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 June 30, 2014
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: 000-27816
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California | 94-3158788 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1825 S. Grant Street, Suite 250, San Mateo, CA | 94402 |
(Address of principal executive offices) | (Zip Code) |
(650) 365-5341
(Registrant's telephone number, including area code)
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report)
1
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. [X] YES[ ] NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] YES [ ] NO
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.
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 Exchange Act).
[ ] YES [X] NO
2
Part I –FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Balance Sheets
June 30, 2014 (unaudited) and December 31, 2013 (audited)
($ in thousands)
ASSETS
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Cash and cash equivalents | $ | 8,115 | $ | 16,393 | ||||
Loans | ||||||||
Secured by deeds of trust | ||||||||
Principal | 59,031 | 51,890 | ||||||
Advances | 744 | 708 | ||||||
Accrued interest | 256 | 222 | ||||||
Unsecured | 102 | 112 | ||||||
Allowance for loan losses | (8,578 | ) | (8,790 | ) | ||||
Net loans | 51,555 | 44,142 | ||||||
Receivable from affiliate | 105 | 33 | ||||||
Real estate held for sale, net | 42,059 | 16,552 | ||||||
Real estate held as investment | 133,368 | 162,563 | ||||||
Other assets, net | 5,043 | 5,258 | ||||||
Total assets | $ | 240,245 | $ | 244,941 |
LIABILITIES AND CAPITAL
Liabilities | ||||||||
Accounts payable | $ | 699 | $ | 980 | ||||
Payable to affiliate | 465 | 495 | ||||||
Mortgages payable | 48,290 | 48,938 | ||||||
Total liabilities | 49,454 | 50,413 | ||||||
Capital | ||||||||
Partners’ capital | ||||||||
Limited partners’ capital, subject to redemption, net | 191,014 | 194,236 | ||||||
General partners’ capital (deficit) | (1,017 | ) | (1,024 | ) | ||||
Total partners’ capital | 189,997 | 193,212 | ||||||
Non-controlling interest | 794 | 1,316 | ||||||
Total capital | 190,791 | 194,528 | ||||||
Total liabilities and capital | $ | 240,245 | $ | 244,941 |
The accompanying notes are an integral part of these consolidated financial statements.
3
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2014 and 2013
($ in thousands, except for per limited partner amounts)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues, net | ||||||||||||||||
Interest income | ||||||||||||||||
Loans | $ | 778 | $ | 566 | $ | 1,446 | $ | 908 | ||||||||
Imputed interest on formation loan | 102 | 97 | 209 | 190 | ||||||||||||
Total interest income | 880 | 663 | 1,655 | 1,098 | ||||||||||||
Interest expense | ||||||||||||||||
Bank loan, secured | — | — | — | — | ||||||||||||
Mortgages | 547 | 530 | 1,093 | 1,081 | ||||||||||||
Amortization of discount on formation loan | 102 | 97 | 209 | 190 | ||||||||||||
Total interest expense | 649 | 627 | 1,302 | 1,271 | ||||||||||||
Net interest income/(expense) | 231 | 36 | 353 | (173 | ) | |||||||||||
Late fees | 17 | 2 | 19 | 5 | ||||||||||||
Other | 178 | 260 | 323 | 539 | ||||||||||||
Total revenues/(expense), net | 426 | 298 | 695 | 371 | ||||||||||||
Recovery of loan losses | (130 | ) | (142 | ) | (160 | ) | (142 | ) | ||||||||
Operating Expenses | ||||||||||||||||
Mortgage servicing fees | 214 | 164 | 340 | 317 | ||||||||||||
Asset management fees | 189 | 192 | 379 | 384 | ||||||||||||
Costs from Redwood Mortgage Corp. | 414 | 384 | 923 | 774 | ||||||||||||
Professional services | 106 | 107 | 214 | 557 | ||||||||||||
REO | ||||||||||||||||
Rental operations, net | (985 | ) | (871 | ) | (1,785 | ) | (1,560 | ) | ||||||||
Holding costs | 25 | 27 | 52 | 91 | ||||||||||||
Loss/(gain) on disposal | — | — | (2 | ) | — | |||||||||||
Impairment loss | — | 291 | — | 291 | ||||||||||||
Other | 41 | 25 | 52 | 29 | ||||||||||||
Total operating expenses | 4 | 319 | 173 | 883 | ||||||||||||
Net income (loss) | $ | 552 | $ | 121 | 682 | (370 | ) | |||||||||
Net income (loss) | ||||||||||||||||
General partners (1%) | $ | 6 | $ | 1 | 7 | (4 | ) | |||||||||
Limited partners (99%) | 546 | 120 | 675 | (366 | ) | |||||||||||
$ | 552 | $ | 121 | 682 | (370 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
4
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Changes in Partners’ Capital
For the Six Months Ended June 30, 2014
(in thousands) (unaudited)
Limited Partners’ Capital | General | Total | ||||||||||||||
Capital | Formation Loan | Capital, net | Partners’ Capital | Partners’ Capital, net | ||||||||||||
Balance, December 31, 2013 | $ | 201,863 | $ | (7,627 | ) | $ | 194,236 | $ | (1,024 | ) | $ | 193,212 | ||||
Net income (loss) | 675 | — | 675 | 7 | 682 | |||||||||||
Allocation of syndication costs | — | — | — | — | — | |||||||||||
Distributions | (1,119 | ) | — | (1,119 | ) | — | (1,119 | ) | ||||||||
Liquidations | (2,821 | ) | — | (2,821 | ) | — | (2,821 | ) | ||||||||
Early withdrawal penalties | — | 43 | 43 | — | 43 | |||||||||||
Balance, June 30, 2014 | $ | 198,598 | $ | (7,584 | ) | $ | 191,014 | $ | (1,017 | ) | $ | 189,997 |
The accompanying notes are an integral part of these consolidated financial statements.
5
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2014 and 2013
($ in thousands) (unaudited)
2014 | 2013 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 682 | $ | (370 | ) | |||
Adjustments to reconcile net income (loss) to | ||||||||
net cash provided by (used in) operating activities | ||||||||
Amortization of borrowings-related origination fees | 49 | 40 | ||||||
Imputed interest on formation loan | (209 | ) | (190 | ) | ||||
Amortization of discount on formation loan | 209 | 190 | ||||||
Provision for loan losses | (160 | ) | (142 | ) | ||||
REO – depreciation, rental properties | 1,304 | 1,236 | ||||||
REO – depreciation, other properties | 11 | 11 | ||||||
REO – loss/(gain) on disposal | (2 | ) | — | |||||
REO – impairment loss | — | 397 | ||||||
Change in operating assets and liabilities | ||||||||
Accrued interest | (97 | ) | (37 | ) | ||||
Advances on loans | (59 | ) | (276 | ) | ||||
Allowance for loan losses-recoveries, net of receivables | 50 | 629 | ||||||
Receivable from affiliates | (72 | ) | — | |||||
Other assets | 166 | (760 | ) | |||||
Accounts payable and accrued liabilities | (281 | ) | (1,351 | ) | ||||
Payable to affiliate | (30 | ) | 181 | |||||
Net cash provided by (used in) operating activities | 1,561 | (442 | ) | |||||
Cash flows from investing activities | ||||||||
Secured loans funded or acquired | (22,907 | ) | (11,352 | ) | ||||
Principal collected on secured loans | 12,995 | 3,628 | ||||||
Loans assigned to affiliates | 2,394 | 1,232 | ||||||
Unsecured loans | 10 | 8 | ||||||
Payments for development of REO | (953 | ) | (1,977 | ) | ||||
Proceeds from disposition of REO | 3,446 | 1,398 | ||||||
Net cash provided by (used in) investing activities | (5,015 | ) | (7,063 | ) | ||||
Cash flows from financing activities | ||||||||
Mortgages taken | — | 5,000 | ||||||
Payments on mortgages | (648 | ) | (574 | ) | ||||
Partners’ withdrawals | (3,940 | ) | (1,129 | ) | ||||
Early withdrawal fees | 43 | — | ||||||
Increase/(decrease) in non-controlling interest | (279 | ) | (438 | ) | ||||
Net cash provided by (used in) financing activities | (4,824 | ) | 2,859 | |||||
Net increase (decrease) in cash and cash equivalents | (8,278 | ) | (4,646 | ) | ||||
Cash and cash equivalents, January 1 | 16,393 | 18,943 | ||||||
Cash and cash equivalents, June 30 | $ | 8,115 | $ | 14,297 | ||||
Supplemental disclosures of cash flow information | ||||||||
Non-cash investing activities | ||||||||
Real estate acquired through foreclosure/settlement on loans, | ||||||||
net of liabilities assumed | $ | 360 | $ | 2,685 | ||||
Cash paid for interest | $ | 1,093 | $ | 1,081 |
The accompanying notes are an integral part of these consolidated financial statements.
6
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL
In the opinion of the general partners, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the consolidated financial information included therein. 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, 2013 filed with the Securities and Exchange Commission (SEC). The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the operating results to be expected for the full year.
Redwood Mortgage Investors VIII, a California Limited Partnership, (RMI VIII or the partnership) was organized in 1993. The partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate.
The general partners of the partnership are Redwood Mortgage Corp. (RMC) and its wholly-owned subsidiary, Gymno LLC (Gymno), a California limited liability company, and Michael R. Burwell (Burwell), an individual. The general partners are solely responsible for partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the partnership. The mortgage loans the partnership invests in are arranged and are generally serviced by RMC. Michael Burwell is the president and majority shareholder (through his holdings and beneficial interests in certain trusts) of RMC. The general partners are required to contribute to capital 1/10 of 1% of the aggregate capital contributions of the limited partners. As of December 31, 2013, the general partners had contributed capital in accordance with Section 4.1 of the partnership agreement.
The rights, duties and powers of the general and limited partners of the partnership are governed by the limited partnership agreement and Sections 15900 et seq. of the California Corporations Code.
A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the partnership and (iv) remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general partner to continue the partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal.
On the mortgage loans originated for RMI VIII, RMC may collect loan brokerage commissions (points) limited to an amount not to exceed four percent per year of the total partnership assets. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the partnership. The proceeds from loan brokerage commissions and other fees earned are the source of funds for the repayment of the formation loans by RMC.
Profits and losses are allocated among the limited partners according to their respective capital accounts after one percent of profits and losses is allocated to the general partners, and are subject to subsequent adjustment as a result of quarterly and year-end accounting and reporting.
RMC, Gymno, and Burwell, as the general partners, are entitled to one percent of the profits and losses of RMI VIII. Beginning with calendar year 2010, and continuing until January 1, 2020, Gymno and RMC each assigned its right to one-third of one percent of profits and losses to Burwell in exchange for Burwell assuming one hundred percent of the general partners’ equity deficit.
Limited partners should refer to the limited partnership agreement for a more complete description of the provisions.
7
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership,
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL (continued)
Election to receive monthly, quarterly or annual distributions
At the time of their subscription for units, partners elect to have distributed to them their monthly, quarterly or annual allocation of profits, or to have profits allocated to their capital accounts to compound. Subject to certain limitations, those electing compounding may subsequently change their election. A partner’s election to receive cash distributions is irrevocable.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of units and accordingly an investment in the partnership is non-liquid. The partnership does not establish a reserve from which to fund withdrawals and, accordingly, the partnership’s capacity to return a limited partner’s capital is restricted to the availability of partnership cash flow. Furthermore, no more than 20% of the total limited partners’ capital accounts outstanding at the beginning of any year, may be liquidated during any calendar year.
The partnership agreement provides that limited partners in the partnership for the minimum five-year period may withdraw all or a portion of their capital accounts in twenty quarterly installments or longer, beginning the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. The general partners, at their discretion, may liquidate all or part of a limited partner’s capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty.
In March 2009, in response to economic conditions then existing, the partnership suspended capital liquidations. In the fourth quarter of 2009 the partnership entered into a forbearance agreement with its banks and subsequently entered into an amended and restated loan agreement (dated October 2010) which included additional restrictions on liquidations and distributions of partners’ capital. The bank loan was paid off in September 2012.
The partnership’s five most recently completed quarters have been profitable, and it has recommenced providing capital liquidation payments as of March 31, 2014. In the quarter ending March 31, 2014, those investors that had a liquidation payment pending but which was suspended as of March 31, 2009, the partnership resumed liquidation payments based on their current capital balance at the payment terms of their election existing at March 2009. Limited partners were informed of our reinstitution of accepting liquidation requests and those that requested liquidation between January 1, 2014 and prior to March 31, 2014, had their liquidation requests added to those previously existing, with payments beginning as of June 30, 2014. Each quarter, the partnership will allocate a specific amount of cash for liquidation payments. In the event that the cash allocated is insufficient to meet the liquidation requests of all limited partners requesting liquidations, then liquidation requests will be disbursed based upon the priority schedule set forth in the limited partnership agreement and then on a pro-rata basis. The partnership intends to continue to accept liquidation requests in future quarters and these requests will be added to previously existing requests and be subject to the same priorities and pro-rata allocation of distributable cash as described in the limited partnership agreement.
