRC Treasures, LLC, or PRC) foreclosed on a participated, first mortgage loan secured by a condominium complex located in Miami, Florida with a principal balance to the Partnership of approximately $26,257,000 and obtained an undivided interest in the properties via the trustee’s sale. The Partnership and other lenders formed a Florida limited liability company, TOTB Miami, LLC (“TOTB”), to own and operate the complex. The complex consists of three buildings, two of which have been renovated and are being leased, and in which 169 units remain unsold and one which contains 160 vacant units that have not been renovated. Based on an appraisal obtained in September 2010, it was determined that the fair value of the property was lower than the Partnership’s total investment in the loan (including a previously established loan loss allowance of $10,188,000) and an additional charge to provision for loan losses of approximately $450,000 was recorded at the time of foreclosure during the first quarter of 2011 (total charge-off of $10,638,000).
24
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
In March 2012, the Partnership made a priority capital contribution to TOTB in the amount of $7,200,000. TOTB then purchased PRC’s member interest in TOTB for $7,200,000. Thus, the remaining members in TOTB are now the Partnership and the General Partner. On the same date, the Partnership and the General Partner executed an amendment to the TOTB operating agreement to set the percentage of capital held by each at 80.74% for the Partnership and 19.26% for the General Partner based on the dollar amount of capital invested in the properties/TOTB (excluding the Preferred Class A Units discussed below). Income and loss allocations will be made based on these percentages after a 15% preferred return to the Partnership based on its $2,583,000 contribution to TOTB in 2011 (represented by its Preferred Class A Units). The change in capital as a result of the PRC buyout and the amended agreement resulted in an increase to the Partnership’s capital of approximately $2,760,000. Per the PRC redemption agreement, in the event the TOTB real estate assets are sold in the future for proceeds in excess of the Partnership’s and General Partner’s investments in TOTB, including all capital contributions, loans, protective advances and accrued and unpaid interest under the operating agreement, PRC is to receive 25% of such excess. The assets, liabilities, income and expenses of TOTB have been consolidated into the accompanying consolidated balance sheets and statements of operations of the Partnership. The noncontrolling interests of the other members of TOTB totaled approximately $6,028,000 and $15,512,000 as of September 30, 2012 and December 31, 2011, respectively.
The net income (loss) to the Partnership from TOTB was approximately $148,000 and $(292,000) (including depreciation of $0 and $150,000) for the three months ended September 30, 2012 and 2011, respectively, and $(216,000) and $(954,000) (including depreciation of $299,000 and $399,000) for the nine months ended September 30, 2012 and 2011, respectively.
1875 West Mission Blvd., LLC
1875 West Mission Blvd., LLC (“1875”) is a California limited liability company formed for the purpose of owning 22.41 acres of industrial land located in Pomona, California which was acquired by the Partnership and PNL Company (who were co-lenders in the subject loan) via foreclosure in August 2011. Pursuant to the Operating Agreement of 1875, the Partnership has a 60% membership interest in 1875 and is entitled to collect approximately $5,078,000 upon the sale of the property after PNL collects any unreimbursed LLC expenses it has paid and $1,019,000 in its default interest at the time of foreclosure. The assets, liabilities, income and expenses of 1875 have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership. The noncontrolling interest of PNL was approximately $2,035,000 and $2,002,000 as of September 30, 2012 and December 31, 2011, respectively.
There was no net income or loss to the Partnership from 1875 for the three and nine months ended September 30, 2012 and 2011.
25
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 6 - REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment is comprised of the following properties as of September 30, 2012 and December 31, 2011:
2012 | 2011 | ||||||
Light industrial building, Paso Robles, California | $ | 1,463,049 | $ | 1,496,788 | |||
Commercial buildings, Roseville, California | 779,902 | 805,383 | |||||
Retail complex, Greeley, Colorado (held within 720 University, LLC) | 12,070,643 | 12,308,400 | |||||
Undeveloped land, Lake Charles, Louisiana (held within Dation, LLC) | 256,108 | — | |||||
Undeveloped residential land, Madera County, California | 726,580 | 720,000 | |||||
Undeveloped residential land, Marysville, California | 403,200 | 403,200 | |||||
Golf course, Auburn, California – transferred to held for sale | — | 1,978,412 | |||||
75 improved residential lots, Auburn, California, (held within Baldwin Ranch Subdivision, LLC) | 3,878,400 | 3,878,400 | |||||
Undeveloped industrial land, San Jose, California | 1,958,400 | 2,044,800 | |||||
Undeveloped commercial land, Half Moon Bay, California | 1,468,800 | 1,468,800 | |||||
Storage facility/business, Stockton, California | 4,049,839 | 4,118,400 | |||||
Two improved residential lots, West Sacramento, California | 130,560 | 182,400 | |||||
Undeveloped residential land, Coolidge, Arizona | 1,017,600 | 1,056,000 | |||||
Office condominium complex (16 units), Roseville, California | 3,991,440 | 4,068,199 | |||||
Eight townhomes, Santa Barbara, California – transferred to held for sale | — | 7,990,000 | |||||
Nineteen condominium units, San Diego, California – transferred to held for sale | — | 1,647,219 | |||||
Golf course, Auburn, California (held within Lone Star Golf, LLC) | 1,968,518 | 1,984,749 | |||||
Industrial building, Sunnyvale, California – transferred to held for sale | — | 3,294,903 | |||||
133 condominium units, Phoenix, Arizona (held within 54th Street Condos, LLC) | 7,261,872 | 5,376,000 | |||||
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC) | 4,887,757 | 4,958,857 | |||||
61 condominium units, Lakewood, Washington (held within Phillips Road, LLC) | 4,691,185 | 4,800,000 | |||||
Apartment complex, Ripon, California (held within 550 Sandy Lane, LLC) | 4,162,161 | 4,246,550 | |||||
45 condominium and 2 commercial units, Oakland, California – transferred to held for sale | — | 8,653,490 | |||||
Industrial building, Chico, California – see Note 5 | — | 6,720,000 | |||||
169 condominium units and 160 unit unoccupied apartment building, Miami, Florida – transferred to held for sale | — | 34,011,709 | |||||
12 condominium and 3 commercial units, Tacoma, Washington (held within Broadway & Commerce, LLC) | 2,444,322 | 2,466,328 | |||||
6 improved residential lots, Coeur D’Alene, Idaho | 969,600 | 1,342,000 | |||||
Undeveloped residential and commercial land, Gypsum, Colorado | 9,600,000 | 9,600,000 | |||||
$ | 68,179,936 | $ | 131,620,987 |
26
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The balances of land and the major classes of depreciable property for real estate held for investment as of September 30, 2012 and December 31, 2011 are as follows:
2012 | 2011 | |||||||
Land | $ | 32,541,463 | $ | 51,154,741 | ||||
Buildings and improvements | 41,776,741 | 86,924,958 | ||||||
74,318,204 | 138,079,699 | |||||||
Less: Accumulated depreciation | (6,138,268 | ) | (6,458,712 | ) | ||||
$ | 68,179,936 | $ | 131,620,987 |
The acquisition of certain real estate properties through foreclosure (including real estate held for sale – see Note 5) resulted in the following non-cash activity for the nine months ended September 30, 2012 and 2011, respectively:
2012 | 2011 | |||||||
Increases: | ||||||||
Real estate held for sale and investment | $ | — | $ | 55,407,119 | ||||
Noncontrolling interests | — | (16,257,427 | ) | |||||
Accounts payable and accrued liabilities | — | (2,980,871 | ) | |||||
Decreases: | ||||||||
Loans secured by trust deeds, net of allowance for loan losses | — | (33,427,406 | ) | |||||
Interest and other receivables | — | (2,741,415 | ) |
See detail of other non-cash activity in Note 5 above.
It is the Partnership’s intent to sell the majority of its real estate properties held for investment, but expected sales are not probable to occur within the next year.
Depreciation expense was approximately $315,000 and $777,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,670,000 and $2,096,000 for the nine months ended September 30, 2012 and 2011, respectively.
During the three and nine months ended September 30, 2012, the Partnership recorded the following impairment losses on real estate held for investment based on updated appraisals obtained:
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||
75 improved residential lots, Auburn, California, (held within Baldwin Ranch Subdivision, LLC) | $ | 31,156 | $ | 31,156 | ||||
Undeveloped industrial land, San Jose, California | 86,400 | 86,400 | ||||||
Two improved residential lots, West Sacramento, California | — | 51,840 | ||||||
Undeveloped residential land, Coolidge, Arizona | — | 38,400 | ||||||
6 improved residential lots, Coeur D’Alene, Idaho | 372,400 | 372,400 | ||||||
$ | 489,956 | $ | 580,196 |
27
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
During the three and nine months ended September 30, 2011, the Partnership recorded the following impairment losses on real estate held for investment based on updated appraisals obtained or other indications of value:
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | |||||||
Office condominium complex (16 units), Roseville, California | $ | 3,247,413 | $ | 3,247,413 | ||||
Two improved residential lots, West Sacramento, California | 352,865 | 352,865 | ||||||
Undeveloped residential land, Coolidge, Arizona | 1,043,816 | 1,043,816 | ||||||
133 condominium units, Phoenix, Arizona (held within 54th Street Condos, LLC) | — | 291,602 | ||||||
6 improved residential lots, Coeur D’Alene, Idaho | 530,000 | 530,000 | ||||||
$ | 5,174,094 | $ | 5,465,696 |
The impairment loss on the condominium units in Phoenix, Arizona was based on contracts executed during 2011 to complete unfinished units within the complex. The aggregate contract amounts were higher than previously estimated at the time of foreclosure of the related loan in December 2009.
Foreclosure Activity
During the quarter ended September 30, 2011, the Partnership foreclosed on a first mortgage loan secured by 6 improved, residential lots located in Coeur D’Alene, Idaho with a principal balance of $2,200,000 and obtained the property via the trustee’s sale. The General Partner was a co-creditor in this loan due to a loan fee that was supposed to be paid to the General Partner at the time the loan was paid off. However, due to an intercreditor agreement between the Partnership and the General Partner, the Partnership must receive its entire investment in the loan (including all accrued, past due interest at the time of foreclosure) prior to any amounts to be paid to the General Partner once the property is sold. It was determined that the fair value of the property was lower than the Partnership’s investment in the loan and a specific loan allowance of approximately $426,000 was recorded as of June 30, 2011. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure, along with an additional charge to provision for loan losses of approximately $2,000. After foreclosure, it was determined that approximately $530,000 in additional improvements costs would be required to complete the lots and ready them for sale. Thus, an additional impairment loss was recorded of $530,000 during the quarter ended September 30, 2011.
During the quarter ended September 30, 2011, the Partnership foreclosed on two first mortgage loans secured by 15 converted condominium and commercial office units in a building located in Tacoma, Washington with an aggregate principal balance of $3,500,000 and obtained the property via the trustee’s sale. It was determined that the fair value of the property was lower than the Partnership’s investment in the loans (including advances made on the loans of approximately $103,000) and a specific loan allowance of approximately $1,110,000 was recorded as of June 30, 2011. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure, along with an additional charge to provision for loan losses of approximately $7,000. The Partnership formed a new, wholly-owned limited liability company, Broadway & Commerce, LLC to own and operate the building.
During the nine months ended September 30, 2011, the Partnership foreclosed on a first mortgage loan secured by an industrial building located in Chico, California in the amount of $8,500,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan (for items such as legal fees and delinquent property taxes) in the total amount of approximately $588,000 were capitalized to the basis of the property. The carrying value of this property of $9,088,000 at the time of foreclosure approximated its then current fair value less estimated selling costs.