Syndication costs
The partnership ultimately incurred its own syndication costs, including expenses incurred in connection with the start-up of the partnership or ongoing offering of the units. Syndication costs were charged against partners’ capital and allocated to individual partners consistent with the partnership’s operating agreement.
8
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL (continued)
Sales commissions - formation loans
Sales commissions are paid to the broker dealers by RMC and are not paid directly by the partnership out of the offering proceeds. The partnership loans to RMC, one of the general partners, amounts to pay all sales commissions to broker/dealers for sale of units and amounts payable in connection with unsolicited orders. This loan is unsecured and non-interest bearing and is referred to as the “formation loan,” and is being repaid equally over a ten year period commencing the year after the close of a partnership offering. The formation loan has been deducted from limited partners’ capital in the consolidated balance sheets. As payments on the formation loan are received from RMC, the deduction from capital will be reduced. Interest has been imputed at the market rate of interest in effect in the years the offering closed. If the general partners are removed and RMC is no longer receiving payments for services rendered, the formation loan is forgiven.
RMC acts as the broker in originating mortgage loans for RMI VIII. The corresponding brokerage commissions paid by borrowers from mortgage loans made by these funds are the primary source of cash used to repay the formation loans. RMI VIII was prohibited by its lending banks from originating new loans under the terms of an Amended and Restated Loan Agreement dated October 2010, and a preceding forbearance agreement that was in effect in the fourth quarter of 2009, until the bank loan was repaid in full, in September 2012. The amended loan and forbearance agreements were the result of a technical covenant default (i.e. not a payment failure) under the original loan. As a result, RMC was deprived of the opportunity to receive brokerage commissions on loans by RMI VIII for the period from the fourth quarter of 2009 continuing through September 30, 2012, a period of almost three years.
During that period, despite receiving no loan brokerage commissions, RMC continued to make the annual formation loan payments of approximately $1.8 million per year (or $5.4 million for the three years) from its own cash reserves that existed as of the date of the forbearance agreement. RMC believes it would have had a reasonable argument that the annual formation loan payments should be suspended until such time as lending by RMI VIII was permitted to resume and brokerage commissions could be earned, but RMC elected not to take such an approach and, instead, continued to make annual formation loan payments due to concerns that the lending banks would view nonpayment of the formation loan as another technical loan default that might have led to a “distressed sale” liquidation of RMI VIII’s assets, resulting in substantial loss of limited partners’ capital.
As the bank loan was fully repaid as of September 2012, RMC has temporarily suspended annual formation loan payments, beginning with the payment due December 31, 2012, for the three-year period then beginning, which is a period commensurate with the period during which lending by RMI VIII was prohibited and RMC was deprived of loan brokerage commissions.
For the offerings, sales commissions paid to brokers ranged from 0% (units sold by general partners) to 9% of gross proceeds. The partnership had anticipated the sales commissions would approximate 7.6% based on the assumption that 65% of investors will elect to reinvest profits, thus generating full 9% commissions. The actual sales commission percentage for all six offerings combined was 7.5%.
Income taxes and Partners’ capital – tax basis
Income taxes – federal and state – are the obligation of the partners, if and when taxes apply, other than for the minimum annual California franchise tax paid by the partnership.
Term of the partnership
The partnership is scheduled to terminate in 2032, unless sooner terminated as provided in the limited partnership agreement.
9
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership’s consolidated financial statements include the accounts of the partnership, its wholly-owned subsidiaries, and its 72.5%-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
Management estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the fair value of loans, primarily loans designated impaired, and the fair value of the related real estate collateral and real estate owned, if any. Actual results could differ significantly from these estimates.
- Fair Value Estimates
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date (i.e. the balance sheet date). An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
Fair values of assets and liabilities are determined based on the fair value hierarchy established in GAAP. The hierarchy is comprised of three levels of inputs to be used.
- | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the partnership has the ability to access at the measurement date. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
- | Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. |
- | Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the partnership’s own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the partnership’s own data. |
For secured loans, the collaterals’ fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the arithmetic difference between the fair value of the collateral, net of any senior liens, and the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest thereon. This computation is done for each loan (whether performing or designated impaired)
The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values, and publicly available information on in-market transactions. These sources would be considered Level 2 inputs.
Appraisals of commercial real property generally present three approaches to estimating value: 1) market comparables or sales approach; 2) cost to replace and 3) capitalized cash flows or investment approach. These approaches may or may not result in a common, single value. The market-comparables approach may yield several different values depending on certain basic assumptions, such as, determining highest and best use (which may or may not be the current use); determining the condition (e.g. as-is, when-completed, or for land when-entitled); and determining the unit of value (e.g. as a series of individual unit sales or as a bulk disposition).
10
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- Fair Value Estimates (continued)
Management has the requisite familiarity with the markets it lends in generally and of the properties lent on specifically to analyze sales-comparables and assess their suitability/applicability. Management is acquainted with market participants – investors, developers, brokers, lenders – that are useful, relevant secondary sources of data and information regarding valuation and valuation variability. These secondary sources may have familiarity with and perspectives on pending transactions, successful strategies to optimize value, and the history and details of specific properties – on and off the market – that enhance the process and analysis that is particularly and principally germane to establishing value for property types – or individual properties that do not transact regularly and/or would not qualify for traditional (e.g. bank) financing.
- Allowance for loan losses
Loans and the related advances and accrued interest are analyzed on a periodic basis for ultimate recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. If events and or changes in circumstances cause management to have serious doubts about the collectability of the payments of interest and principal in accordance with the loan agreement, a loan may be designated as impaired (impaired loans). Any subsequent payments on impaired loans are applied to late fees, then to the accrued interest, then to advances, and lastly to principal.
Performing loans, are aggregated by the property type of the underlying collateral, and for each loan and for the total by property type, the amount of protective equity or amount of exposure to loss (i.e., the dollar amount of the deficiency of the fair value of the underlying collateral to the loan balance) is computed.
For impaired loans, a provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, such that the net carrying amount (principal, plus advances, plus accrued interest less the specific allowance) is reduced to the estimated fair value of the related collateral, net of any senior loans, and net of any costs to sell in arriving at net realizable value if planned disposition of the asset securing a loan is by way of sale.
Based on its knowledge of the borrowers and their historical (and expected) performance, and the exposure to loss, management estimates an appropriate reserve by property type and for individual loans in the loan portfolio. Because the partnership is an asset-based lender, except as to owner-occupied residences, and because specific regions, neighborhoods and even properties within the same neighborhoods, vary significantly as to real estate values and transaction activity, general market trends, which may be indicative of a change in the risk of a loss, and a borrower’s credit worthiness are secondary to the condition of the property, the property type and the neighborhood/region in which the property is located.
The partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.
Cash and cash equivalents
The partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, partnership cash balances in banks exceed federally insured limits.
11
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans and interest income
Loans generally are stated at the unpaid principal balance (principal). Management has discretion to pay amounts (advances) to third parties on behalf of borrowers to protect the partnership’s interest in the loan. Advances include, but are not limited to, the payment of interest and principal on a senior lien to prevent foreclosure by the senior lien holder, property taxes, insurance premiums, and attorney fees. Advances generally are stated at the amount paid out on the borrower’s behalf and accrue interest until repaid by the borrower.
The partnership may fund a specific loan origination net of an interest reserve to insure timely interest payments at the inception (one to two years) of the loan. As monthly interest payments become due, the partnership funds the payments into the affiliated trust account. In the event of an early loan payoff, any unapplied interest reserves would be first applied to any accrued but unpaid interest and then as a reduction to the principal.
From time to time, the partnership negotiates and enters into loan modifications with borrowers whose loans are delinquent. If the loan modification results in a significant reduction in the cash flow compared to the original note, the modification is deemed a troubled debt restructuring and a loss is recognized. In the normal course of the partnership’s operations, loans that mature may be renewed at then current market rates and terms for new loans. Such renewals are not designated as impaired, unless the matured loan was previously designated as impaired.
Interest is accrued daily based on the principal of the loans. An impaired loan continues to accrue as long as the loan is in the process of collection and is considered to be well-secured. Loans are placed on non-accrual status at the earlier of management’s determination that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (which usually occurs when a notice of sale is filed) or when the loan is no longer considered well-secured. When a loan is placed on non-accrual status, the accrual of interest is discontinued; however, previously recorded interest is not reversed. A loan may return to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement.
Real estate owned (REO) held for sale
REO, held for sale includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. REO, held for sale is recorded at acquisition at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property’s net realizable value, which is the 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. The fair value estimates are derived from information available in the real estate markets including similar property, and often require the experience and judgment of third parties such as commercial real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves. After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, REO, held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged to operating expenses. 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 operating expenses. Gains or losses on sale of the property are included in REO – operating expense in the consolidated statements of operations. 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.
12
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real estate owned (REO), held as investment, net
REO, held as investment, net 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. REO, held as investment, net 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, net. 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.
Rental income
Rental income is recognized when earned in accordance with the lease agreement. For commercial leases, the costs associated with originating the lease are amortized over the lease term. Residential lease terms generally range from month-to-month to one year, and the expenses of originating the lease are expensed as incurred.
Depreciation
Real estate owned held as investment that is being operated is depreciated on a straight-line basis over the estimated useful life of the property once the asset is placed in service.
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES
The general partners are entitled to one percent of the profits and losses, which amounted to approximately $5,500 and $1,000 for the three months ended, and $6,800 and $(4,000) for the six months ended June 30, 2014 and 2013, respectively.
Formation loan
The formation loan transactions are summarized in the following table at June 30, 2014 ($ in thousands).
Formation loan made | $ | 22,567 | ||
Unamortized discount on formation loan | (1,625 | ) | ||
Formation loan made, net | 20,942 | |||
Repayments to date | (14,297 | ) | ||
Early withdrawal penalties applied | (686 | ) | ||
Formation loan, net | 5,959 | |||
Unamortized discount on formation loan | 1,625 | |||
Balance, June 30, 2014 | $ | 7,584 |
Interest has been imputed at the market rate of interest in effect at the date the offerings closed which ranged from 4.00% to 9.50%. During the three months ended June 30, 2014 and 2013, approximately $102,000 and $97,000, respectively, were recorded related to amortization of the discount on imputed interest, and for the six months ended June 30, 2014 and 2013, $209,000 and $190,000, respectively, was recorded.
13
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES (continued)
Formation loan (continued)
The future minimum payments on the formation loan are presented in the following table ($ in thousands).
2014 | $ | — | ||
2015 | 1,893 | |||
2016 | 1,665 | |||
2017 | 1,322 | |||
2018 | 1,150 | |||
Thereafter | 1,554 | |||
Total | $ | 7,584 |
RMC acts as the broker in originating mortgage loans for RMI VIII. The corresponding brokerage commissions paid by borrowers from mortgage loans made by these funds are the primary source of cash used to repay the formation loans. RMI VIII was prohibited by its lending banks from originating new loans under the terms of an Amended and Restated Loan Agreement dated October 2010, and a preceding forbearance agreement that was in effect in the fourth quarter of 2009, until the bank loan was repaid in full, September 2012. The amended loan and forbearance agreements were the result of a technical (i.e. non-payment) covenant default under the original loan. As a result, RMC was deprived of the opportunity to receive brokerage commissions on loans by RMI VIII for the period from the fourth quarter of 2009 continuing through September 30, 2012, a period of almost three years.
During that period, despite receiving no loan brokerage commissions, RMC continued to make the annual formation loan payments of approximately $1.8 million per year (or $5.4 million for the three years) from its own cash reserves that existed as of the date of the forbearance agreement. RMC believes it would have had a reasonable argument that the annual formation loan payments should be suspended until such time as lending by RMI VIII was permitted to resume and brokerage commissions could be earned, but RMC elected not to take such an approach and, instead, continued to make annual formation loan payments due to concerns that the lending banks would view nonpayment of the formation loan as another technical loan default that might have led to a “distressed sale” liquidation of RMI VIII’s assets, resulting in substantial loss of limited partners’ capital.
As the bank loan was fully repaid as of September 2012, RMC has temporarily suspended annual formation loan payments, beginning with the payment due December 31, 2012, for the three-year period then beginning, which is a period commensurate with the period during which lending by RMI VIII was prohibited and RMC was deprived of loan brokerage commissions.
The following commissions and/or fees are paid by the borrowers to the general partners and their affiliates and are not an expense of the partnership.
- Brokerage commissions, loan originations
For fees in connection with the review, selection, evaluation, negotiation and extension of loans, the general partners may collect loan brokerage commissions (points) limited to an amount not to exceed 4% of the total partnership assets per year. Loan brokerage commissions paid to the general partners by the borrowers were $299,750 and $225,830 for the three months ended, and $434,313 and $225,830 for the six months ended June 30, 2014 and 2013, respectively.
- Other fees
The partnership agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. Other fees totaled $8,633 and $6,568 for the three months ended, and $14,057 and $10,176 for the six months ended June 30, 2014 and 2013, respectively.
14
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES (continued)
The following fees are paid by the partnership to the general partners.