28
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
Dation, LLC
During the nine months ended September 30, 2012, all of the improved lots and manufactured rental homes owned by Dation, LLC (“Dation”) were sold for $1,650,000 (comprised of cash of $330,000 and a note from the buyer of $1,320,000) resulting in no gain or loss to the Partnership. In addition, during the nine months ended September 30, 2012, the Partnership paid its joint venture partner a portion of its accrued management fees owed of approximately $147,000 in the form of $50,000 cash and two model homes with a book value of $97,000 as part of a settlement agreement to remove the joint venture partner as a member of Dation. The $1,320,000 note receivable from the sale was then assigned to the Partnership. The remaining model home was also sold during the second quarter of 2012 for cash of $25,000, resulting in a loss of approximately $12,000. Dation continues to own 40 acres of unimproved land. The Partnership intends to dissolve Dation during the fourth quarter of 2012 and assign the remaining land to the Partnership. The unimproved land with a book balance of approximately $256,000 was transferred to real estate held for investment as of March 31, 2012 due to the Partnership’s intention to hold the property for the foreseeable future.
720 University, LLC
The Partnership has an investment in a limited liability company, 720 University, LLC (“720 University”), which owns a commercial retail property located in Greeley, Colorado. The Partnership receives 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.
The net income to the Partnership from 720 University was approximately $120,000 and $88,000 (including depreciation and amortization of $109,000 and $141,000) for the three months ended September 30, 2012 and 2011, respectively, and $208,000 and $95,000 (including depreciation and amortization of $331,000 and $371,000) for the nine months ended September 30, 2012 and 2011, respectively. The noncontrolling interest of the joint venture partner of approximately $(4,000) and $5,000 as of September 30, 2012 and December 31, 2011, respectively, is reported in the accompanying consolidated balance sheets. The Partnership’s investment in 720 University real property and improvements was approximately $12,071,000 and $12,308,000 as of September 30, 2012 and December 31, 2011, respectively.
29
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The approximate net income (loss) from Partnership real estate properties held within wholly-owned limited liability companies and other investment properties with significant operating results for the nine months ended September 30, 2012 and 2011 were as follows:
2012 | 2011 | ||||||
Anacapa Villas, LLC | $ | 41,000 | $ | (128,000 | ) | ||
Dation, LLC | 2,000 | (43,000 | ) | ||||
DarkHorse Golf Club, LLC | (151,000 | ) | (347,000 | ) | |||
Lone Star Golf, LLC | (79,000 | ) | (176,000 | ) | |||
Baldwin Ranch Subdivision, LLC | (76,000 | ) | (66,000 | ) | |||
The Last Resort and Marina, LLC | (16,000 | ) | (26,000 | ) | |||
33rd Street Terrace, LLC | 80,000 | 15,000 | |||||
54th Street Condos, LLC | (258,000 | ) | (284,000 | ) | |||
Wolfe Central, LLC | 320,000 | 361,000 | |||||
AMFU, LLC | (15,000 | ) | 25,000 | ||||
Phillips Road, LLC | 71,000 | 75,000 | |||||
550 Sandy Lane, LLC | 150,000 | 133,000 | |||||
1401 on Jackson, LLC | 27,000 | (6,000 | ) | ||||
Broadway & Commerce, LLC | 68,000 | — | |||||
Light industrial building, Paso Robles, California | 137,000 | 149,000 | |||||
Undeveloped industrial land, San Jose, California | (113,000 | ) | (105,000 | ) | |||
Office condominium complex, Roseville, California | (39,000 | ) | (45,000 | ) | |||
Storage facility/business, Stockton, California | 205,000 | 177,000 | |||||
Industrial building, Chico, California | (186,000 | ) | (319,000 | ) | |||
Undeveloped land, Gypsum, Colorado | (257,000 | ) | — |
Certain of the Partnership’s real estate properties held for sale and investment are leased to tenants under noncancellable leases with remaining terms ranging from one to fifteen years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to September 30, 2012 and thereafter is as follows:
Year ending September 30: | ||||
2013 | $ | 5,759,620 | ||
2014 | 2,518,715 | |||
2015 | 1,924,404 | |||
2016 | 1,592,393 | |||
2017 | 1,059,835 | |||
Thereafter (through 2026) | 2,893,500 | |||
$ | 15,748,467 |
30
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 7 - TRANSACTIONS WITH AFFILIATES
In consideration of the management services rendered to the Partnership, the General Partner is entitled to receive from the Partnership a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Partnership’s mortgage loans.
All of the Partnership’s loans are serviced by the General Partner, in consideration for which the General Partner receives up to 0.25% per annum of the unpaid principal balance of the loans.
The General Partner at its sole discretion may, on a monthly basis, adjust the management and servicing fees as long as they do not exceed the allowable limits calculated on an annual basis. Even though the fees for a month may exceed 1/12 of the maximum limits, at the end of the calendar year the sum of the fees collected for each of the 12 months must be equal to or less than the stated limits. Management fees amounted to approximately $405,000 and $544,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,301,000 and $1,830,000 for the nine months ended September 30, 2012 and 2011, respectively, and are included in the accompanying consolidated statements of operations. Servicing fees amounted to approximately $41,000 and $63,000 for the three months ended September 30, 2012 and 2011, respectively, and $123,000 and $218,000 for the nine months ended September 30, 2012 and 2011, respectively, and are included in the accompanying consolidated statements of operations. As of September 30, 2012 and December 31, 2011, the Partnership owed management and servicing fees to the General Partner in the amount of approximately $283,000 and $329,000, respectively.
The maximum servicing fees were paid to the General Partner during the three and nine months ended September 30, 2012 and 2011. If the maximum management fees had been paid to the General Partner during the three and nine months ended September 30, 2012, the management fees would have been $453,000 (increase of $47,000) and $1,356,000 (increase of $55,000), respectively, which would have decreased net income allocated to limited partners by approximately 4.3% and 22.7%, respectively, resulting in no change to net income allocated to limited partners per weighted average limited partner unit. If the maximum management fees had been paid to the General Partner during the three and nine months ended September 30, 2011, the management fees would have been $688,000 (increase of $143,000) and $2,403,000 (increase of $572,000), respectively, which would have increased net loss allocated to limited partners by approximately 2.8% and 8.6%, respectively, and net loss allocated to limited partners per weighted average limited partner unit by the same percentages to a loss of $.019 and $.025, respectively, from a loss of $.018 and $.023, respectively.
In determining the yield to the partners and hence the management fees, the General Partner may consider a number of factors, including current market yields, delinquency experience, cash and real estate activities. The General Partner expects that the management fees it receives from the Partnership will vary in amount and percentage from period to period. However, due to reduced levels of mortgage investments held by the Partnership, during the nine months ended September 30, 2012, the General Partner has chosen to take close to the maximum compensation that it is able to take pursuant to the Partnership Agreement and will likely continue to take the maximum compensation for the foreseeable future.
Pursuant to the Partnership Agreement, the General Partner receives all late payment charges from borrowers on loans owned by the Partnership, with the exception of loans participated with outside entities. The amounts paid to or collected by the General Partner for such charges totaled approximately $1,000 and $4,000 for the three months ended September 30, 2012 and 2011, respectively, and $36,000 and $778,000 for the nine months ended September 30, 2012 and 2011, respectively. In addition, the Partnership remits other miscellaneous fees to the General Partner, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). Such fees remitted to the General Partner totaled approximately $0 and $8,000 for the nine months ended September 30, 2012 and 2011, respectively.
The General Partner originates all loans the Partnership invests in and receives loan origination and extension fees from borrowers. Such fees paid to the General Partner amounted to approximately $24,000 and $168,000 on loans originated or extended of approximately $800,000 and $10,240,000 for the nine months ended September 30, 2012 and 2011, respectively. A loan fee paid to the General Partner in the amount of $78,000 during the nine months ended September 30, 2011 was collected from the borrower upon payoff of the related loan in December 2010 and remitted to the General Partner in January 2011.
31
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The General Partner is reimbursed by the Partnership for the actual cost of goods, services and materials used for or by the Partnership and obtained from unaffiliated entities and the salary and related salary expense of the General Partner’s non-management and non-supervisory personnel performing services for the Partnership which could be performed by independent parties (subject to certain limitations in the Partnership Agreement). The amounts reimbursed to the General Partner by the Partnership were $170,000 and $160,000 during the three months ended September 30, 2012 and 2011, respectively, and $500,000 and $477,000 during the nine months ended September 30, 2012 and 2011, respectively, including administrative/accounting and real estate operations salaries reimbursements.
The General Partner is required to contribute capital to the Partnership in the amount of 0.5% of the limited partners’ aggregate capital accounts (the “GP Contribution Interest”) and, together with its carried interest (the “Carried Interest”); the General Partner has an interest at least equal to 1% of the limited partners’ capital accounts. The Carried Interest of the General Partner of up to 1/2 of 1% is recorded as an expense of the Partnership and credited as a contribution to the General Partner’s capital account as additional compensation. As of September 30, 2012, the General Partner had made cash capital contributions of $1,496,000 to the Partnership ($118,000 of which was distributed to the General Partner along with limited partner capital distributions during 2011). The General Partner is required to continue cash capital contributions to the Partnership in order to maintain its minimum required capital balance. There was no Carried Interest expense charged to the Partnership for the three and nine months ended September 30, 2012 and 2011, respectively.
The General Partner held second (junior to the Partnership’s first deed of trust due to an intercreditor agreement between the parties causing the Partnership to have a senior interest) and fourth deeds of trust in the total amount of approximately $853,000 secured by the same property (and to the same borrower) on which the Partnership had a first deed of trust in the amount of $2,200,000 at an interest rate of 12% per annum. Approximately $517,000 of the General Partner’s second deed of trust was an exit fee included in the deed of trust at the time of loan origination in 2006. The Partnership foreclosed on its first deed of trust during the quarter ended September 30, 2011 and obtained the property via the trustee’s sale (see Note 6).
NOTE 8 - NOTE PAYABLE
The Partnership has a note payable with a bank through its investment in 720 University (see Note 6), which is secured by the retail development located in Greeley, Colorado. The remaining principal balance on the note was approximately $10,126,000 and $10,242,000 as of September 30, 2012 and December 31, 2011, respectively. The interest rate on the note is 5.07% per annum and requires monthly interest and principal payments of $56,816, with the balance of unpaid principal due on March 1, 2015. Interest expense was approximately $131,000 and $133,000 for the three months ended September 30, 2012 and 2011, respectively, and $393,000 and $397,000 for the nine months ended September 30, 2012 and 2011, respectively. The following table shows maturities by year on this note payable as of September 30, 2012:
Year ending September 30: | ||||
2013 | $ | 165,190 | ||
2014 | 173,885 | |||
2015 | 9,786,680 | |||
$ | 10,125,755 |
32
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 9 – PARTNERS’ CAPITAL
The Partnership originally registered 200,000,000 Units under Registration No. 333-69272 of which 90,241,162 Units remained available for sale, at a purchase price of $1.00 per Unit, as of March 31, 2008. The Partnership filed a registration statement with the SEC on Form S-11, file number 333-150248, that was declared effective on April 30, 2008. Subsequently, the Partnership filed a new registration statement with the SEC on Form S-11, file number 333-173249, that was declared effective on May 2, 2011. The new registration statement registered 80,043,274 Units that were previously registered and unsold pursuant to registration statement No. 333-150248. The Partnership intends to amend its registration statement to withdraw the remaining registered Units as it no longer intends to sell Units under this registration statement or pursuant to the Distribution Reinvestment Plan (as defined below).
The Partnership has experienced a significant increase in limited partner capital withdrawal requests since late 2008. As of September 30, 2012, the Partnership has received requests for withdrawal from limited partners holding approximately 108,200,000 Units, which represents approximately 38% of all outstanding limited partner Units and units represented by the Carried Interest and GP Contribution Interest. All scheduled withdrawals from January 1, 2009 through September 30, 2012 were not made because the Partnership has not had sufficient available cash to honor such withdrawal requests, needed to have funds in reserve for operations, to protect the Partnership’s interest in certain delinquent loans and to make needed improvements to real estate properties and, until its bank line of credit was repaid in December 2010, was restricted from making withdrawals under the terms of the line of credit. When funds become available for distribution from net proceeds, the General Partner is permitted to make a pro rata distribution to all partners of up to 10% of the aggregate capital accounts of all outstanding limited partner Units in any calendar year, which would prevent any limited partner withdrawals during the same year. However, there can be no assurance that 10% of the aggregate capital accounts of all outstanding limited partner Units will be distributed in any calendar year. No pro rata capital distributions were made during the nine months ended September 30, 2012. During 2011, the Partnership made pro rata capital distributions to all partners totaling approximately $11,588,000, which was approximately 4% of the aggregate capital accounts of all outstanding limited partner Units.
In April 2011, the General Partner temporarily suspended the Distribution Reinvestment Plan (the “Plan”) for all limited partners, in an effort to ensure the Partnership’s ability to continue to operate in compliance with the requirements of the Partnership Agreement. The Partnership Agreement requires that 86.5% of capital contributions to the Partnership be committed to mortgage loan investments, but also limits the Partnership’s ability to make additional investments in mortgage loans while the Partnership has qualifying withdrawal requests from limited partners that are pending and unpaid. In recent years, Partnership liquidity issues have limited the Partnership’s ability to honor withdrawal requests and/or make pro rata capital distributions at the maximum level (10%), which has restricted the Partnership’s additional mortgage lending activities.
NOTE 10 – CONTINGENCY RESERVES
In accordance with the Partnership Agreement, the Partnership is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of at least 1-1/2% of the tax basis capital accounts of the limited partners. The cash capital contributions of the General Partner, up to a maximum of 1/2 of 1% of the limited partners’ capital accounts, may be maintained as additional contingency reserves, if considered necessary by the General Partner. Although the General Partner believes the contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Partnership, which could lead to unanticipated losses upon sale of such assets.
The 1-1/2% contingency reserves required per the Partnership Agreement as of September 30, 2012 and December 31, 2011 were approximately $3,948,000 and $3,969,000, respectively, and are reported as restricted cash in the accompanying consolidated balance sheets. Cash, cash equivalents and/or certificates of deposit as of the same dates were accordingly maintained as reserves.
33
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 11 – FAIR VALUE
The Partnership measures its financial and nonfinancial assets and liabilities pursuant to ASC 820 – Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in active markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market activity, such as the
Partnership’s own data or assumptions.
Level 3 inputs include unobservable inputs that are used when there is little, if any, market activity for the asset or liability measured at fair value. In certain cases, the inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level in which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
The following is a description of the Partnership’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a recurring and nonrecurring basis.
Impaired Loans
The Partnership does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. A loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35. The fair value of impaired loans is estimated by either an observable market price (if available) or the fair value of the underlying collateral, if collateral dependent. The fair value of the loan’s collateral is determined periodically by third party appraisals (by licensed appraisers), broker price opinions, comparable properties or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At September 30, 2012 and December 31, 2011, the majority of the total impaired loans were evaluated based on the fair value of the collateral by obtaining third party appraisals that valued the collateral primarily by utilizing an income or market approach or some combination of the two. In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value
34
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
of the collateral is based on an observable market price or is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data, the Partnership records the impaired loan as nonrecurring Level 2. When an appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value or there is no observable market data included in a current appraisal, the Partnership records the impaired loan as nonrecurring Level 3. Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach. Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.
Real Estate Held for Sale and Investment
Real estate held for sale and investment includes properties acquired through foreclosure of the related loans. When property is acquired, any excess of the Partnership’s recorded investment in the loan and accrued interest income over the estimated fair market value of the property, net of estimated selling costs, is charged against the allowance for credit losses. Subsequently, real estate properties are carried at the lower of carrying value or fair value less costs to sell. The Partnership periodically compares the carrying value of real estate held for investment to expected future cash flows as determined by internally or third party generated valuations (including third party appraisals that primarily utilize an income or market approach or some combination of the two) 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. As fair value is generally based upon the future undiscounted cash flows, the Partnership records the impairment on real estate properties as nonrecurring Level 3. Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach. Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.
35
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The following table presents information about the Partnership’s assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011:
Fair Value Measurements Using | |||||||
Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||
2012 | |||||||
Nonrecurring: | |||||||
Impaired loans: | |||||||
Commercial | $ | 655,485 | — | — | $ | 655,485 | |
Condominiums | 4,339,200 | — | — | 4,339,200 | |||
Improved and unimproved land | 5,609,303 | — | — | 5,609,303 | |||
Total | $ | 10,603,988 | — | — | $ | 10,603,988 | |
Real estate properties: | |||||||
Commercial | $ | 2,252,146 | — | — | $ | 2,252,146 | |
Condominiums | 8,517,932 | — | — | 8,517,932 | |||
Single family homes | 82,876 | — | — | 82,876 | |||
Improved and unimproved land | 9,423,360 | — | — | 9,423,360 | |||
Total | $ | 20,276,314 | — | — | $ | 20,276,314 | |
2011 | |||||||
Nonrecurring: | |||||||
Impaired loans: | |||||||
Commercial | $ | 492,809 | — | — | $ | 492,809 | |
Condominiums | 4,128,000 | — | — | 4,128,000 | |||
Improved and unimproved land | 6,602,529 | — | — | 6,602,529 | |||
Total | $ | 1,223,338 | — | — | $ | 11,223,338 | |
Real estate properties: | |||||||
Commercial | $ | 15,161,367 | — | — | $ | 15,161,367 | |
Condominiums | 18,165,999 | — | — | 18,165,999 | |||
Single family homes | 2,332,706 | — | — | 2,332,706 | |||
Improved and unimproved land | 27,986,278 | — | — | 27,986,278 | |||
Total | $ | 63,646,350 | — | — | $ | 63,646,350 |
The provision for loan losses based on the fair value of loan collateral less estimated selling costs for the impaired loans above totaled approximately $549,000 and $760,000 during the three months ended September 30, 2012 and 2011, respectively, and $871,000 and $2,086,000 during the nine months ended September 30, 2012 and 2011, respectively. Impairment losses were recorded on real estate properties in the amounts of approximately $615,000 and $5,193,000 during the three months ended September 30, 2012 and 2011, respectively, and approximately $1,033,000 and $5,485,000 during the nine months ended September 30, 2012 and 2011, respectively.
36
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
During the nine months ended September 30, 2012 and 2011, there were no transfers in or out of Levels 1 and 2.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2012:
Description | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average) | ||||
Impaired Loans: | ||||||||
Commercial | $ | 655,485 | Appraisal | Estimate of Future Improvements | 13.9% | |||
Discount Rate | 9.5% | |||||||
Condominiums | $ | 4,339,200 | Appraisal | Capitalization Rate | 6% | |||
Improved and unimproved land | $ | 5,609,303 | Appraisal | Comparable Sales Adjustment Range | -23% to 33% (-23% to 33%) | |||
Discounts on Land improvements | 66.7% | |||||||
Real Estate Properties: | ||||||||
Commercial | $ | 2,252,146 | Appraisal | Comparable Sales Adjustment Range | -58% to 10% (-47.5% to 8.5%) | |||
Capitalization Rate | 8.2% | |||||||
Estimate of Future Improvements | 17.8% | |||||||
Condominiums | $ | 8,517,932 | Appraisal | Capitalization Rates | 4.5% | |||
Estimate of Future Improvements | 1.6% | |||||||
Single Family Homes | $ | 82,876 | Appraisal | Comparable Sales Adjustment Range | -23.4% to 0% (-23.4% to 0%) | |||
Discount Rate | 25% | |||||||
Improved and unimproved land | $ | 9,423,360 | Appraisal | Comparable Sales Adjustment Range | -70.3% to 62.7% (-23.3% to 25%) | |||
Estimate of Future Improvements | 26.6% |
Where only one percentage is presented in the above table there was only one unobservable input of that type for one loan or property. Adjustments to comparable sales included items such as market conditions, location, size, condition, access/frontage and intended use.
37
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The approximate carrying amounts and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011 are as follows:
Fair Value Measurements at September 30, 2012 | |||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | |||||||
Financial assets | |||||||||||
Cash and cash equivalents | $ | 21,275,000 | $ | 21,275,000 | $ | — | $ | — | $ | 21,275,000 | |
Certificates of deposit | 997,000 | — | 997,000 | — | 997,000 | ||||||
Loans secured by trust deeds | 40,215,000 | — | — | 40,215,000 | 40,215,000 | ||||||
Investment in limited liability company | 2,191,000 | — | — | 2,191,000 | 2,191,000 | ||||||
Interest and other receivables | 2,057,000 | — | 2,057,000 | — | 2,057,000 | ||||||
Financial liabilities | |||||||||||
Due to general partner | $ | 283,000 | $ | — | $ | 283,000 | $ | — | $ | 283,000 | |
Accrued interest payable | 43,000 | — | 43,000 | — | 43,000 | ||||||
Note payable | 10,126,000 | — | — | 10,211,000 | 10,211,000 | ||||||
Fair Value Measurements at December 31, 2011 | |||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | |||||||
Financial assets | |||||||||||
Cash and cash equivalents | $ | 16,201,000 | $ | 16,201,000 | $ | — | $ | — | $ | 16,201,000 | |
Certificates of deposit | 1,994,000 | — | 1,994,000 | — | 1,994,000 | ||||||
Loans secured by trust deeds | 44,880,000 | — | — | 44,880,000 | 44,880,000 | ||||||
Investment in limited liability company | 2,140,000 | — | — | 2,140,000 | 2,140,000 | ||||||
Interest and other receivables | 1,456,000 | — | 1,456,000 | — | 1,456,000 | ||||||
Financial liabilities | |||||||||||
Due to general partner | $ | 329,000 | $ | — | $ | 329,000 | $ | — | $ | 329,000 | |
Accrued interest payable | 45,000 | — | 45,000 | — | 45,000 | ||||||
Note payable | 10,242,000 | — | — | 10,283,000 | 10,283,000 |
The carrying value of cash and cash equivalents approximates the fair value because of the relatively short maturity of these instruments. Certificates of deposit are held in several federally insured depository institutions and have original maturities greater than three months. These investments are held to maturity. The fair values of certificates of deposit are estimated using a matrix based on interest rates for certificates of deposit with similar remaining maturities and approximate the carrying values. The carrying value of loans secured by trust deeds (net of allowance for loan losses), other than those analyzed under ASC 310-10-35 and ASC 820 above, approximates the fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made by the Partnership. The applicable amount of accrued interest receivable and advances related thereto has also been considered in evaluating the fair value versus the carrying value. The fair value of the Partnership’s investment in limited liability company is estimated based on an appraisal obtained and approximates the carrying value. The fair value of the Partnership’s note payable is estimated based upon comparable market indicators of current pricing for the same or similar issue or on the current rate offered to the Partnership for debt of the same remaining maturity. The carrying values of interest and other receivables, due to general partner and accrued interest payable are estimated to approximate fair values due to the short term nature of these instruments.
38
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Environmental Remediation Obligation
The Partnership has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850 (see Note 4). As part of the Operating Agreement executed by the Partnership and its joint venture partner in 1850, Nanook, the Partnership has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, the Partnership had accrued an amount that a third party consultant had estimated would need to be paid to monitor and remediate the site. The majority of clean-up activities commenced during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $302,000 was paid by the Partnership from the previously established liability during 2012 and an additional $100,000 was accrued during the nine months ended September 30, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Partnership. As of September 30, 2012 and December 31, 2011, approximately $228,000 and $430,000, respectively, has been accrued on the Partnership’s books. All costs for this project will be paid from cash reserves.
Contractual Obligation
In June 2011, 54th Street Condos, LLC (wholly owned by the Partnership) signed a $2,484,000 construction contract for completion of the remaining condominium units on the property owned by it in Phoenix, Arizona and, together with other related costs, contingencies and change orders, the total estimated cost of the improvements are approximately $3,190,000. Construction began during the third quarter of 2011 and will be completed in phases during the last half of 2012. As of September 30, 2012, approximately $2,925,000 of the total project amount has been incurred and capitalized. All costs for this project will be paid from cash reserves.