- Mortgage servicing fees
RMC may earn mortgage servicing fees of up to 1.5% annually of the unpaid principal of the loan portfolio or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located from RMI VIII. Historically, RMC charged one percent annually, and at times waived additional amounts to improve the partnership’s earnings. Such fee waivers were not made for the purpose of providing the partnership with sufficient funds to satisfy withdrawal requests, nor were such waivers made in order to meet any required level of distributions, as the partnership has no such required level of distributions. RMC does not use any specific criteria in determining the amount of fees, if any, to be waived. The decision to waive fees and the amount, if any, to be waived, is made by RMC in its sole discretion. In April 2014, RMC charged 1.5% (1% was charged in prior periods).
Mortgage servicing fees paid to RMC by the partnership are presented in the following table for the three and six months ended June 30, ($ in thousands).
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Chargeable by RMC | $ | 214 | $ | 246 | $ | 403 | $ | 476 | ||||||||
Waived by RMC | — | (82 | ) | (63 | ) | (159 | ) | |||||||||
Charged | $ | 214 | $ | 164 | $ | 340 | $ | 317 |
- Asset management fees
The general partners receive monthly fees for managing the partnership’s loan portfolio and operations of up to 1/32 of 1% of the “net asset value” (3/8 of 1% annually). At times, the general partners have charged less than the maximum allowable rate to enhance the partnership’s earnings. Such fee waivers were not made with the purpose of providing the partnership with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the partnership has no such required level of distributions. RMC does not use any specific criteria in determining the exact amount of fees, if any, to be waived. The decision to waive fees and the amount, if any, to be waived, is made by RMC in its sole discretion.
Asset management fees were $189,000 and $192,000 for the three months ended, and $379,000 and $384,000 for the six months ended June 30, 2014 and 2013, respectively No asset management fees were waived during any period reported.
- Costs from Redwood Mortgage Corp.
RMC, a general partner, per the operating agreement, may request reimbursement by the partnership for operating expenses incurred on behalf of the partnership, including without limitation, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners, and out-of-pocket general and administration expenses. Certain costs (e.g. postage) can be allocated specifically to a fund. Other costs are allocated on a pro-rata basis (e.g. by the funds’ percentage of total capital of all funds). Payroll and consulting fees are broken out first based on activity, and then allocated to funds on a pro-rata basis based on either a specific asset base or capital percentage. The decision to request reimbursement of any qualifying charges is made by RMC in its sole discretion. Operating expenses of $414,000 and $384,000 for the three months ended and $923,000 and $774,000 for the six months ended June 30, 2014 and 2013, respectively, were reimbursed to RMC. RMC did not waive its right to request reimbursement of any qualifying charges during the three and six months ended June 30, 2014 and 2013. During the second quarter of 2014, the expense allocations were revised retroactive to January 1, 2014, resulting in a decrease to the cost allocations for the first quarter of 2014 of approximately $50,000.
- Syndication costs
As of June 30, 2014 there were no unallocated syndication costs. All syndication costs, totaling $5,010,000, were allocated to the limited partner’s capital accounts as of December 31, 2013.
15
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS
Loans generally are funded with a fixed interest rate and a loan term up to five years. As of June 30, 2014, 29 (64%) of the partnership’s loans (representing 61% of the aggregate principal balance of the partnership’s loan portfolio) have a five year term or less from loan inception. The remaining loans have terms longer than five years. Substantially all loans are written without a prepayment-penalty clause. As of June 30, 2014, 22 (49%) of the loans outstanding (representing 79% of the aggregate principal balance of the partnership’s loan portfolio) provide for monthly payments of interest only, with the principal due in full at maturity. The remaining loans require monthly payments of principal and interest, typically calculated on a 30 year amortization, with the remaining principal balance due at maturity.
The partnership may make construction loans that are not fully disbursed at loan inception. Construction loans are determined to be those loans made to borrowers for the construction of entirely new structures or dwellings, whether residential, commercial or multi-family properties. The partnership will approve and fund the construction loan up to a maximum loan balance. Disbursements will be made periodically as phases of the construction are completed or at such other times as the loan documents may require. Undisbursed construction funds will be held in escrow pending disbursement. Upon project completion, construction loans are reclassified as permanent loans. Funding of construction loans is limited to 10% of the loan portfolio. As of June 30, 2014, the partnership had no construction loans outstanding.
The partnership may also make rehabilitation loans. A rehabilitation loan will be approved up to a maximum principal balance and, at loan inception, will be either fully or partially disbursed. A rehabilitation loan escrow account is fully funded and advanced periodically as phases of the rehabilitation are completed or at such other times as the loan documents may require. The rehabilitation loan proceeds are generally used to acquire and remodel single family homes for future sale or rental. As of June 30, 2014, the partnership had no rehabilitation loans outstanding.
Loans unpaid principal balance (principal)
Secured loan transactions are summarized in the following table for the six months ended June 30, ($ in thousands).
2014 | 2013 | |||||||
Principal, January 1 | $ | 51,890 | $ | 60,870 | ||||
Loans funded or acquired | 22,907 | 11,352 | ||||||
Principal collected | (12,995 | ) | (3,628 | ) | ||||
Loans assigned to affiliates | (2,394 | ) | (1,232 | ) | ||||
Foreclosures | (360 | ) | (2,714 | ) | ||||
Loans charged off as uncollectible | (17 | ) | — | |||||
Principal, June 30 | $ | 59,031 | $ | 64,648 |
During the six months ended June 30, 2014 and 2013, the partnership renewed zero and two loans, respectively, with a remaining aggregate principal of approximately $0 and $351,000, at June 30, 2014 and 2013, respectively, not included in the activity shown on the table above.
16
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Loan characteristics
Secured loans had the characteristics presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Number of secured loans | 45 | 36 | ||||||
Secured loans – principal | $ | 59,031 | $ | 51,890 | ||||
Secured loans – lowest interest rate (fixed) | 4.00 | % | 4.00 | % | ||||
Secured loans – highest interest rate (fixed) | 12.00 | % | 12.00 | % | ||||
Average secured loan – principal | $ | 1,312 | $ | 1,441 | ||||
Average principal as percent of total principal | 2.22 | % | 2.78 | % | ||||
Average principal as percent of partners’ capital | 0.69 | % | 0.75 | % | ||||
Average principal as percent of total assets | 0.55 | % | 0.59 | % | ||||
Largest secured loan – principal | $ | 16,312 | $ | 16,312 | ||||
Largest principal as percent of total principal | 27.63 | % | 31.44 | % | ||||
Largest principal as percent of partners’ capital | 8.55 | % | 8.44 | % | ||||
Largest principal as percent of total assets | 6.79 | % | 6.65 | % | ||||
Smallest secured loan – principal | $ | 59 | $ | 79 | ||||
Smallest principal as percent of total principal | 0.10 | % | 0.15 | % | ||||
Smallest principal as percent of partners’ capital | 0.03 | % | 0.04 | % | ||||
Smallest principal as percent of total assets | 0.02 | % | 0.03 | % | ||||
Number of counties where security is located (all California) | 19 | 17 | ||||||
Largest percentage of principal in one county | 28.20 | % | 41.68 | % | ||||
Number of secured loans in foreclosure status | 2 | 2 | ||||||
Secured loans in foreclosure – principal | $ | 16,977 | $ | 16,689 | ||||
Number of secured loans with an interest reserve | — | — | ||||||
Interest reserves | $ | — | $ | — |
As of June 30, 2014, the partnership’s largest loan, in the unpaid principal balance of $16,312,000 (representing 27.63% of outstanding secured loans and 6.79% of partnership assets) has an interest rate of 5.00% and is secured by 75 units in a condominium complex with 128 total units, located in Contra Costa County, California. This loan matured April 1, 2012. A court appointed receiver is managing the 75 units. A foreclosure sale date is still to be determined based upon the progress of the receiver.
Larger loans sometimes increase above 10% of the secured loan portfolio or partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans.
17
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Lien position
At funding secured loans had the following lien positions and are presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
First trust deeds | 28 | $ | 48,508 | 82 | % | 19 | $ | 36,816 | 71 | % | ||||
Second trust deeds | 16 | 10,237 | 17 | 16 | 14,784 | 28 | ||||||||
Third trust deeds | 1 | 286 | 1 | 1 | 290 | 1 | ||||||||
Total secured loans | 45 | 59,031 | 100 | % | 36 | 51,890 | 100 | % | ||||||
Liens due other lenders at loan closing | 40,442 | 53,098 | ||||||||||||
Total debt | $ | 99,473 | $ | 104,988 | ||||||||||
Appraised property value at loan closing | $ | 165,650 | $ | 148,215 | ||||||||||
Percent of total debt to appraised | ||||||||||||||
values (LTV) at loan closing(1) | 60.05 | % | 70.83 | % |
(1) | Based on appraised values and liens due other lenders at loan closing. The loan-to-value computation does not take into account subsequent increases or decreases in security property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders by payments or interest accruals, if any. Property values likely have changed, particularly over the last four years, and the portfolio’s current loan to value ratio likely is higher than this historical ratio. |
Property type
Secured loans summarized by property type are presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
Single family | 33 | $ | 35,879 | 60 | % | 27 | $ | 33,771 | 65 | % | ||||
Multi-family | 1 | 1,000 | 2 | 1 | 1,000 | 2 | ||||||||
Commercial(2) | 11 | 22,152 | 38 | 8 | 17,119 | 33 | ||||||||
Total secured loans | 45 | $ | 59,031 | 100 | % | 36 | $ | 51,890 | 100 | % |
(2) | Includes one loan with a principal balance of approximately $529,000, secured by an improved land lot, with plans to be developed as a five-unit townhouse by the borrower. |
18
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Property type (continued)
Single family properties include owner-occupied and non-owner occupied single family homes (1-4 unit residential buildings), condominium units, townhouses, and condominium complexes. From time to time, loan originations in one sector or property type become more active due to prevailing market conditions. The current concentration of the partnership’s loan portfolio in condominium properties may pose additional or increased risks. Recovery of the condominium sector of the real estate market is generally expected to lag behind that of single-family residences. In addition, availability of financing for condominium properties has been, and will likely continue to be, constricted and more difficult to obtain than other property types. As of June 30, 2014 and December 31, 2013, $17,280,000 and $16,312,000, respectively, of the partnership’s loans were secured by condominium properties.
Condominiums may create unique risks for the partnership that are not present for loans made on other types of properties. In the case of condominiums, a board of managers generally has discretion to make decisions affecting the condominium building, including regarding assessments to be paid by the unit owners, insurance to be maintained on the building, and the maintenance of that building, which may have an impact on the partnership loans that are secured by such condominium property.
The partnership may have less flexibility in foreclosing on the collateral for a loan secured by condominiums upon a default by the borrower. Among other things, the partnership must consider the governing documents of the homeowners association and the state and local laws applicable to condominium units, which may require an owner to obtain a public report prior to the sale of the units.
19
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Distribution by California counties
The distribution of secured loans outstanding by the California county in which the primary collateral is located is presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||
Unpaid Principal Balance | Percent | Unpaid Principal Balance | Percent | |||||||
San Francisco Bay Area(3) | ||||||||||
San Francisco | $ | 16,333 | 27.67 | % | $ | 21,627 | 41.68 | % | ||
Contra Costa | 16,645 | 28.20 | 16,647 | 32.08 | ||||||
San Mateo | 6,969 | 11.81 | 1,765 | 3.40 | ||||||
Marin | 3,320 | 5.62 | 180 | 0.35 | ||||||
Santa Clara | 3,064 | 5.19 | 3,208 | 6.18 | ||||||
Solano | 2,575 | 4.36 | — | — | ||||||
Alameda | 1,248 | 2.11 | 1,260 | 2.43 | ||||||
Napa | 403 | 0.68 | 406 | 0.78 | ||||||
50,557 | 85.64 | 45,093 | 86.90 | |||||||
Other Northern California | ||||||||||
Yolo | 2,800 | 4.75 | — | — | ||||||
Sacramento | 237 | 0.40 | 249 | 0.48 | ||||||
Sutter | 218 | 0.37 | — | — | ||||||
Monterey | 176 | 0.30 | 178 | 0.34 | ||||||
Calaveras | 174 | 0.30 | 182 | 0.35 | ||||||
San Benito | 97 | 0.16 | 97 | 0.19 | ||||||
Butte | 59 | 0.10 | 79 | 0.15 | ||||||
3,761 | 6.38 | 785 | 1.51 | |||||||
Total Northern California | 54,318 | 92.02 | 45,878 | 88.41 | ||||||
Los Angeles & Coastal | ||||||||||
Los Angeles | 2,807 | 4.76 | 2,511 | 4.84 | ||||||
Orange | 1,442 | 2.44 | 1,354 | 2.61 | ||||||
Ventura | 349 | 0.59 | 350 | 0.67 | ||||||
San Diego | — | — | 1,680 | 3.24 | ||||||
4,598 | 7.79 | 5,895 | 11.36 | |||||||
Other Southern California | ||||||||||
Kern | 115 | 0.19 | 117 | 0.23 | ||||||
Total Southern California | 4,713 | 7.98 | 6,012 | 11.59 | ||||||
Total Secured Loans | $ | 59,031 | 100 | % | $ | 51,890 | 100 | % |
(3) | Includes Silicon Valley |
20
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Scheduled maturities
Secured loans are scheduled to mature as presented in the following table ($ in thousands).