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.
NOTE 13 – SUBSEQUENT EVENT
The board of directors of the General Partner, as the sole general partner of the Partnership, has authorized the filing of a registration statement on Form S-4 with the SEC in order to initiate a restructuring of the Partnership’s business operations to allow the Partnership to qualify as a real estate investment trust, or a REIT, for U.S. federal income tax purposes. The Form S-4 registration statement, File No. 333-184392 was initially filed with the SEC on October 11, 2012 and is available to the public over the Internet at the SEC’s website at http://www.sec.gov. The merger that is anticipated to effect the restructuring, the related restructuring transactions, and the election of REIT status is referred to as the “REIT conversion”. The General Partner believes that the REIT conversion will provide limited partners with increased opportunity for liquidity for their interests in the Partnership, while maintaining the business operations and assets of the Partnership. Subject to compliance with applicable REIT rules and regulations, the Partnership intends to operate its business after the REIT conversion substantially as it is currently conducted, while leaving substantially intact the current management structure and operating policies of the Partnership and substantially replicating limited partner’s existing rights in the Partnership in the REIT. The General Partner does not expect a significant change in the Partnership’s business operations as a result of the REIT conversion. The REIT conversion is not expected to change the Partnership’s investment objectives.
39
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
Notes to Consolidated Financial Statements (Unaudited)
The REIT conversion is expected to include, among other things, the merger of the Partnership with and into Owens Realty Mortgage, Inc., a recently formed Maryland corporation. The limited partners will be asked to consider and vote upon a proposal to adopt and approve the merger agreement, which will effect the merger and implement the REIT conversion. Shortly following closing of the merger, Owens Realty Mortgage, Inc. intends to elect to be taxed as a REIT under the U.S. Internal Revenue Code. In the merger, limited partners are expected to receive one share of common stock, par value $0.01 per share, of Owens Realty Mortgage, Inc., or Common Stock, for every 25 limited partner units of the Partnership that he/she/it owns. Owens Realty Mortgage, Inc. currently intends to seek to have its Common Stock listed on a national exchange operated by The NASDAQ OMX Group, Inc., or on the New York Stock Exchange; however it may first have to seek to quote its Common Stock on the Over-the-Counter Bulletin Board and subsequently seek a listing on a national exchange at such time as it meets the applicable listing criteria. For a more detailed discussion of the contemplated REIT conversion, including a discussion of some of the potential risks associated with the REIT conversion, please see the registration statement on Form S-4 (and any amendments thereto) filed with the SEC by Owens Realty Mortgage, Inc., available to the public and over the Internet at the SEC’s website at http://www.sec.gov.
40
PART I – Item 2.
Forward Looking Statements
Some of the information in this Form 10-Q may contain forward-looking statements. Such statements can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss expectations, hopes, intentions, beliefs and strategies regarding the future, contain projections of results of operations or of financial conditions or state other forward-looking information. When considering such forward-looking statements you should keep in mind the risk factors and other cautionary statements in the Partnership’s Form 10-Q and in the most recent Form 10-K. Forward-looking statements include, among others, statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in real estate markets in which the Partnership does business, effects of competition, estimates or determinations as to the allowance for loan losses and the valuation of real estate held for sale and investment, estimates of future limited partner withdrawals, additional foreclosures in 2012 and their effects on liquidity, and recovering certain values for properties through sale. Although management of the Partnership believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are certain factors, in addition to these risk factors and cautioning statements, such as unexpected changes in general economic conditions or interest rates, local real estate conditions, including a continued downturn in the real estate markets where the Partnership has made loans, adequacy of reserves, the impact of competition and competitive pricing, or weather and other natural occurrences that might cause a difference between actual results and those forward-looking statements. All forward-looking statements and reasons why results may differ included in this Form 10-Q 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.
Critical Accounting Policies
In preparing the consolidated 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 for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for 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 fair value of the property as collateral; (2) the valuation of real estate held for sale and investment (at acquisition and subsequently); and (3) the estimate of environmental remediation liabilities. At September 30, 2012, the Partnership owned thirty-two real estate properties, including seventeen within majority- or wholly-owned limited liability companies. The limited liability companies not wholly owned by the Partnership are held as follows: a 80.74% ownership interest in a limited liability company that owns property located in Miami, Florida (the General Partner holds the remaining ownership interests), a 60% ownership interest in a limited liability company that owns property located in Pomona, California (a third party holds the remaining ownership interest), and a 65% ownership interest in a limited liability company that owns property located in Greeley, Colorado (a third party holds the remaining ownership interests). The Partnership also has a 50% ownership interest in a limited liability company accounted for under the equity method that owns property located in Santa Clara, California (a third party holds the remaining ownership interest).
Loans secured by trust deeds are stated at the principal amount outstanding. The Partnership’s portfolio consists primarily of commercial real estate loans generally collateralized by first, second and third deeds of trust. Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.
41
Loans and related accrued interest and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Provisions are made to adjust the allowance for loan losses to an amount considered by management to be adequate, with consideration to original collateral values at loan inception and to provide for unrecoverable accounts receivable, including impaired and other loans, accrued interest, and advances on loans.
Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. If the probable ultimate recovery of the carrying amount of a loan is less than amounts due according to the contractual terms of the loan agreement, 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 by management at the estimated fair value of the related collateral, less estimated selling costs. Estimated collateral fair values are determined based on third party appraisals, opinions of fair value from third party real estate brokers and/or comparable third party sales.
If events and/or changes in circumstances cause management to have serious doubts about the collectability of the contractual payments or when monthly payments are delinquent greater than ninety days, a loan is categorized as impaired and interest is no longer accrued. Any subsequent payments received on impaired loans are first applied to reduce any outstanding accrued interest, and then are recognized as interest income, except when such payments are specifically designated principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.
The Partnership leases multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
Real estate held for sale (including eight properties within consolidated limited liability companies) includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. Real estate held for sale is recorded at acquisition at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable. After acquisition, real estate held for sale is analyzed periodically for changes in fair values.
Real estate held for investment includes real estate purchased or acquired in full or partial settlement of loan obligations generally through foreclosure (including nine properties within consolidated limited liability companies) that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions. Real estate held for investment is recorded at acquisition at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell, as applicable. Depreciation of buildings and improvements is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements. Depreciation of tenant improvements is provided on the straight-line method over the lives of the related leases. Costs related to the improvement of real estate held for sale and investment are capitalized, whereas those related to holding the property are expensed.
The Partnership periodically compares the carrying value of real estate held for investment to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.
The Partnership’s environmental remediation liability related to the property located in Santa Clara, California was estimated based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.
42
Recent Activities
The board of directors of the General Partner, as the sole general partner of the Partnership, has authorized the filing of a registration statement on Form S-4 with the SEC in order to initiate a restructuring of the Partnership’s business operations to allow the Partnership to qualify as a real estate investment trust, or a REIT, for U.S. federal income tax purposes. The Form S-4 registration statement, File No. 333-184392 was initially filed with the SEC on October 11, 2012 and is available to the public over the Internet at the SEC’s website at http://www.sec.gov. The merger that is anticipated to effect the restructuring, the related restructuring transactions, and the election of REIT status is referred to as the “REIT conversion”. The General Partner believes that the REIT conversion will provide limited partners with increased opportunity for liquidity for their interests in the Partnership, while maintaining the business operations and assets of the Partnership. Subject to compliance with applicable REIT rules and regulations, the Partnership intends to operate its business after the REIT conversion substantially as it is currently conducted, while leaving substantially intact the current management structure and operating policies of the Partnership and substantially replicating limited partner’s existing rights in the Partnership in the REIT. The General Partner does not expect a significant change in the Partnership’s business operations as a result of the REIT conversion. The REIT conversion is not expected to change the Partnership’s investment objectives.
The REIT conversion is expected to include, among other things, the merger of the Partnership with and into Owens Realty Mortgage, Inc., a recently formed Maryland corporation. The limited partners will be asked to consider and vote upon a proposal to adopt and approve the merger agreement, which will effect the merger and implement the REIT conversion. Shortly following closing of the merger, Owens Realty Mortgage, Inc. intends to elect to be taxed as a REIT under the U.S. Internal Revenue Code. In the merger, limited partners are expected to receive one share of common stock, par value $0.01 per share, of Owens Realty Mortgage, Inc., or Common Stock, for every 25 limited partner units of the Partnership that he/she/it owns. Owens Realty Mortgage, Inc. currently intends to seek to have its Common Stock listed on a national exchange operated by The NASDAQ OMX Group, Inc., or on the New York Stock Exchange; however it may first have to seek to quote its Common Stock on the Over-the-Counter Bulletin Board and subsequently seek a listing on a national exchange at such time as it meets the applicable listing criteria. For a more detailed discussion of the contemplated REIT conversion, including a discussion of some of the potential risks associated with the REIT conversion, please see the registration statement on Form S-4 (and any amendments thereto) filed with the SEC by Owens Realty Mortgage, Inc., available to the public and over the Internet at the SEC’s website at http://www.sec.gov.
Related Parties
The General Partner of the Partnership is Owens Financial Group, Inc. (the “General Partner”). All Partnership business is conducted through the General Partner, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership. The fees received by the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner, subject to the limitations imposed by the Partnership Agreement. In the past, the General Partner has elected not to take the maximum compensation in order to maintain return to the limited partners at historical levels. There can be no assurance that the General Partner will continue to do this in the future. The following is a list of various Partnership activities for which related parties are compensated.
· | Management Fees - In consideration of the management services rendered to the Partnership, the General Partner is entitled to receive from the Partnership a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Partnership’s mortgage loans at the end of each month in the calendar year. Management fees amounted to approximately $405,000 and $544,000 for the three months ended September 30, 2012 and 2011, respectively. |
· | Servicing Fees – All of the Partnership’s loans are serviced by the General Partner, in consideration for which the General Partner is entitled to receive from the Partnership a monthly fee, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee in the community where the loan is placed or up to 0.25% per annum of the unpaid principal balance of the loans at the end of each month. Servicing fees amounted to approximately $41,000 and $63,000 for the three months ended September 30, 2012 and 2011, respectively. |
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· | Acquisition and Origination Fees – The General Partner is entitled to receive and retain all acquisition and origination fees paid or payable by borrowers for services rendered in connection with the evaluation and consideration of potential investments of the Partnership (including any selection fee, mortgage placement fee, nonrecurring management fee, and any origination fee, loan fee, or points paid by borrowers). The acquisition and origination fees are paid by borrowers, and thus, are not an expense of the Partnership. Such fees paid to the General Partner amounted to approximately $24,000 and $168,000 on loans originated or extended of approximately $800,000 and $10,240,000 for the nine months ended September 30, 2012 and 2011, respectively. There were no such fees paid to OFG during the three months ended September 30, 2012 and 2011. |
· | Late Payment Charges – The General Partner is entitled to receive all late payment charges by borrowers on delinquent loans held by the Partnership (including additional interest and late payment fees). The late payment charges are paid by borrowers and collected by the Partnership with regular monthly loan payments or at the time of loan payoff. These are recorded as a liability (Due to General Partner) when collected and are not recognized as an expense of the Partnership. The amounts paid to or collected by the General Partner for such charges totaled approximately $1,000 and $4,000 for the three months ended September 30, 2012 and 2011, respectively. |
· | Other Miscellaneous Fees - The Partnership remits other miscellaneous fees to the General Partner, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). There were no such fees paid to the General Partner during the three months ended September 30, 2012 and 2011. |
· | Partnership Expenses – The General Partner is entitled to be reimbursed by the Partnership for the actual cost of goods, services and materials used for or by the Partnership and obtained from unaffiliated entities. The General Partner is also entitled to reimbursement for the salaries and related salary expense of the General Partner’s non-management and non-supervisory personnel performing services for the Partnership which could be performed by independent parties (subject to certain limitations in the Partnership Agreement). The amounts reimbursed to the General Partner by the Partnership were approximately $170,000 and $160,000 during the three months ended September 30, 2012 and 2011, respectively. |
· | Carried Interest and Contributed Capital – The General Partner is required to contribute capital to the Partnership in the amount of 0.5% of the limited partners’ aggregate capital accounts (the “GP Contribution Interest”) and, together with its carried interest (the “Carried Interest”), the General Partner has an interest equal to 1% of the limited partners’ capital accounts. This Carried Interest of the General Partner of up to 1/2 of 1% is recorded as an expense of the Partnership and credited as a contribution to the General Partner’s capital account as additional compensation. As of September 30, 2012, the General Partner had made cash capital contributions of $1,496,000 to the Partnership ($118,000 of which was distributed to the General Partner along with limited partner capital distributions during 2011). The General Partner is required to continue cash capital contributions to the Partnership in order to maintain its required capital balance. There was no Carried Interest expense charged to the Partnership for the three months ended September 30, 2012 and 2011, respectively. |
Results of Operations
Overview
The Partnership invests in mortgage loans on real property located in the United States that are primarily originated by the General Partner. The Partnership’s primary objective is to generate monthly income from its investments in mortgage loans and real estate properties that were acquired through foreclosure. The Partnership’s focus is on making mortgage loans to owners and developers of real property whose financing needs are often not met by traditional mortgage lenders. These include borrowers that traditional lenders may not normally consider because of perceived credit risks based on ratings or experience levels, and borrowers who require faster loan decisions and funding. One of the Partnership’s competitive advantages has been the ability to approve loan applications and fund more quickly than traditional lenders.
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The Partnership originates loans secured by very diverse property types. In addition, the Partnership occasionally lends to borrowers to whom traditional lenders will not normally lend because of a variety of factors including their credit ratings and/or experience. Due to these factors, the Partnership may make deed of trust loans that are riskier than deed of trust loans made by commercial banks and other institutional lenders. To compensate for those potential risks, the Partnership seeks to make loans at higher interest rates and with more protection from the underlying real property collateral, such as with lower loan-to-value ratios. The Partnership is not presently originating new deed of trust loans, as it must first either satisfy withdrawal requests of limited partners and/or make capital distributions pro rata to its limited partners of up to 10% of limited partners’ capital per calendar year with net proceeds from loan payoffs, real estate sales and/or capital contributions, as funds become available.
Due to the declining economy and reductions in real estate values over the past four years, the Partnership has experienced increased delinquent loans and foreclosures which have created substantial losses to the Partnership. In addition, the Partnership now owns significantly more real estate than in the past, which has reduced cash flow and net income. As of September 30, 2012, approximately 80% of Partnership loans are impaired and/or past maturity. In addition, the Partnership now owns approximately $137,000,000 of real estate held for sale or investment.
It is possible that the Partnership will continue to experience losses in the future. Management expects that as non-delinquent Partnership loans are paid off by borrowers, interest income received by the Partnership will be reduced. In addition, the Partnership will likely foreclose on more delinquent loans, thereby obtaining ownership of more real estate that may create larger operating losses. Management will attempt to sell many of these properties but may need to sell them for losses or wait until market values recover in the future. Due to the large amount of unfulfilled withdrawal requests resulting in restrictions on origination of loans, the Partnership will be unable to take advantage of current favorable lending opportunities that could help to increase net income to the Partnership.
The Partnership’s operating results are affected primarily by:
· | the level of foreclosures and related loan and real estate losses experienced; |
· | the income or losses from foreclosed properties prior to the time of disposal; |
· | the amount of cash available to invest in mortgage loans; |
· | the amount of borrowing to finance mortgage loan investments and the Partnership’s cost of funds on such borrowing; |
· | the level of real estate lending activity in the markets serviced; |
· | the ability to identify and lend to suitable borrowers; |
· | the interest rates the Partnership is able to charge on loans; and |
· | the level of delinquencies on mortgage loans. |
From 2007 to 2011, the U.S. economy deteriorated due to a combination of factors including a substantial decline in the housing market, liquidity issues in the lending market, and increased unemployment. The national unemployment rate increased substantially from 5.0% in December 2007 to 9.4% in December 2008. However, the national unemployment rate declined to 7.8% in September 2012. The California unemployment rate has increased from 6.1% in December 2007 to 10.2% in September 2012.
The Partnership has experienced increased loan delinquencies and foreclosures over the past four years. The General Partner believes that this has primarily been the result of the depressed economy, lack of availability of credit and the slowing real estate market in California and other parts of the nation. The increased loan delinquencies and foreclosures have resulted in a substantial reduction in Partnership income over the past three years. In addition, due to the state of the economy and depressed real estate values, the Partnership has had to increase its loan loss reserves and take write-downs on certain real estate properties which, in turn, have resulted in losses to the Partnership.
Although currently the General Partner believes that only six of the Partnership's delinquent loans will result in loss to the Partnership (and has caused the Partnership to record specific allowances for loan losses on such loans), real estate values could decrease further. The Partnership continues to perform periodic evaluations of such collateral values using internal and external sources, including the use of updated independent appraisals. As a result of these evaluations, the allowance for loan losses and the Partnership’s investments in real estate could change in the near term, and such changes could be material. As of December 31, 2011 and June 30, 2012, OMIF obtained updated appraisals on the majority of the properties securing its trust deed investments and its wholly- and majority-owned real estate properties.
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Although it appears that the U.S. economy has recently experienced positive growth, continued unemployment could continue to negatively affect the values of real estate held by the Partnership and real estate securing Partnership loans. This could potentially lead to even greater delinquencies and foreclosures, further reducing the liquidity and net income, decreasing the cash available for distribution in the form of net income and capital redemptions, and increase real estate held by the Partnership.
Historically, the General Partner has focused its operations on California and certain Western states. Because the General Partner has a significant degree of knowledge with respect to the real estate markets in such states, it is likely most of the Partnership’s loans will be concentrated in such states. As of September 30, 2012, 69.5% of loans were secured by real estate in Northern California, while 11.5%, 6.2%, 4.0%, 3.7%, 3.1%, and 2.0% were secured by real estate in Arizona, Pennsylvania, Utah, Washington, Hawaii and Louisiana, respectively. Such geographical concentration creates greater risk that any downturn in such local real estate markets could have a significant adverse effect upon results of operations.
Summary of Financial Results
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Total revenues | $ | 6,186,077 | $ | 5,475,722 | $ | 14,888,569 | $ | 14,107,268 | |||||
Total expenses | 5,112,898 | 10,427,051 | 14,130,680 | 20,095,559 | |||||||||
Net income (loss) | $ | 1,073,179 | $ | (4,951,329 | ) | $ | 757,889 | $ | (5,988,291 | ) | |||
Less: Net (income) loss attributable to noncontrolling interests | 41,149 | (195,495 | ) | (515,289 | ) | (681,244 | ) | ||||||
Net income (loss) attributable to Owens Mortgage Investment Fund | $ | 1,114,328 | $ | (5,146,824 | ) | $ | 242,600 | $ | (6,669,535 | ) | |||
Net income (loss) allocated to limited partners | $ | 1,102,947 | $ | (5,095,949 | ) | $ | 240,087 | $ | (6,600,916 | ) | |||
Net income (loss) allocated to limited partners per weighted average limited partnership unit | $ | 0.004 | $ | (0.018 | ) | $ | 0.001 | $ | (0.023 | ) | |||
Annualized rate of return to limited partners (1) | 1.6 | % | (7.2) | % | 0.1 | % | (3.1) | % | |||||
Distribution per average partner capital (yield) (2) | 0.5 | % | 0.9 | % | (0.4) | % | (3.7) | % | |||||
Weighted average limited partner units | 278,606,000 | 281,575,000 | 278,606,000 | 287,242,000 |
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(1) | The annualized rate of return to limited partners is calculated based upon the net income (loss) allocated to limited partners per weighted average limited partner unit as of September 30, 2012 and 2011 divided by the number of months during the period and multiplied by twelve months. |
(2) | Distribution per average partner capital (yield) is the annualized average of the monthly tax basis yield to the partners for the periods indicated. The monthly yield is calculated by dividing the total monthly cash distribution or net loss allocated to partners by the prior month’s weighted average tax basis partners’ capital balance. |
Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011
Total Revenues
Interest income on loans secured by trust deeds decreased $1,007,000 (54%) and $2,660,000 (57%) during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011, primarily due to a decrease in the weighted average balance of the loan portfolio of approximately 34% and 44% during the three and nine months ended September 30, 2012 as compared to the same periods in 2011 and an increase in the percentage of delinquent loans during 2012 as compared to 2011.
Net gain on sales of real estate increased $1,859,000 and $1,848,000 during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011. During the three and nine months ended September 30, 2012, the Partnership recognized a gain of approximately $1,863,000 from the sale of the industrial building located in Chico, California and a loss of approximately $4,000 from the sale of a house in the manufactured home subdivision development located in Ione, California. During the nine months ended September 30, 2012, the Partnership also recognized a loss of approximately $12,000 from the sale of the remaining model home owned by Dation, LLC. There were no real estate sales during the three and nine months ended September 30, 2011.
Recognition of deferred gain on sale of real estate increased $785,000 during the nine months ended September 30, 2012, as compared to the same period in 2011, as the Partnership recognized $805,000 in deferred gain related to the sale of the Bayview Gardens property in 2006 as the carry back note was repaid in full by the buyer/borrower during 2012.
Total Expenses
Management fees to the General Partner decreased $139,000 (26%) and $529,000 (29%) during the three and nine months ended September 30, 2012, as compared to the same periods in 2011. The decrease was primarily the result of a decrease in the weighted average balance of the loan portfolio of approximately 34% and 44% during the three and nine months ended September 30, 2012 as compared to 2011 as the General Partner can only be paid management fees up to a maximum of 2.75% per year of the average unpaid balance of mortgage loans.
Servicing fees to the General Partner decreased $21,000 (34%) and $95,000 (44%) during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011. This was the result of a decrease in the weighted average balance of the loan portfolio of approximately 34% and 44% during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011.
The maximum servicing fees were paid to the General Partner during the three and nine months ended September 30, 2012 and 2011. If the maximum management fees had been paid to the General Partner during the three and nine months ended September 30, 2012, the management fees would have been $453,000 (increase of $47,000) and $1,356,000 (increase of $55,000), respectively, which would have decreased net income allocated to limited partners by approximately 4.3% and 22.7%, respectively, resulting in no change to net income allocated to limited partners per weighted average limited partner unit. If the maximum management fees had been paid to the General Partner during the three and nine months ended September 30, 2011, the management fees would have been $688,000 (increase of $143,000) and $2,403,000 (increase of $572,000), respectively, which would have increased net loss allocated to limited partners by approximately 2.8% and 8.6%, respectively, and net loss allocated to limited partners per weighted average limited partner unit by the same percentages to a loss of $.019 and $.025, respectively, from a loss of $.018 and $.023, respectively.
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The maximum management fee permitted under the Partnership Agreement is 2.75% per year of the average unpaid balance of mortgage loans. For the years 2009, 2010 and 2011 and the nine months ended September 30, 2012 (annualized), the management fees were 0.89%, 1.00%, 2.19% and 2.64% of the average unpaid balance of mortgage loans, respectively. Although management fees as a percentage of mortgage loans have increased substantially between 2009 and 2012, the total dollar amount of management fees paid to the General Partner has decreased because the average balance of the loan portfolio has decreased by approximately 73% between 2009 and 2012.
In determining the management fees and hence the yield to the partners, the General Partner may consider a number of factors, including current market yields, delinquency experience, cash and real estate activities. The General Partner expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period. However, due to reduced levels of mortgage investments held by the Partnership, during the three and nine months ended September 30, 2012, the General Partner has chosen to take close to the maximum compensation that it is able to take pursuant to the Partnership Agreement and will likely continue to take the maximum compensation for the foreseeable future.