Scheduled maturities at June 30, 2014 | Loans | Principal | Percent | ||||
2014 | 2 | $ | 515 | 1 | % | ||
2015 | 17 | 23,716 | 40 | ||||
2016 | 7 | 8,690 | 15 | ||||
2017 | 6 | 2,394 | 4 | ||||
2018 | 2 | 582 | 1 | ||||
2019 | 7 | 5,817 | 10 | ||||
Total future maturities | 41 | 41,714 | 71 | ||||
Matured at June 30, 2014 | 4 | 17,317 | 29 | ||||
Total secured loans | 45 | $ | 59,031 | 100 | % |
It is the partnership’s experience loans may be repaid or refinanced before, at or after the contractual maturity date. For matured loans, the partnership may continue to accept payments while pursuing collection of amounts owed from borrowers. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.
The partnership reports maturity data based upon the most recent contractual agreement with the borrower. The table above includes five loans with an aggregate principal of $1,167,000 which are renewals.
Matured loans
Secured loans past maturity are summarized in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Number of loans(4)(5) | 4 | 5 | ||||||
Principal | $ | 17,317 | $ | 17,694 | ||||
Advances | 718 | 683 | ||||||
Accrued interest | — | 63 | ||||||
Loan balance | $ | 18,035 | $ | 18,440 | ||||
Percent of principal | 29 | % | 34 | % |
(4) | The secured loans past maturity include four and five loans as of June 30, 2014 and December 31, 2013, respectively, which are also included in the secured loans in non-accrual status. |
(5) | The secured loans past maturity include four and five loans as of June 30, 2014 and December 31, 2013, respectively, which are also included in the secured loans delinquency. |
21
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Delinquency
Secured loans summarized by payment delinquency are presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Past due | ||||||||
30-89 days | $ | 349 | $ | 665 | ||||
90-179 days | 665 | 17,197 | ||||||
180 or more days | 16,885 | 474 | ||||||
Total past due | 17,899 | 18,336 | ||||||
Current | 41,132 | 33,554 | ||||||
Total secured loans | $ | 59,031 | $ | 51,890 |
At June 30, 2014 and December 31, 2013, the partnership’s largest loan, with an unpaid principal balance of $16,312,000, is included in the table above at 180 or more days and 90-179 days delinquent, respectively. This loan is secured by 75 units in a condominium complex with 128 total units, located in Contra Costa County, California. This loan matured April 1, 2012. A court appointed receiver is managing the 75 units. A foreclosure sale date is still to be determined based upon the progress by the receiver in stabilizing the property.
At June 30, 2014, the partnership had three workout agreements in effect with an aggregate principal of $508,450. All three borrowers had made all required payments under the workout agreements. Two loans were included in the above table as current and one loan is included in 180 or more days delinquent. All three of the loans were designated impaired and were in non-accrual status.
At December 31, 2013, the partnership had three workout agreements in effect with an aggregate principal of $1,097,000. All three borrowers had made all required payments under the workout agreements and the loans were included in the above table as current. All three of the loans were designated impaired and were in non-accrual status.
Interest income accrued on loans contractually past due 90 days or more as to principal or interest payments during the six months ended June 30, 2014 and the year ended December 31, 2013 was $0 and $62,000, respectively. Accrued interest on loans contractually past due 90 days or more as to principal or interest payments at June 30, 2014 and December 31, 2013 was $0 and $81,000, respectively.
Modifications, workout agreements and troubled debt restructurings
Modified secured loan transactions are summarized in the following table for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||||
Active | Principal | Active | Principal | |||||||||||||
Balance, January 1 | 5 | $ | 3,947 | 5 | $ | 6,085 | ||||||||||
New modifications | — | — | 1 | 325 | ||||||||||||
Paid off/Foreclosed | (1 | ) | (325 | ) | (1 | ) | (2,140 | ) | ||||||||
Expired/Voided | — | — | — | — | ||||||||||||
Principal Collected | — | (174 | ) | — | (323 | ) | ||||||||||
Ending Balance | 4 | $ | 3,448 | 5 | $ | 3,947 |
22
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Modifications, workout agreements and troubled debt restructurings (continued)
Workout agreements on secured loan transactions are summarized in the following table for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||||
Active | Principal | Active | Principal | |||||||||||||
Balance, January 1 | 3 | $ | 1,097 | 4 | $ | 1,126 | ||||||||||
New agreements | 1 | 97 | 2 | 847 | ||||||||||||
Paid off/Foreclosed | — | — | (1 | ) | (417 | ) | ||||||||||
Expired/Voided | (1 | ) | (665 | ) | (2 | ) | (449 | ) | ||||||||
Principal collected | — | (21 | ) | — | (10 | ) | ||||||||||
Balance, end of period | 3 | $ | 508 | 3 | $ | 1,097 |
Modifications and workout agreements may cause a loan to qualify as a troubled debt restructuring (TDR) under GAAP, and may result in a provision for loan losses being recorded. TDRs on secured loans transactions are summarized in the following table for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||||
Active | Principal | Active | Principal | |||||||||||||
Balance, January 1 | 5 | $ | 4,228 | 6 | $ | 8,042 | ||||||||||
New agreements | — | — | 2 | 990 | ||||||||||||
Paid off/Foreclosed | (1 | ) | (325 | ) | (3 | ) | (4,507 | ) | ||||||||
Principal collected | — | (150 | ) | — | (297 | ) | ||||||||||
Balance, end of period | 4 | $ | 3,753 | 5 | $ | 4,228 | ||||||||||
Provision for loan losses | $ | — | $ | — |
Loans in non-accrual status
Secured loans in nonaccrual status are summarized in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Secured loans in nonaccrual status | ||||||||
Number of loans | 7 | 8 | ||||||
Principal | $ | 17,962 | $ | 18,361 | ||||
Advances | 723 | 688 | ||||||
Accrued interest | — | 63 | ||||||
Loan balance | $ | 18,685 | $ | 19,112 | ||||
Foregone interest | $ | 486 | $ | 887 |
At June 30, 2014 and December 31, 2013, there was zero and one loan with a loan balance of $0 and $425,000, respectively that was contractually 90 or more days past due as to principal or interest and not in non-accrual status.
23
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Loans designated impaired
Impaired loans had the balances shown and the associated allowance for loan losses presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Principal | $ | 20,632 | $ | 21,499 | ||||
Recorded investment(6) | $ | 21,370 | $ | 22,249 | ||||
Impaired loans without allowance | $ | 3,695 | $ | 4,149 | ||||
Impaired loans with allowance | $ | 17,675 | $ | 18,100 | ||||
Allowance for loan losses, impaired loans | $ | 8,578 | $ | 8,740 |
(6) | Recorded investment is the sum of principal, advances, and interest accrued for financial reporting purposes. |
Impaired loans had the average balances and interest income recognized and received in cash as presented in the following table as of, and for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Average recorded investment | $ | 21,822 | $ | 36,652 | ||||
Interest income recognized | $ | 92 | $ | 156 | ||||
Interest income received in cash | $ | 52 | $ | 378 |
Allowance for loan losses
Activity in the allowance for loan losses is presented in the following table as of, and for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Balance, January 1 | $ | 8,790 | $ | 19,815 | ||||
Provision for loan losses | (160 | ) | (1,040 | ) | ||||
Charge-offs, net | ||||||||
Charge-offs | (102 | ) | (14,623 | ) | ||||
Recoveries | 50 | 4,638 | ||||||
Charge-offs, net | (52 | ) | (9,985 | ) | ||||
Balance, June 30 | $ | 8,578 | $ | 8,790 | ||||
Ratio of charge-offs, net during the period to average | ||||||||
secured loans outstanding during the period | 0.09 | % | 17.00 | % |
24
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 4 – LOANS (continued)
Allowance for loan losses (continued)
The composition of the allowance for loan losses and the percentage of unpaid principal balance for each property type are presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||
Amount | Percent | Amount | Percent | |||||||||
Allowance for loan losses | ||||||||||||
Secured loans by property type | ||||||||||||
Single family | $ | 8,578 | 60 | % | $ | 8,790 | 65 | % | ||||
Multi-family | — | 2 | — | 2 | ||||||||
Commercial | — | 38 | — | 33 | ||||||||
Total allowance for loan losses | $ | 8,578 | 100 | % | $ | 8,790 | 100 | % |
NOTE 5 – REAL ESTATE OWNED (REO)
Periodically, management reviews the status of the owned properties to evaluate among other things, their asset classification. Properties generally are acquired through foreclosure. Several factors are considered in determining the classification of owned properties as “real estate held for sale” or “real estate held as investment.” These factors include, but are not limited to, real estate market conditions, status of any required permits, repair, improvement or development work to be completed, rental and lease income and investment potential.
REO held for sale
Real estate owned is classified as held for sale in the period in which the GAAP required criteria are met. As a property’s status changes, reclassifications may occur.
Transactions and activity, including changes in the net book values, if any, of REO held for sale are presented in the following table for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Balance, beginning of period | $ | 16,552 | $ | — | ||||
Acquisitions | 360 | 3,895 | ||||||
Dispositions | (2,918 | ) | (7,745 | ) | ||||
Improvements/betterments | 513 | 11 | ||||||
Designated (to)from REO held as investment | 25,211 | 20,594 | ||||||
Change in net book value | 2,522 | (160 | ) | |||||
Depreciation | (181 | ) | (43 | ) | ||||
Balance, end of period | $ | 42,059 | $ | 16,552 |
25
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held for sale (continued)
The following transactions occurred during the six months ended June 30, 2014:
- Designated to REO held for sale from REO held for investment
- | Nine unit condominium complex located in Sutter County. The units sold for approximately their carrying value after taking into account a previously recorded valuation reserve. |
- | 72 Units in a condominium complex located in Los Angeles County. |
- | Two condominium units located in San Francisco County. One unit is in contract for sale. |
- | Eight unit condominium complex located in Solano County. |
- | 38 unit apartment complex located in San Joaquin County. The property is in contract for sale. |
- | Four unit condominium complex located in Alameda County. |
REO, held for sale, summarized by property classification is presented in the following table as of June 30, 2014, and December 31, 2013, ($ in thousands).
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Property type | ||||||||
Rental | $ | 32,825 | 10,541 | |||||
Non-Rental | 360 | — | ||||||
Development | 8,874 | 6,011 | ||||||
Total REO, held for sale | $ | 42,059 | $ | 16,552 | ||||
Number of properties, end of period | 8 | 3 |
Non-Rental and Development properties consist of the following three properties at June 30, 2014:
- | Two condominium units located in San Francisco County. One unit is in contract for sale. |
- | Four remaining units of a tenant-in-common building located in San Francisco County. One unit is in contract for sale. |
- | Single-family residence located in Orange County. The property is listed for sale. |
The net rental income for the designated properties, and any other REO held for sale rental results, has been reclassified from REO – Rental Operations, to Revenues – Other for all periods presented in the financial statements and the Results of Operations in Item 2 of this report. The net book value, and related basis information of these properties continue to be presented based on their classification during the period indicated, and have not been reclassified per the above changes to designations.
26
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment
For REO, held as investment, the activity in net book value (NBV) and changes in accumulated depreciation are summarized in the following table for the six months ended June 30, 2014 and the year ended December 31, 2013 ($ in thousands).
NBV | Accumulated Depreciation | |||||||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Balance, beginning of period | $ | 162,563 | $ | 181,333 | $ | 8,275 | $ | 5,926 | ||||||||
Acquisitions | — | 3,099 | — | — | ||||||||||||
Dispositions | (525 | ) | (1,696 | ) | (7 | ) | — | |||||||||
Improvements/betterments | 440 | 4,059 | — | — | ||||||||||||
Designated (to)from REO held for sale | (25,211 | ) | (20,594 | ) | (1,652 | ) | (411 | ) | ||||||||
Changes in net book values (NBV) | (2,765 | ) | (878 | ) | — | — | ||||||||||
Depreciation | (1,134 | ) | (2,760 | ) | 1,134 | 2,760 | ||||||||||
Balance, end of period | $ | 133,368 | $ | 162,563 | $ | 7,750 | $ | 8,275 |
The following transactions occurred during the six months ended June 30, 2014:
- Designated from REO held for investment to REO held for sale
- | Nine unit condominium complex Located in Sutter County. The units sold for approximately their carrying value after taking into account a previously recorded valuation reserve. |
- | 72 Units in a condominium complex located in Los Angeles County. |
- | Two condominium units located in San Francisco County. One unit is in contract for sale. |
- | Eight unit condominium complex located in Solano County. |
- | 38 unit apartment complex located in San Joaquin County. The property is in contract for sale. |
- | Four unit condominium complex located in Alameda County. |
REO, held as investment, summarized by property classification is presented in the following table as of June 30, 2014, and December 31, 2013, ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||
Properties | NBV | Properties | NBV | |||||||
Property classification | ||||||||||
Rental | 13 | $ | 118,940 | 19 | $ | 141,812 | ||||
Non-Rental | 3 | 4,866 | — | — | ||||||
Development | 1 | 9,562 | 5 | 20,751 | ||||||
Total REO, held as investment, net | 17 | $ | 133,368 | 24 | $ | 162,563 |
Rental properties include single-family residences (1-4 units), multi-family buildings, wholly-owned condominium complexes, fractured condominium complexes and commercial property.