Administrative/accounting expense increased $30,000 (61%) and $82,000 (51%) during the three and nine months ended September 30, 2012, as compared to the same periods in 2011. The Partnership Agreement provides that the Partnership may reimburse the General Partner for the salaries and related salary expenses of the General Partner’s non-management and non-supervisory personnel performing services which could be performed by independent parties (subject to certain limitations in the Partnership Agreement). Such reimbursements have increased during 2012 as compared to 2011 because the General Partner was not reimbursed for the full amount that it could have been in 2011, but in 2012 chose to be reimbursed for the full amount of the actual salary and related salary costs of its non-management and non-supervisory personnel providing administrative and accounting services with respect to the Partnership’s assets.
Legal and professional expenses increased $148,000 (115%) and $426,000 (103%) during the three and nine months ended September 30, 2012, as compared to the same periods in 2011, primarily due to increased legal costs incurred in 2012 related to certain regulatory matters and related documents and proposed filings for the Partnership and the cost of retaining a firm to appraise the majority of the Partnership’s trust deed and real estate assets as of December 31, 2011 and June 30, 2012.
Environmental remediation expense increased $100,000 (100%) during the nine months ended September 30, 2012, as compared to the same period in 2011, due to an additional accrual recorded by the Partnership as a result of an updated estimate of future costs to be incurred to remediate and monitor the contamination of the real properties owned by 1850 De La Cruz, LLC.
The provisions for loan losses of $552,000 and $399,000 during the three and nine months ended September 30, 2012, respectively, were the result of analyses performed on the loan portfolio. The general loan loss allowance increased $3,000 and decreased $472,000 during the three and nine months ended September 30, 2012, respectively, due to a small increase in the historical loss factor applied to non-impaired loans during the three month period and a decrease in non-impaired loans not analyzed for a specific allowance during the nine month period. The specific loan loss allowance increased $549,000 and $871,000 during the three and nine months ended September 30, 2012, as reserves were adjusted on seven impaired loans. The Partnership recorded a provision for loan losses of approximately $730,000 and $1,519,000, respectively, during the three and nine months ended September 30, 2011.
The impairment losses on real estate properties of $615,000 and $1,033,000 during the three and nine months ended September 30, 2012, respectively, were the result of updated appraisals or other valuation information obtained on certain Partnership real estate properties. The Partnership recorded impairment losses on real estate properties of $5,193,000 and $5,485,000 during the three and nine months ended September 30, 2011, respectively.
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Net Loss from Rental and Other Real Estate Properties
Net income from rental and other real estate properties increased $446,000 (from a net loss of $16,000 to net income of $430,000) during the three months ended September 30, 2012, as compared to the same period in 2011, and increased $1,189,000 (from a net loss of $716,000 to net income of $473,000) during the nine months ended September 30, 2012, as compared to the same period in 2011, due primarily to the ability of the General Partner to increase the operating income or decrease operating losses on several Partnership real estate properties in 2011 and 2012, the fact that many of the residential real estate properties owned by the Partnership are close to being fully occupied by tenants and because the Partnership no longer recorded depreciation on seven properties during the quarter ended September 30, 2012 as they were transferred to held for sale as of June 30, 2012.
Financial Condition
September 30, 2012 and December 31, 2011
Loan Portfolio
The number of Partnership mortgage investments decreased from 25 to 24, and the average loan balance decreased from $2,777,000 to $2,715,000, between December 31, 2011 and September 30, 2012.
As of September 30, 2012 and December 31, 2011, the Partnership had seventeen and eighteen loans, respectively, that were impaired totaling approximately $51,646,000 (79%) and $52,327,000 (75%), respectively. This included thirteen and fourteen past maturity loans totaling $46,057,000 (71%) and $45,176,000 (65%), respectively. In addition, one and two loans totaling approximately $690,000 (1%) and $1,490,000 (2%), respectively, were past maturity but current in monthly payments as of September 30, 2012 and December 31, 2011, respectively (combined total of impaired and past maturity loans of $52,336,000 (80%) and $53,817,000 (78%), respectively). Of the impaired and past maturity loans, approximately $30,225,000 (46%) and $8,050,000 (12%), respectively, were in the process of foreclosure and $4,493,000 (7%) and $24,203,000 (35%), respectively, involved borrowers who were in bankruptcy as of September 30, 2012 and December 31, 2011.
During the nine months ended September 30, 2012, the Partnership foreclosed on no loans. During the nine months ended September 30, 2011, the Partnership foreclosed on eight loans with aggregate principal balances totaling approximately $45,610,000 and obtained the properties via the trustee’s sales.
As of September 30, 2012 and December 31, 2011, the Partnership held the following types of mortgages:
2012 | 2011 | |||||||
By Property Type: | ||||||||
Commercial | $ | 25,956,848 | $ | 29,552,531 | ||||
Condominiums | 10,129,631 | 10,369,534 | ||||||
Single family homes (1-4 units) | 250,000 | 250,000 | ||||||
Improved and unimproved land | 28,819,811 | 29,249,811 | ||||||
$ | 65,156,290 | $ | 69,421,876 | |||||
By Deed Order: | ||||||||
First mortgages | $ | 50,860,254 | $ | 48,710,380 | ||||
Second and third mortgages | 14,296,036 | 20,711,496 | ||||||
$ | 65,156,290 | $ | 69,421,876 |
As of September 30, 2012 and December 31, 2011, approximately 69% and 73% of the Partnership’s mortgage loans were secured by real property in Northern California. In addition, approximately 81% of the Partnership’s mortgage loans as of September 30, 2012 were secured by real estate located in the states of California and Arizona, which have experienced dramatic reductions in real estate values over the past four years.
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The Partnership’s investment in loans decreased by $4,266,000 (6.1%) during the nine months ended September 30, 2012 as a result of full and partial loan payoffs. The Partnership is not presently able to originate new loans, other than entering into loans as part of carryback financing for sales of real estate.
The allowance for loan losses increased by $399,000 and decreased by $10,664,000 (provision net of charge-offs) during the nine months ended September 30, 2012 and 2011, respectively. The General Partner believes that the allowance is sufficient given the estimated underlying collateral values of impaired loans. There is no precise method used by the General Partner to predict delinquency rates or losses on specific loans. The General Partner has considered the number and amount of delinquent loans, loans subject to workout agreements and loans in bankruptcy in determining the allowance for loan losses, but there can be no assurance that the allowance is sufficient. Because any decision regarding allowance for loan losses reflects judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect. In such event, actual losses may exceed (or be less than) the amount of any reserve. To the extent that the Partnership experiences losses greater than the amount of its reserves, the Partnership may incur a charge to earnings that will adversely affect operating results and the amount of any distributions payable to limited partners.
Changes in the allowance for loan losses for the nine months ended September 30, 2012 and the year ended December 31, 2011 were as follows:
Nine Months Ended September 30, 2012 | Year Ended December 31, 2011 | ||||||
Balance, beginning of period | $ | 24,541,897 | $ | 36,068,515 | |||
Provision | 399,179 | 9,074,121 | |||||
Charge-offs | — | (20,600,739 | ) | ||||
Balance, end of period | $ | 24,941,076 | $ | 24,541,897 |
As of September 30, 2012 and December 31, 2011, there was a general allowance for loan losses of $1,778,000 and $2,250,000, respectively, and a specific allowance for loan losses on six and seven loans in the total amount of $23,163,076 and $22,291,897, respectively.
Real Estate Properties Held for Sale and Investment
As of September 30, 2012, the Partnership held title to thirty-two properties that were acquired through foreclosure with a total carrying amount of approximately $136,889,000 (including properties held in seventeen limited liability companies), net of accumulated depreciation of $6,138,000. As of September 30, 2012, properties held for sale total $68,709,000 and properties held for investment total $68,180,000. When the Partnership acquires property by foreclosure, it typically earns less income on those properties than could be earned on mortgage loans and may not be able to sell the properties in a timely manner.
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Changes in real estate held for sale and investment during the nine months ended September 30, 2012 and the year ended December 31, 2011 were as follows:
Nine Months Ended September 30, 2012 | Year Ended December 31, 2011 | ||||||
Balance, beginning of period | $ | 145,591,660 | $ | 97,066,199 | |||
Real estate acquired through foreclosure, net of specific loan loss allowance | — | 65,007,119 | |||||
Investments in real estate properties | 2,436,773 | 1,464,155 | |||||
Two homes given to JV partner in settlement of accrued management fees | (96,819 | ) | — | ||||
Sales of real estate properties | (8,339,079 | ) | — | ||||
Impairment losses on real estate properties | (1,033,266 | ) | (15,022,659 | ) | |||
Depreciation of properties held for investment | (1,669,822 | ) | (2,923,154 | ) | |||
Balance, end of period | $ | 136,889,447 | $ | 145,591,660 |
Twelve of the Partnership’s thirty-two properties do not currently generate revenue. Expenses from real estate properties have decreased from approximately $9,966,000 (including depreciation expense of $2,096,000) to $9,632,000 (including depreciation expense of $1,670,000) (decrease of 4%) for the nine months ended September 30, 2011 and 2012, respectively, and revenues associated with these properties have increased from approximately $9,280,000 to $10,105,000 (increase of 9%), thus generating a net income from real estate properties of $473,000 during the nine months ended September 30, 2012 (compared to a net loss of $716,000 for the same period in 2011).
During the quarter ended September 30, 2012, the Partnership sold the industrial building located in Chico, California for net sales proceeds of approximately $8,514,000 resulting in a gain to the Partnership of approximately $1,863,000. In addition, during the quarter ended September 30, 2012, the Partnership sold one of the manufactured homes located in Ione, California for net sales proceeds of approximately $57,000 resulting in a loss to the Partnership of approximately $4,000.
During the nine months ended September 30, 2012 and 2011, the Partnership recorded impairment losses on real estate held for sale and investment in the total amount of approximately $1,033,000 and $5,485,000, respectively, as a result of updated appraisals obtained or other indications of value.
In October 2012 (subsequent to quarter end), the Partnership sold the nineteen condominium units located in San Diego, California for net sales proceeds of approximately $2,181,000 resulting in a gain to the Partnership of approximately $555,000.
The Partnership and the General Partner (as members in TOTB Miami, LLC or “TOTB”) have signed a contract to sell the real property and related rights and property owned by TOTB for a sales price of $45,500,000 and is expected to close escrow in December 2012. In addition, the Partnership has signed a contract to sell the eight townhomes it owns in Santa Barbara, California (held within Anacapa Villas, LLC) for a sales price of $10,000,000 ($7,500,000 of financing to be provided by the Partnership) and is expected to close escrow in December 2012.
Dation, LLC
During the nine months ended September 30, 2012, all of the improved lots and manufactured rental homes owned by Dation, LLC, or “Dation”, were sold for $1,650,000 (comprised of cash of $330,000 and a note from the buyer of $1,320,000) resulting in no gain or loss to the Partnership. In addition, during the nine months ended September 30, 2012, the Partnership paid its joint venture partner a portion of its accrued management fees owed of approximately $147,000 in the form of $50,000 cash and two model homes with a book value of $97,000 as part of a settlement agreement to remove the joint venture partner as a member of Dation. The $1,320,000 note receivable from the sale was then assigned to the Partnership. The remaining model home was sold during the second quarter of 2012 for cash of $25,000, resulting in a loss of approximately $12,000. Dation continues to own 40 acres of unimproved land in the park. The Partnership intends to dissolve Dation during the fourth quarter of 2012 and assign the remaining land to the Partnership.