During the six month ended June 30, 2014, construction was completed at one property previously classified as Development and the property was designated as REO held for sale, as of June 30, 2014, one of the two units was in contract for sale.
27
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment (continued)
Non-rental and Development properties consist of the following four properties at June 30, 2014:
- | A property located in Los Angeles County, which was re-entitled to multi-family during the six months ended June 30, 2014. Development plans provide for demolition of current building, and new construction. |
- | Approximately 14 acres located in Stanislaus County zoned commercial. This property was re-classified from Development to Other during the six months ended June 30, 2014. |
- | Approximately 13 acres located in Marin County, zoned for residential development. This property was re-classified from Development to Other during the six months ended June 30, 2014. |
- | A partially completed home subdivision located in Fresno County. The property has rental operations of five single-family residences. This property was re-classified from Development to Other during the six months ended June 30, 2014. |
REO, held as investment, summarized by geographic area is presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
Rental | Non-Rental | Rental | Non-Rental | |||||||||||||||||||||||||||||
No. | NBV | No. | NBV | No. | NBV | No. | NBV | |||||||||||||||||||||||||
San Francisco Bay Area | ||||||||||||||||||||||||||||||||
Contra Costa | 4 | $ | 12,809 | — | $ | — | 4 | $ | 13,985 | — | $ | — | ||||||||||||||||||||
Alameda | 2 | 7,867 | — | — | 3 | 8,515 | — | — | ||||||||||||||||||||||||
San Francisco | 3 | 3,882 | — | — | 3 | 3,915 | 1 | 5,776 | ||||||||||||||||||||||||
Napa | 1 | 1,483 | — | — | 1 | 1,491 | — | — | ||||||||||||||||||||||||
Marin | — | — | 1 | 1,210 | — | — | 1 | 1,209 | ||||||||||||||||||||||||
Solano | — | — | — | — | 1 | 1,149 | — | — | ||||||||||||||||||||||||
Total San Francisco Bay Area | 10 | 26,041 | 1 | 1,210 | 12 | 29,055 | 2 | 6,985 | ||||||||||||||||||||||||
Other Northern California | ||||||||||||||||||||||||||||||||
Sacramento | 1 | 39,072 | ��� | — | 1 | 40,165 | — | — | ||||||||||||||||||||||||
Amador | 1 | 1,517 | — | — | 1 | 1,551 | — | — | ||||||||||||||||||||||||
Stanislaus | — | — | 1 | 2,780 | — | — | 1 | 2,790 | ||||||||||||||||||||||||
Fresno | — | — | 1 | 876 | — | — | 1 | 1,612 | ||||||||||||||||||||||||
San Joaquin | — | — | — | — | 2 | 3,235 | — | — | ||||||||||||||||||||||||
Sutter | — | — | — | — | 1 | 475 | — | — | ||||||||||||||||||||||||
Total Other Northern California | 2 | 40,589 | 2 | 3,656 | 5 | 45,426 | 2 | 4,402 | ||||||||||||||||||||||||
Total Northern California | 12 | 66,630 | 3 | 4,866 | 17 | 74,481 | 4 | 11,387 | ||||||||||||||||||||||||
Los Angeles | 1 | 52,310 | 1 | 9,562 | 2 | 67,331 | 1 | 9,364 | ||||||||||||||||||||||||
Total REO Held as investment | 13 | $ | 118,940 | 4 | $ | 14,428 | 19 | $ | 141,812 | 5 | $ | 20,751 |
28
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment (continued)
Non-Rental REO, held as investment, summarized by property type is presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Property type (non-rental) | Units | Properties | NBV | Units | Properties | NBV | ||||||||||||||||||
Residential - Single family | — | — | $ | — | 2 | 2 | $ | 7,388 | ||||||||||||||||
Commercial(1) | — | 4 | 14,428 | — | 3 | 13,363 | ||||||||||||||||||
Total REO, held as investment, net | — | 4 | $ | 14,428 | 2 | 5 | $ | 20,751 |
(1) Includes two parcels of land of 14 and 13 acres respectively.
Rental REO, held as investment, summarized by property type is presented in the following table as of June 30, 2014 and December 31, 2013 ($ in thousands).
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Property type (rental) | Units | Properties | NBV | Units | Properties | NBV | ||||||||||||||||||
Residential | ||||||||||||||||||||||||
Single family | 1 | 1 | $ | 1,483 | 1 | 1 | $ | 1,491 | ||||||||||||||||
Apartments | — | — | — | 8 | 1 | 527 | ||||||||||||||||||
Condominiums(2) | 174 | 2 | 60,072 | 220 | 4 | 65,014 | ||||||||||||||||||
Fractured Condominiums(3) | 355 | 7 | 54,707 | 440 | 10 | 71,589 | ||||||||||||||||||
Total Residential | 530 | 10 | 116,262 | 669 | 16 | 138,621 | ||||||||||||||||||
Commercial | — | 3 | 2,678 | — | 3 | 3,191 | ||||||||||||||||||
Total REO, held as investment, net | 530 | 13 | $ | 118,940 | 669 | 19 | $ | 141,812 |
(2) Includes units in condominium complexes wholly-owned by the partnership.
(3) Includes units in condominium complexes where some units had been sold prior to the partnership’s acquisition.
29
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment (continued)
The earnings/(loss) from rental operations of the real estate owned, held as investment is presented in the following table for the three and six months ended June 30 ($ in thousands).
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Rental income | $ | 2,602 | $ | 2,453 | $ | 5,278 | $ | 4,600 | ||||||||
Operating expenses, rentals | ||||||||||||||||
Administration and payroll | 331 | 331 | 673 | 629 | ||||||||||||
Homeowner association fees | 167 | 153 | 375 | 302 | ||||||||||||
Professional services | (33 | ) | — | (6 | ) | — | ||||||||||
Utilities and maintenance | 256 | 240 | 546 | 462 | ||||||||||||
Advertising and promotions | 25 | 27 | 53 | 57 | ||||||||||||
Property taxes | 261 | 233 | 589 | 417 | ||||||||||||
Other | 89 | 57 | 139 | 92 | ||||||||||||
Total operating expenses, rentals | 1,096 | 1,041 | 2,369 | 1,959 | ||||||||||||
Net operating income | 1,506 | 1,412 | 2,909 | 2,641 | ||||||||||||
Depreciation | 520 | 526 | 1,123 | 1,021 | ||||||||||||
Receiver fees | 1 | 15 | 1 | 60 | ||||||||||||
Rental operations, net | 985 | 871 | 1,785 | 1,560 | ||||||||||||
Interest on mortgages | 386 | 392 | 823 | 785 | ||||||||||||
Rental operation, net, less related mortgage interest | $ | 599 | $ | 479 | $ | 962 | $ | 775 |
Leases on residential properties are all one year lease terms or month to month. One commercial property has a short term lease, due to the cancellation clause at lessee’s option.
NOTE 6 – BORROWINGS
Mortgages payable transactions are summarized in the following table for the six months ended June 30, ($ in thousands).
2014 | 2013 | |||||||
Principal, January 1 | $ | 48,938 | $ | 47,293 | ||||
New mortgages taken | — | 5,000 | ||||||
Principal repaid | (648 | ) | (574 | ) | ||||
Principal, June 30 | $ | 48,290 | $ | 51,719 |
30
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 6 – BORROWINGS (continued)
Mortgages payable are summarized in the following table as of June 30, 2014 and December 31, 2013 (mortgage balance $ in thousands).
June 30, | December 31, | |||||||
Lender – summary of terms | 2014 | 2013 | ||||||
NorthMarq Capital – Secured by a condominium complex, | $ | 17,943 | $ | 18,170 | ||||
located in Los Angeles County, matures July 1, 2015, | ||||||||
interest rate (2.90%) varies monthly (LIBOR plus 2.73%), | ||||||||
monthly payment(1)(2) $119,758 | ||||||||
East West Bank – Secured by a fractured condominium project | 13,292 | 13,391 | ||||||
located in Sacramento County, matures June 1, 2017, | ||||||||
interest rate varies monthly (greater of Prime plus 1% or 5.50%), | ||||||||
monthly payment(2) $78,283 | ||||||||
Business Partners – Secured by a commercial property located | 6,522 | 6,721 | ||||||
in San Francisco County, matures May 1, 2015, | ||||||||
interest rate varies monthly (greater of 5-year Treasuries | ||||||||
plus 2.33% or 6.53%), | ||||||||
monthly payment(1)(2) $79,155 | ||||||||
Chase Bank – Secured by a condominium complex | 4,985 | 5,036 | ||||||
located in Contra Costa County, matures September 1, 2042, | ||||||||
interest rate variable (fixed until September 1, 2017 at 3.52%), | ||||||||
monthly payment $23,228 | ||||||||
CapitalSource – Secured by a condominium complex, | 4,893 | 4,952 | ||||||
located in Los Angeles County, matures July 1, 2023, | ||||||||
interest rate variable (fixed until June 1, 2016 at 3.95%), | ||||||||
monthly payment(1)(2) $42,258 | ||||||||
Wells Fargo Bank – Secured by a condominium unit located in | 344 | 351 | ||||||
San Francisco County, matures October 1, 2032, | ||||||||
interest rate (2.88%) varies annually (LIBOR plus 2.75%), | ||||||||
monthly payment $2,014 | ||||||||
Wells Fargo Bank – Secured by a condominium unit located in | 311 | 317 | ||||||
San Francisco County, matures September 15, 2032, | ||||||||
interest rate (4.03%) varies annually (bank rate plus 3.10%), | ||||||||
monthly payment $2,110 | ||||||||
Total mortgages payable | $ | 48,290 | $ | 48,938 |
(1) Monthly payments include amounts for various impounds such as property taxes, insurance, and repairs.
(2) Monthly payments based upon a 30 year amortization, with a balloon payment due at maturity.
31
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 6 – BORROWINGS (continued)
Future minimum payments of principal at June 30, 2014 are presented in the following table ($ in thousands).
2014 | $ | 671 | ||
2015 | 24,508 | |||
2016 | 503 | |||
2017 | 13,017 | |||
2018 | 292 | |||
Thereafter | 9,299 | |||
Total | $ | 48,290 |
NOTE 7 – FAIR VALUE |
The partnership does not record loans, REO, nor mortgages payable at fair value on a recurring basis.
Certain assets and liabilities are measured at fair value on a non-recurring basis:
· | Loans designated impaired (i.e. that are collateral dependent) |
· | REO held for sale |
· | REO held as investment |
· | Loans designated impaired which were acquired through foreclosure or deed in lieu of foreclosure during the year |
· | Loans designated impaired which were acquired through foreclosure or deed in lieu of foreclosure and sold during the year |
Assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2014 are presented in the following table ($ in thousands).
Fair Value Measurement at Report Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | Total | |||||||||||||
Identical Assets | Inputs | Inputs | as of | |||||||||||||
Item | (Level 1) | (Level 2) | (Level 3) | 06/30/14 | ||||||||||||
Impaired loans with allowance, net(1) | $ | — | $ | 9,097 | $ | — | $ | 9,097 | ||||||||
REO held for sale | $ | — | $ | 42,059 | $ | — | $ | 42,059 | ||||||||
REO held as investment(2) | $ | — | $ | 13,639 | $ | — | $ | 13,639 | ||||||||
Impaired loans with allowance, net | ||||||||||||||||
foreclosed upon during 2014(1)(3) | $ | — | $ | 280 | $ | — | $ | 280 | ||||||||
Impaired loans with allowance, net | ||||||||||||||||
foreclosed and sold during 2014(1) | $ | — | $ | — | $ | — | $ | — |
(1) | Sum of principal, advances, interest accrued, less the related specific allowance for financial reporting purposes. |
(2) | Only includes properties with a valuation change during the year. |
(3) | Excludes any properties included in the REO lines above. |
32
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 7 – FAIR VALUE (continued) |
Assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2013 are presented in the following table ($ in thousands).
Fair Value Measurement at Report Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | Total | |||||||||||||
Identical Assets | Inputs | Inputs | as of | |||||||||||||
Item | (Level 1) | (Level 2) | (Level 3) | 12/31/13 | ||||||||||||
Impaired loans with allowance, net(1) | $ | — | $ | 9,360 | $ | — | $ | 9,360 | ||||||||
REO held for sale | $ | — | $ | 16,552 | $ | — | $ | 16,552 | ||||||||
REO held as investment(2) | $ | — | $ | 4,868 | $ | 1,551 | $ | 6,419 | ||||||||
Impaired loans with allowance, net | ||||||||||||||||
foreclosed upon during 2013(1)(3) | $ | — | $ | 2,662 | $ | — | $ | 2,662 | ||||||||
Impaired loans with allowance, net | ||||||||||||||||
foreclosed and sold during 2013(1) | $ | — | $ | 3,895 | $ | — | $ | 3,895 |
(1) | Sum of principal, advances, interest accrued, less the related specific allowance for financial reporting purposes. |
(2) | Only includes properties with a valuation change during the year. |
(3) | Excludes any properties included in the REO lines above. |
The following methods and assumptions are used when estimating fair value.