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TOTB Miami, LLC
During the nine months ended September 30, 2011, the Partnership and two co-lenders (which included the General Partner and PRC Treasures, LLC, or PRC) foreclosed on a participated, first mortgage loan secured by a condominium complex located in Miami, Florida with a principal balance to the Partnership of approximately $26,257,000 and obtained an undivided interest in the properties via the trustee’s sale. The Partnership and other lenders formed a Florida limited liability company, TOTB Miami, LLC (“TOTB”), to own and operate the complex. The complex consists of three buildings, two of which have been renovated and are being leased, and in which 169 units remain unsold and one which contains 160 vacant units that have not been renovated. Based on an appraisal obtained in September 2010, it was determined that the fair value of the property was lower than the Partnership’s total investment in the loan (including a previously established loan loss allowance of $10,188,000) and an additional charge to provision for loan losses of approximately $450,000 was recorded at the time of foreclosure during the first quarter of 2011 (total charge-off of $10,638,000).
In March 2012, the Partnership made a priority capital contribution to TOTB in the amount of $7,200,000. TOTB then purchased PRC’s member interest in TOTB for $7,200,000. Thus, the remaining members in TOTB are now the Partnership and the General Partner. On the same date, the Partnership and the General Partner executed an amendment to the TOTB operating agreement to set the percentage of capital held by each at 80.74% for the Partnership and 19.26% for the General Partner based on the dollar amount of capital invested in the properties/TOTB (excluding the Preferred Class A Units discussed below). Income and loss allocations will be made based on these percentages after a 15% preferred return to the Partnership based on its $2,583,000 contribution to TOTB in 2011 (represented by its Preferred Class A Units). The change in capital as a result of the PRC buyout and the amended agreement resulted in an increase to the Partnership’s capital of approximately $2,760,000. Per the PRC redemption agreement, in the event the TOTB real estate assets are sold in the future for proceeds in excess of the Partnership’s and General Partner’s investments in TOTB, including all capital contributions, loans, protective advances and accrued and unpaid interest under the operating agreement, PRC is to receive 25% of such excess. The noncontrolling interests of the other members of TOTB totaled approximately $6,028,000 and $15,512,000 as of September 30, 2012 and December 31, 2011, respectively.
Foreclosure Activity
During the quarter ended September 30, 2011, the Partnership and a third party lender who participated in a first mortgage loan secured by industrial land located in Pomona, California with a principal balance to the Partnership of approximately $5,078,000 contributed their interests in the loan to a new limited liability company, 1875 West Mission Blvd., LLC (“1875”). The lenders then foreclosed on the subject loan and obtained the property via the trustee’s sale within 1875.
During the quarter ended September 30, 2011, the Partnership foreclosed on a first mortgage loan secured by 6 improved, residential lots located in Coeur D’Alene, Idaho with a principal balance of $2,200,000 and obtained the property via the trustee’s sale. The General Partner was a co-creditor in this loan due to a loan fee that was supposed to be paid to the General Partner at the time the loan was paid off. However, due to an intercreditor agreement between the Partnership and the General Partner, the Partnership must receive its entire investment in the loan (including all accrued, past due interest at the time of foreclosure) prior to any amounts to be paid to the General Partner once the property is sold. It was determined that the fair value of the property was lower than the Partnership’s investment in the loan and a specific loan allowance of approximately $426,000 was recorded as of June 30, 2011. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure, along with an additional charge to provision for loan losses of approximately $2,000. After foreclosure, it was determined that approximately $530,000 in additional improvements costs would be required to complete the lots and ready them for sale. Thus, an additional impairment loss was recorded of $530,000 during the quarter ended September 30, 2011.
During the quarter ended September 30, 2011, the Partnership foreclosed on two first mortgage loans secured by 15 converted condominium and commercial office units in a building located in Tacoma, Washington with an aggregate principal balance of $3,500,000 and obtained the property via the trustee’s sale. It was determined that the fair value of the property was lower than the Partnership’s investment in the loans and a specific loan allowance was established of approximately $1,110,000 as of June 30, 2011. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure, along with an additional charge to provision for loan losses of approximately $7,000. The Partnership formed a new, wholly-owned limited liability company, Broadway & Commerce, LLC to own and operate the complex.
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During the nine months ended September 30, 2011, the Partnership foreclosed on a first mortgage loan secured by a 1/7th interest in a single family home located in Lincoln City, Oregon in the amount of approximately $75,000 and obtained the property interest via the trustee’s sale. In addition, accrued interest and advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $10,000 were capitalized to the basis of the property.
During the nine months ended September 30, 2011, the Partnership foreclosed on a first mortgage loan secured by an industrial building located in Chico, California in the amount of $8,500,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $588,000 were capitalized to the basis of the property. The carrying value of this property of $9,088,000 at the time of foreclosure approximated its then current fair value less estimated selling costs.
Cash and Cash Equivalents, Restricted Cash and Certificates of Deposit
Cash and cash equivalents, restricted cash and certificates of deposit increased from approximately $18,195,000 as of December 31, 2011 to approximately $22,272,000 as of September 30, 2012 (increase of $4,077,000 or 22%) due primarily to approximately $5,586,000 received from the full or partial payoff of trust deeds and approximately $8,867,000 received from sales of real estate properties, net of approximately $7,200,000 paid for the purchase of a member’s interest in TOTB and capitalized improvements to real estate properties of approximately $2,437,000 during the nine month period.
Interest and Other Receivables
Interest and other receivables increased from approximately $1,456,000 as of December 31, 2011 to $2,057,000 as of September 30, 2012 ($602,000 or 41% increase) due primarily to delinquent property taxes and legal expenses paid related to delinquent loans during the nine months ended September 30, 2012. A portion of these advances resulted in additions to the Partnership’s specific loan loss allowance as of September 30, 2012.
Other Assets
Other assets increased from approximately $1,329,000 as of December 31, 2011 to approximately $2,312,000 as of September 30, 2012 ($983,000 or 74% increase), due primarily to capitalized offering costs incurred during the nine months ended September 30, 2012 in the total amount of approximately $521,000 related to a proposed securities filing that was recently completed for the Partnership and filed with the Securities and Exchange Commission and approximately $600,000 is deposits made into escrow for the purchase of parcels located in South Lake Tahoe, California contiguous to parcels securing four impaired Partnership loans (see further details below under Liquidity and Capital Resources).
Accrued Distributions Payable
Accrued distributions payable decreased from approximately $74,000 as of December 31, 2011 to $0 as of September 30, 2012 because there was no tax basis net income distributed to partners in October 2012 (for September 2012 activity).
Due to General Partner
Due to General Partner decreased from approximately $329,000 as of December 31, 2011 to approximately $283,000 as of September 30, 2012, ($46,000 or 14% decrease) due primarily to lower accrued management and service fees owed to the General Partner as of September 30, 2012 as compared to December 31, 2011. These fees are paid pursuant to the Partnership Agreement (see “Results of Operations” above) and can fluctuate from month to month.
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Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities increased from approximately $3,211,000 as of December 31, 2011 to approximately $3,600,000 as of September 30, 2012 ($389,000 or 12% increase) due primarily to an increase in property taxes payable on Partnership real estate properties as of September 30, 2012.
Deferred Gains
Deferred gains decreased from approximately $1,449,000 as of December 31, 2011 to approximately $644,000 as of September 30, 2012 ($805,000 or 56% decrease) due to the full payoff of the carry back note by the buyer/borrower related to the sale of the Bayview Gardens property in 2006.
Noncontrolling Interests
Noncontrolling interests decreased from approximately $17,520,000 as of December 31, 2011 to approximately $8,059,000 as of September 30, 2012 ($9,461,000 or 54% decrease), due primarily to TOTB’s buyout of PRC’s interest in TOTB during the nine months ended September 30, 2012 and the adjustment to the Partnership’s capital balance as a result of an amendment to TOTB’s operating agreement as of the same date.
Asset Quality
A consequence of lending activities is that losses will be experienced and that the amount of such losses will vary from time to time, depending on 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 Partner. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on specific loans or on segments of the loan portfolio.
The conclusion that a Partnership loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to regulations that, among other things, require them to perform ongoing analyses of their loan portfolios (including analyses of loan-to-value ratios, reserves, etc.), and to obtain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted these practices. Rather, management of the General Partner, in connection with the quarterly closing of the accounting records of the Partnership and the preparation of the financial statements, evaluates the Partnership’s mortgage loan portfolio. The allowance for loan losses is established through a provision for loan losses based on the General Partner’s evaluation of the risk inherent in the Partnership’s loan portfolio and current economic conditions. Such evaluation, which includes a review of all loans on which the General Partner determines that full collectability may not be reasonably assured, considers among other matters:
borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay; |
Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover probable losses of the Partnership. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. As of September 30, 2012, management believes that the allowance for loan losses of approximately $24,941,000 is adequate in amount to cover probable losses. Because of the number of
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variables involved, the magnitude of swings possible and the General Partner’s inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the General Partner. As of September 30, 2012, seventeen loans totaling $51,646,000 were impaired. This included thirteen past maturity loans totaling $46,057,000. In addition, one loan of $690,000 was also past maturity but current in monthly payments as of September 30, 2012 (combined total of impaired and past maturity loans of $52,336,000). After the General Partner’s evaluation of the loan portfolio, the Partnership recorded an increase in the allowance for loan losses of approximately $399,000 (increase in specific loan loss allowance of $871,000 and decrease in general allowance of $472,000). The General Partner believes that the allowance for loan losses is sufficient given the estimated fair value of the underlying collateral values of impaired and past maturity loans.
Liquidity and Capital Resources
The Partnership’s principle source of liquidity is its cash from operations and investments (including interest income, income from the sale of properties held for sale, income from loan payoffs and income from operation of certain properties held for investment).
During the nine months ended September 30, 2012, cash flows provided by operating activities approximated $55,000. Investing activities provided approximately $13,053,000 of net cash during the nine months ended September 30, 2012, as approximately $16,510,000 was received from the full or partial payoff of loans, sale of the industrial building located in Chico, California and the majority of real estate assets in Dation, LLC, as a distribution from 1850 De La Cruz, LLC and from the maturity of certificates of deposit, net of approximately $3,457,000 used for improvements to real estate properties, purchase of equipment and to invest in certificates of deposit. Approximately $8,034,000 was used in financing activities, as $7,200,000 was used to purchase the member interest of PRC in TOTB, approximately $117,000 was used to repay the note payable securing the property within 720 University, LLC and approximately $718,000 was distributed to partners in the form of income distributions (including distributions to noncontrolling interests). The General Partner believes that the Partnership will have sufficient cash flow to sustain operations over the next year.
The Partnership has experienced a significant increase in limited partner capital withdrawal requests since late 2008. As of September 30, 2012, the Partnership has received requests for withdrawal from limited partners holding approximately 108,200,000 units, which represents approximately 38% of all outstanding limited partner units and units representing the Carried Interest and GP Contribution Interest. All scheduled withdrawals from January 1, 2009 through September 30, 2012 were not made because the Partnership has not had sufficient available cash to honor such withdrawal requests, needed to have funds in reserve for operations, to protect the Partnership’s interest in certain delinquent loans and to make needed improvements to real estate properties, and, until its bank line of credit was repaid in December 2010, was restricted from making withdrawals under the terms of the line of credit. When funds become available for distribution from net proceeds, the General Partner is permitted to make a pro rata distribution to all partners of up to 10% of the aggregate capital accounts of all outstanding limited partner units in any calendar year, which would prevent any limited partner withdrawals during the same year. However, there can be no assurance that 10% of the aggregate capital accounts of all outstanding limited partner units will be distributed in any calendar year. No pro rata capital distributions were made during the nine months ended September 30, 2012. In July and October 2011, the Partnership made pro rata capital distributions to all partners totaling approximately $11,588,000, which was approximately 4% of the aggregate capital accounts of all outstanding limited partner units.