(a) | Secured loans (Level 2) – The recorded amount of the performing loans (i.e. the loan balance) is deemed to approximate the fair value. The partnership prices its loans uniquely and generally pricing does not react to other than significant changes in the prevailing interest rate indices. Each loan is reviewed for its delinquency, protective equity (LTV) adjusted for the most recent valuation of the underlying collateral, remaining term to maturity, borrower’s payment history and other factors. Also considered is the limited resale market for the loans. Most companies or individuals making similar loans as the partnership intend to hold the loans until maturity as the average contractual term of the loans (and the historical experience of the time the loan is outstanding due to pre-payments) is shorter than conventional mortgages. Further, for substantially all loans, there are no prepayment-penalties to be collected and any potential loan buyers would be hesitant to risk paying above par. Due to these factors sales of the loans are infrequent and an active market does not exist. |
(b) | Secured loans (Level 2) – designated impaired are deemed collateral dependent, and the fair value of the loan is the lesser of the fair value of the collateral or the enforceable amount owing under the note. The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values, and publicly available information on in-market transactions Level 2 inputs. |
33
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 7 – FAIR VALUE (continued) |
The following methods are used depending upon the property type of the collateral of the secured loans.
Single family – The partnership’s preferred method for determining the fair market value of its single-family residential assets is the sale comparison method. Management primarily obtains sale comparables via its subscription to the RealQuest service, but also use free online services such as Zillow.com and other available resources to supplement this data. Sale comparables are reviewed for similarity to the subject property, examining features such as proximity to subject, number of bedrooms and bathrooms, square footage, sale date, condition, and year built.
Where sufficient, applicable sale comparables are not available, management will seek additional information in the form of broker’s opinions of value or appraisals.
Multi-family residential – The partnership’s multi-family residential assets consist of either multiple owned units at fractured condominium projects and wholly owned apartment complexes with condominium overlays. Management’s fair market value analysis compares the aggregate retail value of the units as for-sale condominiums against the asset’s value as an income-producing rental property in determining its most favorable market.
The partnership’s preferred method for determining the aggregate retail value of its multifamily units is the sale comparison method for the individual condominium units. Management primarily obtains sale comparables via its subscription to the RealQuest service, but also use free online services such as Zillow.com to supplement this data. Sale comparables are reviewed for similarity to the subject property, examining features such as proximity to subject, number of bedrooms and bathrooms, square footage, sale date, condition, amenities and year built. For fractured condominium projects, sales of units within the same community are preferred.
Management compiles a list of the most relevant sale comparables and derives an average price per square foot, which is then applied to the average square footage of partnership-owned units at the subject property to determine the average price per unit and the gross square footage of all partnership units to determine the aggregate retail value of the units as for-sale condominiums.
Where adequate sale comparables are not available, management will seek additional information in the form of broker’s opinions of value or appraisals.
The partnership’s preferred method for valuing its multifamily assets as income-producing rental operations is the direct capitalization method when rental operations are consistent and rental income and expenses have been normalized. In order to determine market capitalization rates, management refers to published data from reliable third-party sources such as the CBRE Cap Rate Survey. Management then applies the appropriate capitalization rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing project. When reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value of stabilized properties performing at market, less any cost to improve.
Where such information is available, management may also determine the asset’s value as an income-producing rental project via the sale comparison method by comparing the value of similar multifamily assets sold recently. This method typically applies only to wholly owned apartment complexes.
Management compares the aggregate retail value to the value as an income-producing rental project to determine the property’s current highest and best use/ most favorable market, setting the fair market value accordingly.
34
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
June 30, 2014 (unaudited)
NOTE 7 – FAIR VALUE (continued) |
Commercial buildings – Where commercial rental income information is available, the partnership’s preferred method for determining the fair value of its commercial real estate assets is the direct capitalization method. In order to determine market capitalization rates for properties of the same class and location as the subject, management refers to reputable third-party sources such as the CBRE Cap Rate Survey. Management then applies the appropriate capitalization rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing commercial rental project. When reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value of stabilized properties performing at market, less any cost to improve.
Supplemental, and particularly when reliable net operating income is not available or the project is under development, management will seek additional information in the form of a sale comparison analysis (where adequate sale comparables are available), broker’s opinion of value, or appraisal.
Commercial land – Commercial land has many variations/uses, thus requiring management to employ a variety of methods depending upon the unique characteristics of the subject land.
(c) | Unsecured loans (Level 3). Unsecured loans are valued at their principal less any discount or loss reserves established by management after taking into account the borrower’s creditworthiness and ability to repay the loan. |
(d) | Real estate owned (REO), net (Level 2). Real estate acquired in full or partial settlement of loan obligations, generally through foreclosure, is recorded at acquisition at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property’s fair value less estimated costs to sell, as applicable. The fair value estimates are derived as above in secured loans for similar property types. In rare instances where no market comparables are available, the fair value of the property will be computed using internal analytics that are expected to be indicative of the value that would be ascribed by a buyer/investor. |
(e) | Mortgages payable (Level 2). The partnership has mortgages payable (see Note 6 Borrowings for details). The interest rates are deemed to be at market rates for the type and location of the securing property, the length of the mortgage, and the other terms and conditions are deemed to be customary. All of the partnership’s mortgages are deemed to be at fair value as they are either, with variable interest rates which have adjusted within the past twelve months, or were refinanced/extended within the past twelve months with terms and conditions deemed customary for the collateral property. |
NOTE 8 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN AND REO COMMITMENTS
Legal proceedings
In the normal course of business, the partnership may become involved in various legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust and to resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions typically would be of any material importance. As of the date hereof, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
NOTE 9 – SUBSEQUENT EVENTS
None
35
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto, which are included in Item 1 of this Report, as well as the audited consolidated financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the partnership’s Annual Report on Form 10-K for the year ended December 31, 2013.
Forward-Looking Statements
Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the partnership’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding economic conditions and their effect on the partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimated costs to complete certain property developments, additional foreclosures in 2014, expectations regarding the level of loan delinquencies, plans to develop certain properties, the anticipated diminishment of the difference between amount distributed and net income, and the use of excess cash flow. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the partnership has made loans. 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
Management estimates
See Note 2 (Summary of Significant Accounting Policies) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of critical accounting policies.
Related Parties
See Note 1 (Organizational and General) and Note 3 (General Partners and Other Related Parties) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of various partnership activities for which the general partners and related parties are compensated, and other related-party transactions, including the formation loan.
36
Results of Operations
Results of operation are discussed below for the three and six months ended June 30, 2014 and 2013 ($ in thousands).
Changes during the three months ended June 30, 2014 versus 2013 | Changes during the six months ended June 30, 2014 versus 2013 | |||||||||||
Dollars | Percent | Dollars | Percent | |||||||||
Revenue, net | ||||||||||||
Interest income | ||||||||||||
Loans | $ | 212 | 37 | % | $ | 538 | 59 | % | ||||
Imputed interest on formation loan | 5 | 5 | 19 | 10 | ||||||||
Other interest income | — | — | — | — | ||||||||
Total interest income | 217 | 33 | 557 | 51 | ||||||||
Interest expense | ||||||||||||
Bank loan, secured | — | — | — | — | ||||||||
Mortgages payable | 17 | 3 | 12 | 1 | ||||||||
Amortization of discount on formation loan | 5 | 5 | 19 | 9 | ||||||||
Other interest expense | — | — | — | — | ||||||||
Total interest expense | 22 | 4 | 31 | 2 | ||||||||
Net interest income/(expense) | 195 | 542 | 526 | 304 | ||||||||
Late fees | 15 | 750 | 14 | 280 | ||||||||
Other | (82 | ) | (32 | ) | (216 | ) | (40 | ) | ||||
Total revenues, net | $ | 128 | 43 | % | $ | 324 | 87 | % | ||||
Provision for loan losses/(recoveries), net | 12 | 8 | (18 | ) | (13 | ) | ||||||
Operating expenses | ||||||||||||
Mortgage servicing fees | 50 | 30 | 23 | 7 | ||||||||
Asset management fees | (3 | ) | (2 | ) | (5 | ) | (1 | ) | ||||
Costs from RMC | 30 | 8 | 149 | 19 | ||||||||
Professional services | (1 | ) | (1 | ) | (343 | ) | (62 | ) | ||||
REO | ||||||||||||
Rental operations, net | (114 | ) | (13 | ) | (225 | ) | (14 | ) | ||||
Holding costs | (2 | ) | (7 | ) | (39 | ) | (43 | ) | ||||
Loss/(gain) on disposal | — | — | (2 | ) | 100 | |||||||
Impairment loss | (291 | ) | (100 | ) | (291 | ) | (100 | ) | ||||
Other | 16 | 64 | 23 | 79 | ||||||||
Total operating expenses, net | (315 | ) | (99 | ) | (710 | ) | (50 | ) | ||||
Net income (loss) | $ | 431 | 356 | % | $ | 1,052 | 284 | % |
Please refer to the above table and the consolidated Statement of Operations in the financial statements included in Part I, Item 1 of this report throughout the discussion of Results of Operations.
37
General Economic Conditions and Financial Overview
As noted in the Wells Fargo Economics Group report “California Employment Conditions: June 2014” - “Over the past year, nonfarm employment has increased 2.4 percent, producing a net gain of 356,400 jobs. With the increase, nonfarm employment in California has finally surpassed its prerecession peak, which dates back to July 2007. … the current cycle has largely been driven by the technology boom, which has most directly benefitted the San Francisco Bay Area. Coastal areas of Southern California have also improved, lifted by rebounds in international trade, tourism, and housing.” This is a continuation of trends noted in the “California Economic Outlook: March 2014” also published by the Wells Fargo’s Economics Group: “The Golden State’s Economy continues to grow at a pace slightly ahead of the nation’s, although gains have been heavily weighted toward the state’s larger metropolitan areas along the coast. Technology, tourism and retail trade have led the recovery in job growth in recent years, which has helped trim the unemployment rate and revive housing demand.” The report states in its Summary and Outlook Section: “California’s economy continues to gradually gain momentum. While the recovery has been slower than in the past, the state has methodically made progress working through a number of major impediments, most notably the overhang of foreclosures and distressed homes left over from the housing bust.” Further contained in that section: “The biggest headlines and strongest job gains continue to be in California’s tech sector, much of which is centered in the Bay Area.”
Other published reports, including regional real estate market reports prepared by Polaris Pacific as published June 2014, indicate that real estate prices and rents are increasing in the California communities in which we lend. Median condominium resale prices increased 11.4% in San Francisco, 7.7% in the Silicon Valley and 12.6% in the Greater Los Angeles Area compared to the prior year. During 2013, rents in San Francisco increased 11.5% and 10.1% in the Silicon Valley.
Performance Highlights
The year 2013 marked the first full year since the 2008 financial crisis the partnership has operated without severe constraints that had been imposed by its lenders (which borrowings since have been repaid) and in a normally operating (i.e. not distressed) real estate markets. For the first time since 2008, the partnership reported full year net income for 2013, which continues into the second quarter of 2014, and the transition from crisis management, focused on cash management to a focus on re-building the business’ profitability.
Net income for the quarter ending June 30, 2014 increased by $431,000 compared to the quarter ending June 30, 2013. The change in net income is primarily due to an increase of interest on loans, net of $195,000 due to growth in the performing loan balance and average yield rate, and a decrease in REO impairment losses of $291,000 due the continued stabilization of the partnership’s loan and REO portfolios.
Net income for the six months ending June 30, 2014 increased by $1,052,000 compared to the same period in 2013. The change in net income is primarily due to the same reasons discussed above, with an increase of interest on loans, net of $526,000, and a reduction in REO impairment losses of $291,000 for the six months ended June 30, 2014. Additionally, for the six months ended June 30, 2014 professional fees decreased by $343,000 compared to the same period in 2013, due to the reduction of complex workout agreements, legal costs, and tax and accounting matters regarding the loan and REO portfolios’ stabilization and rental operations.
Loan Characteristics – Ongoing & Legacy Loans
The loans made after the bank loan was repaid (Ongoing) have borrowers underwritten to today’s standards and have significantly higher equity in their properties than the loans created before the bank loan was repaid. The loans created before the bank loan was repaid (Legacy loans), have many borrowers that continue to struggle with the effects of the financial crisis and the resultant loss of equity in their properties.
The partnership has been concentrating its Ongoing lending efforts in the San Francisco Bay Area, and Coastal Metropolitan Southern California. These areas have shown the greatest recoveries in the real estate markets as well as their respective local economies.
38
The tables below show the 2014 activity and various characteristics of the loan portfolio by Ongoing and Legacy groupings as of June 30, 2014 ($ in thousands).
Transactions | Ongoing | Legacy | Total | |||||||||
Principal, January 1, 2014 | $ | 27,402 | $ | 24,488 | $ | 51,890 | ||||||
Loans funded or acquired | 22,907 | — | 22,907 | |||||||||
Principal collected | (12,252 | ) | (743 | ) | (12,995 | ) | ||||||
Loans sold to affiliates | (2,394 | ) | — | (2,394 | ) | |||||||
Foreclosures | — | (360 | ) | (360 | ) | |||||||
Other-loans charged off | — | (17 | ) | (17 | ) | |||||||
Principal, June 30, 2014 | $ | 35,663 | $ | 23,368 | $ | 59,031 | ||||||
Portfolio characteristics | ||||||||||||
Number of secured loans | 26 | 19 | 45 | |||||||||
Average secured loan-principal | 1,372 | 1,230 | 1,312 | |||||||||
Largest secured loan-principal | 10,500 | 16,312 | 16,312 | |||||||||
Smallest secured loan-principal | 218 | 59 | 59 | |||||||||
Number of counties | 10 | 14 | 19 | |||||||||
Average interest rate | 7.37 | % | 5.76 | % | 6.73 | % | ||||||
Number of loans with workout agreements | — | 3 | 3 | |||||||||
Aggregate workout principal balance | — | 508 | 508 | |||||||||
Number of loans with active modifications | — | 4 | 4 | |||||||||
Aggregate modifications principal balance | — | 3,448 | 3,448 |
The Ongoing portfolio has an average interest rate of 7.37% compared to 5.76% for the Legacy portfolio. The difference is primarily due to reducing interest rates from collection efforts through loan modifications and workout agreements over the past several years on Legacy loans.
As of June 30, 2014, the partnership’s largest Legacy loan, in the unpaid principal balance of $16,312,000 (representing 68.39% of outstanding secured Legacy principal balance and 6.79% of total partnership assets) has an interest rate of 5.00% and is secured by 75 units in a 128 unit condominium complex located in Contra Costa County, California. This loan matured April 1, 2012. A court appointed receiver is overseeing the management of the property and exploring the market for the disposition of the remaining units.
39
Loans | Principal | Percent | ||||||||||
Geographic distribution | ||||||||||||
Ongoing | ||||||||||||
San Francisco Bay Area | 17 | $ | 28,523 | 80 | % | |||||||
Other Northern California | 2 | 3,018 | 8 | |||||||||
Los Angeles & Southern Coastal | 7 | 4,122 | 12 | |||||||||
Other Southern California | — | — | — | |||||||||
Total ongoing loans | 26 | $ | 35,663 | 100 | % | |||||||
Legacy | ||||||||||||
San Francisco Bay Area | 11 | $ | 22,034 | 94 | % | |||||||
Other Northern California | 5 | 743 | 3 | |||||||||
Los Angeles & Southern Coastal | 2 | 476 | 2 | |||||||||
Other Southern California | 1 | 115 | 1 | |||||||||
Total legacy loans | 19 | $ | 23,368 | 100 | % | |||||||
Total | ||||||||||||
San Francisco Bay Area | 28 | 50,557 | 85 | % | ||||||||
Other Northern California | 7 | 3,761 | 6 | |||||||||
Los Angeles & Southern Coastal | 9 | 4,598 | 8 | |||||||||
Other Southern California | 1 | 115 | 1 | |||||||||
Total | 45 | $ | 59,031 | 100 | % | |||||||
Lien position | ||||||||||||
Ongoing | ||||||||||||
First trust deeds | 20 | $ | 30,524 | 86 | % | |||||||
Second trust deeds | 6 | 5,139 | 14 | |||||||||
Third trust deeds | — | — | — | |||||||||
Total ongoing loans | 26 | $ | 35,663 | 100 | % | |||||||
Legacy | ||||||||||||
First trust deeds | 8 | $ | 17,984 | 77 | % | |||||||
Second trust deeds | 10 | 5,098 | 22 | |||||||||
Third trust deeds | 1 | 286 | 1 | |||||||||
Total legacy loans | 19 | $ | 23,368 | 100 | % | |||||||
Total | ||||||||||||
First trust deeds | 28 | $ | 48,508 | 82 | % | |||||||
Second trust deeds | 16 | 10,237 | 17 | |||||||||
Third trust deeds | 1 | 286 | 1 | |||||||||
Total loans | 45 | $ | 59,031 | 100 | % |
40
Ongoing | Legacy | Total | ||||||||||
Scheduled maturities | ||||||||||||
2014 | $ | 374 | $ | 141 | $ | 515 | ||||||
2015 | 22,443 | 1,273 | 23,716 | |||||||||
2016 | 5,665 | 3,025 | 8,690 | |||||||||
2017 | 1,015 | 1,379 | 2,394 | |||||||||
2018 | 349 | 233 | 582 | |||||||||
Thereafter | 5,817 | — | 5,817 | |||||||||
Total future maturities | 35,663 | 6,051 | 41,714 | |||||||||
Matured at June 30, 2014 | — | 17,317 | 17,317 | |||||||||
Total secured loans | $ | 35,663 | $ | 23,368 | $ | 59,031 | ||||||
Matured loans | ||||||||||||
Number of loans | — | 4 | 4 | |||||||||
Principal | $ | — | $ | 17,317 | $ | 17,317 | ||||||
Advances | — | 718 | 718 | |||||||||
Accrued interest | — | — | — | |||||||||
Loan balance | $ | — | $ | 18,035 | $ | 18,035 | ||||||
Percent of principal | — | % | 74 | % | 74 | % | ||||||
Delinquency | ||||||||||||
Past due | ||||||||||||
30-89 days | $ | 349 | $ | — | $ | 349 | ||||||
90-179 days | — | 665 | 665 | |||||||||
180 or more days | — | 16,885 | 16,885 | |||||||||
Total past due | 349 | 17,550 | 17,899 | |||||||||
Current | 35,314 | 5,818 | 41,132 | |||||||||
Total secured loans | $ | 35,663 | $ | 23,368 | $ | 59,031 | ||||||
Secured loans in nonaccrual status | ||||||||||||
Number of loans | — | 7 | 7 | |||||||||
Principal | $ | — | $ | 17,962 | $ | 17,962 | ||||||
Advances | — | 723 | 723 | |||||||||
Accrued interest | — | — | — | |||||||||
Loan balance | $ | — | $ | 18,685 | $ | 18,685 | ||||||
Loans designated impaired | ||||||||||||
Principal | $ | — | 20,632 | $ | 20,632 | |||||||
Recorded investment(1) | $ | — | 21,371 | $ | 21,371 | |||||||
Impaired loans without allowance | $ | — | 3,695 | $ | 3,695 | |||||||
Impaired loans with allowance | $ | — | 17,675 | $ | 17,675 | |||||||
Allowance for loan losses | ||||||||||||
Provision/(Recovery) for loan losses, 2014 | $ | — | $ | (160 | ) | $ | — | |||||
Allowance for loan losses | $ | — | $ | 8,578 | $ | 8,578 |
(1) | Recorded investment is the sum of principal, advances, and interest accrued for financial reporting purposes. |
41
Revenue – Interest income – Loans
Interest income on loans increased for the three and six months ended June 30, 2014 as a result of the partnership adding approximately $33,539,700 of new performing loans to the loan portfolio since June 30, 2013. Foregone interest (not recorded for financial reporting purposes on loans designated in non-accrual status) was $243,046 and $729,655 for the three months ended, and $486,134 and $1,475,005 for the six months ended June 30, 2014 and 2013, respectively. The tables below recap the three and six month averages and the effect of the foregone interest on the average yield rate for the Ongoing and Legacy groups of loans ($ in thousands).
For the three months ended June 30, | ||||||||||||||||
Average | Stated | |||||||||||||||
Secured | Effective | Average | ||||||||||||||
Loan | Interest | Yield | Yield | |||||||||||||
Year | Balance | Income | Rate | Rate | ||||||||||||
Ongoing | ||||||||||||||||
2014 | $ | 35,066 | $ | 622 | 7.10 | % | 7.49 | % | ||||||||
2013 | $ | 17,524 | $ | 231 | 5.28 | % | 6.69 | % | ||||||||
Legacy | ||||||||||||||||
2014 | $ | 24,093 | $ | 156 | 2.59 | % | 5.78 | % | ||||||||
2013 | $ | 50,020 | $ | 335 | 2.68 | % | 7.34 | % | ||||||||
Total | ||||||||||||||||
2014 | $ | 59,159 | $ | 778 | 5.26 | % | 6.63 | % | ||||||||
2013 | $ | 67,544 | $ | 566 | 3.35 | % | 7.02 | % |
For the six months ended June 30, | ||||||||||||||||
Average | Stated | |||||||||||||||
Secured | Effective | Average | ||||||||||||||
Loan | Interest | Yield | Yield | |||||||||||||
Year | Balance | Income | Rate | Rate | ||||||||||||
Ongoing | ||||||||||||||||
2014 | $ | 35,557 | $ | 1,089 | 7.13 | % | 7.42 | % | ||||||||
2013 | $ | 14,012 | $ | 330 | 4.71 | % | 5.35 | % | ||||||||
Legacy | ||||||||||||||||
2014 | $ | 24,409 | $ | 358 | 2.93 | % | 5.81 | % | ||||||||
2013 | $ | 50,320 | $ | 578 | 2.30 | % | 7.36 | % | ||||||||
Total | ||||||||||||||||
2014 | $ | 54,966 | $ | 1,446 | 5.26 | % | 6.62 | % | ||||||||
2013 | $ | 64,332 | $ | 908 | 2.82 | % | 6.35 | % |
Revenue – Interest expense
- Mortgages
Mortgage interest expense increased by $17,000 for the three months ended June 30, 2014 compared to the same period in 2013 due to a new mortgage acquired in June of 2013, for which the first payment was not due until August 2013.
For the six months ended June 30, 2014 mortgage interest expense increased by $12,000 compared to the same period in 2013 due to the new mortgage discussed above, and an offsetting reduction in interest expense during the first quarter of 2014 related to one mortgage being paid off in full subsequent to the sale of the rental property securing the loan at the end of 2013.
Revenue - Other
Rental income generated from REO held for sale is reclassified as Revenue – Other when the property is designated as held for sale. The decrease of $216,000 for the six months ended June 30, 2014, is primarily due to the sale of three properties since June 30, 2013.
42
Provision for Losses on Loans/Allowance for Loan Losses
The provision for loan losses (recoveries), net is primarily driven by the specific reserves maintained in the allowance for loan losses, associated with impaired loans as analyzed each year. All Ongoing loans are performing and are deemed well collateralized and the improving real estate markets in our lending areas is increasing the fair values of the underlying collateral of the legacy loans. As a result, the allowance for loan losses decreased by $18,000.
See Note 4 (Loans) to the consolidated financial statements included in Part I, Item 1 of this report for detailed presentations of loan balances, activity, and characteristics, and the corresponding data regarding the allowance for loan losses.
Operating Expenses
- Mortgage servicing fees
The increase in mortgage servicing fees for the three months ended June 30, 2014 is due to the increase in the average secured loan balances and a change in the portion of fees waived by RMC, a general partner. Fees are charged at the annual rate of 1.5%, and prior to April 2014, RMC at its sole discretion, waived 0.5% of the annual rate. Beginning in the second quarter of 2014, the full 1.5% was charged to the partnership. There is no guarantee RMC will waive any portion of this fee in the future.
- Costs from RMC
The increase in costs from RMC was largely due to increased office and personnel expenses for the six months ending June 30, 2014, compared to the same period in 2013. The increase in reimbursable expenses were offset by a revision in the general partner’s allocations, done in accordance with the operating agreement. The change was made during the quarter ended June, 30, 2014, which resulted in a reduction in allocated costs for both the first and second quarter of 2014 totaling $105,000.
- Professional services
The decrease in professional services for the six month ended June 30, 2014 was largely due to the above normal operating costs during the first quarter of 2013 related to complex workout agreements, legal costs, and tax and accounting matters regarding the loan and REO portfolios’ stabilization and rental operations. Fees for auditing and tax services decreased approximately $30,000, legal fees decreased $264,000 and consultant’s fees decreased $11,000.
REO – Rental operations, net
The table below summarizes the rental operations, net for the three and six months ended June 30, ($ in thousands).
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Rental income | $ | 2,602 | $ | 2,453 | $ | 5,278 | $ | 4,600 | ||||||||
Operating expenses, rentals | ||||||||||||||||
Administration and payroll | 331 | 331 | 673 | 629 | ||||||||||||
Homeowner association fees | 167 | 153 | 375 | 302 | ||||||||||||
Professional services | (33 | ) | — | (6 | ) | — | ||||||||||
Utilities and maintenance | 256 | 240 | 546 | 462 | ||||||||||||
Advertising and promotions | 25 | 27 | 53 | 57 | ||||||||||||
Property taxes | 261 | 233 | 589 | 417 | ||||||||||||
Other | 89 | 57 | 139 | 92 | ||||||||||||
Total operating expenses, rentals | 1,096 | 1,041 | 2,369 | 1,959 | ||||||||||||
Net operating income | 1,506 | 1,412 | 2,909 | 2,641 | ||||||||||||
Depreciation | 520 | 526 | 1,123 | 1,021 | ||||||||||||
Receiver fees | 1 | 15 | 1 | 60 | ||||||||||||
Rental operations, net | 985 | 871 | 1,785 | 1,560 | ||||||||||||
Interest on mortgages | 386 | 392 | 823 | 785 | ||||||||||||
Rental operations, net, less related mortgage interest | $ | 599 | $ | 479 | $ | 962 | $ | 775 |
43
Rental operations are comprised of residential and commercial properties. There were 10 residential properties at June 30, 2014 with a net book value of $116,262,000, and three commercial properties with a net book value of $2,678,000. Rental financial highlights by property type are presented in the table below for the three and six months ended June 30, 2014, ($ in thousands).