The limited partners may withdraw capital from the Partnership, either in full or partially, subject to the following limitations, among others:
· | The withdrawing limited partner is required to provide written notice of withdrawal to the General Partner, and the distribution to the withdrawing limited partner will not be made until 61 to 91 days after delivery of such notice of withdrawal. |
· | No withdrawal of capital with respect to Units is permitted until the expiration of one year from the date of purchase of such units, other than units received under the Partnership’s Reinvested Distribution Plan. |
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· | Any such payments are required to be made only from net proceeds and capital contributions (as defined) in the Partnership Agreement. |
· | A maximum of $100,000 per limited partner may be withdrawn during any calendar quarter. |
· | The General Partner is not required to establish a reserve fund for the purpose of funding withdrawals. |
· | No more than 10% of the aggregate capital accounts of limited partners can be paid to limited partners through any combination of distributions of net proceeds and withdrawals during any calendar year, except upon a plan of dissolution of the Partnership. |
Although normal market conditions have not applied to the Partnership over the past four years, when such conditions do apply, sales of units to investors, reinvestment of limited partner distributions, portfolio loan payoffs, sales of foreclosed properties and advances on the Partnership’s line of credit (which has been fully repaid) provide the capital for new mortgage investments. If general market interest rates were to increase substantially, investors might turn to interest-yielding investments other than Partnership units, which would reduce the liquidity of the Partnership and its ability to make additional mortgage investments to take advantage of the generally higher interest rates. In addition, an additional increase in delinquencies on Partnership loans (including an increase in past maturity loans) could further reduce liquidity and could further reduce the cash available to invest in new loans and distribute to limited partners. In contrast, a significant increase in the dollar amount of loan payoffs, sales of foreclosed properties and any additional limited partner investments without the origination of new loans of the same amount would increase the liquidity of the Partnership. Such an increase in liquidity could result in a decrease in the yield paid to limited partners as the Partnership would typically invest the additional funds in lower yielding, short term investments.
Limited partner capital increased by approximately $2,350,000 during the nine months ended September 30, 2012 due primarily to the adjustment to capital as a result of TOTB’s purchase of the member interest of PRC during this nine month period. There were no reinvested distributions from limited partners during the nine months ended September 30, 2012. Reinvested distributions from limited partners electing to reinvest were $56,000 for the nine months ended September 30, 2011. In April 2011, the General Partner suspended the Distribution Reinvestment Plan for all limited partners, in an effort to ensure the Partnership’s ability to continue to operate in compliance with the requirements of the Partnership Agreement. The Partnership intends to amend its registration statement to withdraw the remaining registered Units as it no longer intends to sell Units under this registration statement or pursuant to the Distribution Reinvestment Plan. There were no limited partner withdrawals or capital distributions during the nine months ended September 30, 2012. Pro rata capital distributions totaling $11,588,000 were made to all partners during the year ended December 31, 2011. Limited partner withdrawal and capital distribution percentages have been 5.66%, 0.00%, 2.01%, 10.14% and 6.34% for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively. These percentages are the annual average of the limited partners’ withdrawals and capital distributions in each calendar quarter divided by the total limited partner capital as of the end of each quarter.
The Partnership Agreement provides that the total amount of indebtedness incurred by the Partnership cannot exceed the sum of 50% of the aggregate fair market value of all Partnership loans. Until December 2010, the Partnership had a line of credit agreement with a group of three banks that provided interim financing on mortgage loans invested in by the Partnership. The line of credit was repaid in full by the Partnership in December 2010. Because of such repayment, various restrictions on the Partnership’s capital resources imposed by the line of credit agreement no longer apply.
The Partnership has a note payable with a bank through its investment in 720 University, LLC with a balance of $10,126,000 and $10,242,000 as of September 30, 2012 and December 31, 2011, respectively. The note required monthly interest-only payments until March 1, 2010 at a fixed rate of 5.07% per annum. Commencing April 1, 2010, the note became amortizing and monthly payments of $56,816 are now required, with the balance of unpaid principal due on March 1, 2015. The Partnership anticipates that this note will be paid off from the proceeds of the eventual sale of the property. Alternatively, the note may be refinanced.
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Although the Partnership previously had commitments under construction and rehabilitation loans, no such commitments remained as of September 30, 2012.
The Partnership has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850. As part of the Operating Agreement executed by the Partnership and its joint venture partner in 1850, Nanook Ventures, LLC, or Nanook, the Partnership has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, the Partnership had accrued an amount that a third party consultant had estimated would need to be paid to monitor and remediate the site. The majority of clean-up activities commenced during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $302,000 was paid by the Partnership from the previously established liability during 2012 and an additional $100,000 was accrued during the nine months ended September 30, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Partnership. As of September 30, 2012 and December 31, 2011, approximately $228,000 and $430,000, respectively, has been accrued on the Partnership’s books. All costs for this project will be paid from cash reserves.
It was determined subsequent to foreclosure of the applicable loans in November 2009 that additional renovation costs would be required to complete certain of the condominium units located in Phoenix, Arizona owned by the Partnership so that these units may be leased or sold. In June 2011, 54th Street Condos, LLC (wholly owned by the Partnership) signed a $2,484,000 construction contract for completion of the remaining condominium units. The total estimated cost to complete these units (including related costs, change orders and contingency) is now estimated to be approximately $3,190,000. As of September 30, 2012, approximately $2,925,000 has been incurred and capitalized by the Partnership. Construction began during the third quarter of 2011 and should be completed in phases by the end of 2012. All improvement costs will be paid from cash reserves.
The Partnership has four delinquent loans with aggregate principal balances totaling approximately $24,203,000 that were originally secured by first, second and third deeds of trust on 29 parcels of land with entitlements for a 502,267 square foot resort development located in South Lake Tahoe, California known as Chateau at Lake Tahoe (the “Project”). In July 2012 (subsequent to quarter end), the Partnership signed purchase agreements totaling $6,600,000 to acquire seven parcels in the Project that are contiguous to parcels securing the Partnership’s loans. These seven parcels had provided partial security for the Partnership’s existing loans which were junior to loans held by senior lenders that foreclosed on the property in 2010 and early 2011. While these parcels were originally part of the security for the Partnership’s loans, management chose not to advance the funds to acquire the parcels at the foreclosure sales due to the bankruptcy of the borrower and the uncertainty surrounding the Project. As a result, there are multiple owners of the contiguous parcels. For similar reasons, in July 2012, the Partnership also signed a letter of intent to acquire the senior note for $1,400,000 secured by two parcels on which the Partnership holds second and third deeds of trust. In addition, the Partnership will advance $200,000 to obtain a release of the deed of trust that is senior to the Partnership’s loan on a single parcel in the second phase of the Project, and advance $100,000 for the option to acquire a note for $700,000 which is senior to the Partnership’s loan.
As of September 30, 2012, the Partnership has paid $600,000 in deposits for the purchase of the parcels. The purchases are expected to close escrow in December 2012. The Partnership expects to pay a total of $4,000,000 out of cash reserves for the above purchases. The sellers of the parcels and notes are expected to provide financing for the balance of the purchase price which totals $5,000,000 at 5% interest with interest only, semi-annual payments until the note becomes due in four years from the close of escrow. Once these acquisitions are completed, it is anticipated that the Partnership will then foreclose on all of the deeds of trust and gain ownership of the related parcels. The Partnership will then own a total of 20 parcels which will include all of the parcels necessary to complete the first phase of the Project. Management made the decision to purchase these parcels and notes in order to protect the Partnership’s existing investment in the loans by securing controlling ownership of the first phase of the Project, which will enable the Partnership to move ahead with the sale or potential development of the Project.
Contingency Reserves
The Partnership is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of at least 1-1/2% of the tax basis capital accounts of the limited partners. The cash capital contributions of OFG, up to a maximum of 1/2 of 1% of the limited partners’ capital accounts, may be maintained as additional contingency reserves, if considered necessary by the General Partner. Although the General Partner believes the contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Partnership.
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The General Partner of the Partnership carried out an evaluation, under the supervision and with the participation of the General Partner’s management, including the General Partner’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of the General Partner concluded that, as of September 30, 2012, which is the end of the period covered by this quarterly report on Form 10-Q, the Partnership’s disclosure controls and procedures are effective.
There have been no changes in the Partnership’s internal control over financial reporting in the fiscal quarter ending September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
PART II. OTHER INFORMATION
In the normal course of business, the Partnership may become involved in various types of legal proceedings including, but not limited to, assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, and judicial foreclosure. These proceedings may seek to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup the Partnership’s investment from the real property secured by the deeds of trust. The Partnership believes that it is not party to any pending legal or arbitration proceedings that would have a material adverse effect on its financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on net income in any particular period.
On September 20, 2012, TOTB Miami, LLC (“TOTB”), a limited liability company wholly-owned by the Partnership and the General Partner, and MI-1900 Treasures Investor LLC, a Delaware limited liability company (“the Buyer”) entered into a Purchase Agreement and Deposit Receipt (the “Agreement”), whereby the Buyer has agreed, subject to the terms and conditions of the Agreement, to purchase all of the real property (constituting 169 residential condominium units, a residential apartment building containing 160 units, and certain undeveloped real property) and certain associated rights and properties held by TOTB (collectively, the “Property”). The purchase price to be paid by the Buyer to TOTB for the Property shall be $45,500,000, all cash payable as follows: (i) the sum of $2,000,000 shall be paid from a deposit made to an escrow agent to secure the Buyer’s performance; and (ii) the balance of $43,500,000, subject to adjustments and proration provided for in the Agreement, shall be made by the Buyer in good collective funds to TOTB. There are no material relationships between the Partnership and its affiliates and the Buyer, other than in respect of the Agreement.
Commencing on the date of the Agreement, the Buyer had until November 5, 2012 (the “Inspection Period”) to conduct independent investigations, studies and tests as the Buyer deemed necessary concerning TOTB’s ownership, operation, use, development and/or suitability of the Property for the Buyer’s intended purposes. On November 1, 2012, TOTB and the Buyer entered into the First Amendment to the Agreement in order to: (i) extend the Inspection Period to November 27, 2012; and (ii) extend the closing date from December 5, 2012 to December 7, 2012, subject to other provisions of the Agreement and fulfillment of all closing conditions. In the event the Buyer is not satisfied with the results of the Buyer’s inspection, or for any other reason, in the Buyer’s sole and absolute discretion, the Buyer may cancel the Agreement and the transactions contemplated thereby prior to the expiration of the Inspection Period, in which event the escrow agent shall return the deposit of $2,000,000 and all interest thereon to the Buyer and whereby on all parties shall be released from all further obligations under the Agreement (except those that expressly survive the termination of the Agreement). The Agreement provides that TOTB shall retain all rights in, to and under those certain currently pending lawsuits with respect to the Property and described therein (the “Reserved Rights”). At the closing of the transactions contemplated by the Agreement, the Buyer and TOTB intend to enter into an indemnity and cooperation agreement regarding the Reserved Rights to better identify the rights and obligations with respect thereto.
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The Partnership can give no assurance that the transactions contemplated by the Agreement will be consummated.
(a) Exhibits
10.1 | Purchase Agreement and Deposit Receipt* |
10.2 | First Amendment to Purchase Agreement and Deposit Receipt |
31.1 | Section 302 Certification of William C. Owens |
31.2 | Section 302 Certification of Bryan H. Draper |
32 | Certifications pursuant to 18 U.S.C. Section 1350 |
101 | Financial statements from this quarterly report on Form 10-Q, formatted in XBRL: (i) the Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Partners’ Capital for the nine months ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (v) the Notes to such Consolidated Financial Statements. |
*Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OWENS MORTGAGE INVESTMENT FUND, a California Limited Partnership | |||
By: | OWENS FINANCIAL GROUP, INC., GENERAL PARTNER | ||
Dated: November 14, 2012 | By: | /s/ William C. Owens | |
William C. Owens, President and Chief Executive Officer | |||
Dated: November 14, 2012 | By: | /s/ Bryan H. Draper | |
Bryan H. Draper, Chief Financial Officer and Secretary | |||
Dated: November 14, 2012 | By: | /s/ Melina A. Platt | |
Melina A. Platt, Controller |
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