Rental | ||||||||||||||||||||||||||||
Operations, | ||||||||||||||||||||||||||||
net, less | ||||||||||||||||||||||||||||
Net | Related | |||||||||||||||||||||||||||
Rental | Operating | Operating | Receiver | Mortgage | Mortgage | |||||||||||||||||||||||
Income | Expenses | Income | Depreciation | Fees | Interest | Interest | ||||||||||||||||||||||
Three months ended June 30, | ||||||||||||||||||||||||||||
Property type | ||||||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||
Single family | $ | 3 | $ | 16 | $ | (13 | ) | $ | 2 | $ | — | $ | — | $ | (15 | ) | ||||||||||||
Condominiums and | 1,046 | 342 | 704 | 263 | — | 188 | 253 | |||||||||||||||||||||
apartments | ||||||||||||||||||||||||||||
Fractured condominiums | 1,377 | 609 | 768 | 241 | 1 | 198 | 328 | |||||||||||||||||||||
Total residential | 2,426 | 967 | 1,459 | 506 | 1 | 386 | 566 | |||||||||||||||||||||
Commercial | 176 | 129 | 47 | 14 | — | — | 33 | |||||||||||||||||||||
Total | $ | 2,602 | $ | 1,096 | $ | 1,506 | $ | 520 | $ | 1 | $ | 386 | $ | 599 | ||||||||||||||
Six months ended June 30, | ||||||||||||||||||||||||||||
Property type | ||||||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||
Single family | $ | 15 | $ | 23 | $ | (8 | ) | $ | 8 | $ | — | $ | — | $ | (16 | ) | ||||||||||||
Condominiums and | 2,053 | 746 | 1,307 | 526 | — | 376 | 405 | |||||||||||||||||||||
apartments | ||||||||||||||||||||||||||||
Fractured condominiums | 2,991 | 1,363 | 1,628 | 567 | 1 | 447 | 613 | |||||||||||||||||||||
Total residential | 5,059 | 2,132 | 2,927 | 1,101 | 1 | 823 | 1,002 | |||||||||||||||||||||
Commercial | 219 | 237 | (18 | ) | 22 | — | — | (40 | ) | |||||||||||||||||||
Total | $ | 5,278 | $ | 2,369 | $ | 2,909 | $ | 1,123 | $ | 1 | $ | 823 | $ | 962 |
44
The increase in rental operations for the second quarter of 2014 was largely due to the continued stabilization of occupancy rates and increased rental rates. Major areas of change from the second quarter of 2013 to the second quarter of 2014 are summarized in the following table, ($ in thousands).
Rental | |||||||||||||||
Operations, | |||||||||||||||
net, less | |||||||||||||||
Net | Related | ||||||||||||||
Rental | Operating | Operating | Receiver | Mortgage | Mortgage | ||||||||||
Income | Expenses | Income | Depreciation | Fees | Interest | Interest | |||||||||
2014 results | $ 2,602 | $ 1,096 | $ 1,506 | $ 520 | $ 1 | $ 386 | $ 599 | ||||||||
2013 results | 2,453 | 1,041 | 1,412 | 526 | 15 | 392 | 479 | ||||||||
Change | $ 149 | $ 55 | $ 94 | $ (6) | $ (14) | $ (6) | $ 120 | ||||||||
Explanation of change | |||||||||||||||
Rents to market rates & | |||||||||||||||
increased occupancy | $ 149 | $ 41 | $ 108 | $ — | $ — | $ — | $ 108 | ||||||||
Refunds / Adjustments | — | (16) | 16 | — | — | — | 16 | ||||||||
Completed deferred | |||||||||||||||
maintenance | — | (11) | 11 | — | — | — | 11 | ||||||||
Deferred maintenance | — | — | — | — | — | — | — | ||||||||
Receiver contract | |||||||||||||||
complete | — | — | — | — | (14) | — | 14 | ||||||||
New mortgages | — | — | — | — | — | — | — | ||||||||
Other | — | 41 | (41) | (6) | — | (6) | (29) | ||||||||
Change | $ 149 | $ 55 | $ 94 | $ (6) | $ (14) | $ (6) | $ 120 |
- Rental income – In the second quarter of 2014, vacancy rates decreased compared to the second quarter of 2013 due to the continued stabilization of rental properties post acquisition. In addition, 66% of rental properties are located in areas such as San Francisco Bay Area, Los Angeles, and Southern Coastal California, where rental rates continue to increase due to favorable market conditions. |
- Operating expenses – The second quarter of 2014 experienced higher operating costs in conjunction with the increase in occupancy rates and rental income as mentioned above. Property taxes, which are due in the second quarter of each year, increased in 2014 due in part to refunds received in the second quarter of 2013 based on the reassessment of rental properties post-acquisition. Additionally, state franchise tax expense increased in the second quarter of 2014 due primarily to the timing of the annual payment. In 2013, a portion of tax expenses were paid in subsequent periods. |
- Receiver fees – In the second quarter of 2014 there was a decrease in receiver fees due to the receiver’s assignment being completed during 2013. |
At the general partners’ direction, the property management companies have worked to improve net operating income by executing the strategy of increasing occupancy while achieving market rent growth. We manage market rents across our portfolio by reviewing market surveys and by communicating with property managers. Additionally, as tenants vacate units we anticipate moving rents to the currently existing higher market rents. The general partners are also reviewing administrative costs such as management fees and operating costs.
REO – Holding costs – The decrease in holding costs in the three and six months ended June 30, 2014 was primarily due to the sale of properties during 2013.
45
Liquidity and Capital Resources
The partnership relies upon loan payoffs, borrowers’ mortgage payments, the sale and financing of real estate owned and to a lesser degree, retention of income when profitable for the source of funds for operations, lending and payments to partners.
Contractual Obligations, Commitments, and Contingencies
A summary of the contractual obligations of the partnership as of June 30, 2014 is set forth below ($ in thousands).
Contractual Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | ||||||||||||
Mortgages payable | $ | 48,290 | $ | 1,357 | $ | 37,199 | $ | 9,734 | ||||||||
Construction contracts | — | — | — | — | ||||||||||||
Construction loans | — | — | — | — | ||||||||||||
Rehabilitation loans | — | — | — | — | ||||||||||||
Total | $ | 48,290 | $ | 1,357 | $ | 37,199 | $ | 9,734 |
Distributions to limited partners
The percent of limited partners electing cash distributions, if any, by weighted average to total partners’ capital was 58% and 56% for the six months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014 and 2013, $562,000 and $563,000, respectively, was distributed to limited partners and $1,119,000 and $1,129,000 was distributed to limited partners for the six months ended June 30, 2014 and 2013, respectively. Should the full year results of operations be a net loss, these amounts distributed would constitute a return of capital.
Withdrawals of limited partners’ capital
There are substantial restrictions on transferability of units and accordingly an investment in the partnership is non-liquid. The partnership does not establish a reserve from which to fund withdrawals and, accordingly, the partnership’s capacity to return a limited partner’s capital is restricted to the availability of partnership cash flow. Furthermore, no more than 20% of the total limited partners’ capital accounts outstanding at the beginning of any year, may be liquidated during any calendar year.
In order to provide a certain degree of liquidity to the limited partners, once a limited partner has been in the partnership for the minimum five-year period, they may withdraw all or a portion of their capital accounts in twenty quarterly installments or longer, beginning the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. The general partners, at their discretion, may liquidate all or part of a limited partner’s capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty.
The table below sets forth actual redemptions for the three and six months ended June 30 ($ in thousands).
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Capital liquidations-without penalty | $ | 1,503 | $ | — | $ | 2,281 | $ | — | ||||||||
Capital liquidations-subject to penalty | — | — | 540 | — | ||||||||||||
Total | $ | 1,503 | $ | — | $ | 2,821 | $ | — |
In March 2009, in response to economic conditions then existing, the partnership suspended capital liquidations. In the fourth quarter of 2009 the partnership entered into a forbearance agreement with its banks and subsequently entered into an amended and restated loan agreement (dated October 2010) which included additional restrictions on liquidations and distributions of partners’ capital. The bank loan was paid off in September 2012.
46
The partnership’s five most recently completed quarters have been profitable, and it has recommenced providing capital liquidation payments as of March 31, 2014. In the quarter ending March 31, 2014, those investors that had a liquidation payment pending but which was suspended as of March 31, 2009, the partnership resumed liquidation payments based on their current capital balance at the payment terms of their election existing at March 2009. Limited partners were informed of our reinstitution of accepting liquidation requests and those that requested liquidation between January 1, 2014 and prior to March 31, 2014, had their liquidation requests added to those previously existing, with payments beginning as of June 30, 2014. Each quarter, the partnership will allocate a specific amount of cash for liquidation payments. In the event that the cash allocated is insufficient to meet the liquidation requests of all limited partners requesting liquidations, then liquidation requests will be disbursed based upon the priority schedule set forth in the limited partnership agreement and then on a pro-rata basis.
In summary, the priority order states liquidation payments will be made first to limited partners withdrawing capital accounts according to the 5-year or longer installment liquidation period, then to benefit plan investors withdrawing capital accounts per the accelerated provision, then to other limited partners withdrawing capital accounts per the accelerated provision, then to executors, heirs or other administrators withdrawing capital accounts upon the death of a limited partner, and finally to all other limited partners withdrawing capital accounts. For the first quarter of 2014 liquidations payments of $1,318,000 were made, and there were no unfulfilled requests. For the second quarter of 2014, $1,503,000 of liquidations were paid, which fulfilled 83% of the requests for those requesting the 5-year or longer option. The remaining unfulfilled requests at June 30, 2014, were $1,690,000. The partnership intends to continue to accept liquidation requests in future quarters and these requests will be added to previously existing requests and be subject to the same priorities and pro-rata allocation of distributable cash as described in the limited partnership agreement.
Valuation of partners’ capital as units
In some cases in order to satisfy broker-dealers and other reporting requirements, the general partners have valued the limited partners’ interest in the partnership on a basis which utilizes a per unit system of calculation, rather than based upon the investors’ capital account. This information has been reported in this manner in order to allow the partnership to integrate with certain software used by the broker-dealers and other reporting entities. In those cases, the partnership will report to broker-dealers, trust companies and others a “reporting” number of units based upon a $1.00 per unit calculation. The number of reporting units provided will be calculated based upon the limited partner’s capital account value divided by $1.00. Each investor’s capital account balance is set forth periodically on the partnership account statement provided to investors. The reporting units are solely for broker-dealers requiring such information for their software programs and do not reflect actual units owned by a limited partner or the limited partners’ right or interest in cash flow or any other economic benefit in the partnership. Each investor’s capital account balance is set forth periodically on the partnership account statement provided to investors. The amount of partnership profits each investor is entitled to receive is determined by the ratio each investor’s capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any FINRA member client account statement in providing a per unit estimated value of the client’s investment in the partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the units, such determination may not be representative of the ultimate price realized by an investor for such units upon sale. No public trading market exists for the units and none is likely to develop. Thus, there is no certainty the units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the partnership, which may include early withdrawal penalties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not included as the partnership is a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the general partners concluded the partnership’s disclosure controls and procedures were effective.
Changes to Internal Control Over Financial Reporting
There have not been any changes in the partnership’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the partnership’s internal control over financial reporting.
47
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
In the normal course of business, the partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce provisions of the deeds of trust, collect the debt owed under promissory notes, or to protect, or recoup its investment from real property secured by the deeds of trust and resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions would typically be of any material importance. As of the date hereof, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
ITEM 1A. Risk Factors
Not included as the partnership is a smaller reporting company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
ITEM 3. Defaults Upon Senior Securities
Not Applicable.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
48
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.
REDWOOD MORTGAGE INVESTORS VIII | ||||
(Registrant) | ||||
Date: August 14, 2014 | By: | Redwood Mortgage Corp., General Partner | ||
By: | /s/ Michael R. Burwell | |||
Name: | Michael R. Burwell | |||
Title: | President, Secretary and Treasurer | |||
(On behalf of the registrant, and in the capacity of principal financial officer), Director | ||||
Date: August 14, 2014 | By: | Gymno LLC, General Partner | ||
By: | /s/ Michael R. Burwell | |||
Name: | Michael R. Burwell | |||
Title: | Manager | |||
Date: August 14, 2014 | By: | Michael R. Burwell, General Partner | ||
By: | /s/ Michael R. Burwell | |||
Name: | Michael R. Burwell | |||
Title: | General Partner | |||
49