REDWOOD MORTGAGE INVESTORS VII
(a California Limited Partnership)
Index to Form 10-K
December 31, 2004
Part I
Page No.
-----------
Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 7
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 7
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7
Item 6 - Selected Financial Data 8
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 18
Item 8 - Financial Statements and Supplementary Data 20
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
Item 9a - Controls and Procedures 42
Item 9b - Other Information 42
Part III
Item 10 - Directors and Executive Officers of the Registrant 43
Item 11 - Executive Compensation 44
Item 12 - Security Ownership of Certain Beneficial Owners and Management 45
Item 13 - Certain Relationships and Related Transactions 45
Item 14 - Principal Accountant Fees and Services 45
Part IV
Item 15 - Exhibits, Financial Statements and Schedules 46
Signatures 47
Certifications 48
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2004
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: 33-30427
REDWOOD MORTGAGE INVESTORS VII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3094928
(State or other jurisdiction of incorporation (I.R.S. Employer Identification)
or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
(address of principal executive offices) (zip code)
(650) 365-5341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of
the Act: Limited Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
-------------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
As of June 30, 2004, the aggregate value of limited partnership units held
by non-affiliates was $9,048,879. This calculation is based on the capital
account balance of the limited partners and excludes limited partnership units
held by the general partner.
Documents incorporated by reference:
Portions of the Prospectus dated October 20, 1989, and Supplement #5 dated
February 14, 1992, filed on form S-11, are incorporated in Parts II, III, and
IV. Exhibits filed as part of Form S-11 Registration Statement #33-30427 are
incorporated in part IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VII, a California limited partnership (the
"Partnership"), was organized in 1989 of which Michael R. Burwell and Gymno
Corporation, a California corporation, are the general partners. The address of
the Partnership and the general partners is 900 Veterans Blvd., Suite 500,
Redwood City, California 94063. The Partnership is organized to engage in
business as a mortgage lender, for the primary purpose of making loans secured
by deeds of trust on California real estate. Loans are arranged and serviced by
Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's
objectives are to make investments, as referred to above, which will: (i)
provide the maximum possible cash returns which limited partners may elect to
(a) receive as monthly, quarterly or annual cash distributions or (b) have
credited to their capital accounts and applied to Partnership activities; and
(ii) preserve and protect the Partnership's capital. The Partnership's general
business is more fully described under the section entitled "Investment
Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by
reference.
Originally, 60,000 Units were offered on a "best efforts" basis through
broker/dealer member firms of the National Association of Security Dealers, Inc.
In accordance with the terms of the Prospectus, the general partners increased
the number of Units for sale from 60,000 to 120,000 and elected to continue the
offering until September 30, 1992. The offering closed on September 30, 1992,
and the limited partners contributed capital totaled $11,998,359 of an approved
$12,000,000 issue, in Units of $100 each. At that date all the applicants had
been admitted into the Partnership with none left in the applicant status. The
final SR report (Report of Sales of Securities and use of proceeds therefrom)
was filed on September 21, 1992.
The Partnership began selling Units in October 1989 and began investing in
mortgages in December 1989. At December 31, 2004, the Partnership had a balance
in its secured loan portfolio totaling $7,388,478 with interest rates thereon
ranging from 6.50% to 10.50%.
Currently, loans secured by First Trust Deeds comprise 80.36% of the amount
of funds in the secured loan portfolio followed by Second Trust Deeds of 19.64%.
Owner-occupied homes combined with non-owner occupied homes total 60.82% of the
secured loans. Commercial loans decreased from last year, now comprising 26.03%
of the secured portfolio. Loans to apartments totaled 13.15%. Of the total
secured loans, 66.34% are in five counties of the Bay Area, and the adjacent
counties of Monterey, San Joaquin, Merced, and Solano Counties collectively make
up 9.62% of the loans. Additionally, the northern Californian County of
Sacramento makes up 11.72% of the loans. The balance of loans 12.32% are
primarily in Southern California. Loan size decreased the past year, and is now
averaging $263,874 per loan, a decrease of $96,162. Some of the larger loans
invested in by the Partnership are fractionalized between other affiliated
partnerships with objectives similar to those of the Partnership to further
reduce risk. Average equity per loan transaction based on appraised values and
senior debt at the inception date of the loan, which is our loan plus any senior
loans, divided by the property's appraised value, subtracted from 100%, stood at
28.70%. A 40% equity average on loan origination is generally considered very
conservative. Generally, the more equity, the more protection for the lender.
The Partnership's loan portfolio is in good condition with one property in
foreclosure as of December 2004.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2004 the Partnership took back vacant land
through a deed in lieu of foreclosure. No property was taken back in 2003.
During the year 2002, the Partnership acquired one piece of real estate property
through foreclosure. To assist in protecting its own assets and reduce
liability, the Partnership subsequently transferred the property to a newly
formed LLC, called the Stockton Street Property Company, LLC. The Partnership
owned a 34% minority interest in the Stockton Street Property Company, LLC, and
another affiliated partnership owns the remaining interest. Assets of this LLC
were sold during 2003 and the Partnership incurred a loss of approximately
$42,000. The LLC will be dissolved when its final tax return for year 2004 is
filed. The LLC is further discussed under Notes to Financial Statements (Note
6).
3
In prior years, the Partnership took back two additional properties through
foreclosure. One is a commercial property which the Partnership sold in 2004.
The Partnership realized a loss of approximately $613,800 on the sale of this
property. This loss was offset against reserves previously set aside for real
estate owned properties. The second property taken back in 1993 is a parcel of
land located in East Palo Alto, CA, which is on the market for sale. The general
partners believe that this property is worth considerably more than its carrying
value, but it may take a considerable amount of additional time to sell the
property and realize its full potential. The property is unique in that it may
only be utilized for commercial or industrial uses. Until recently, land sales
activity has been slow. Interest in land sales for commercial sites has been
improving.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans are banks,
savings and loan associates, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the general partners generate all of their
loans. The general partners have been in the business of making or investing in
mortgage loans in Northern California since 1978 and have developed a quality
reputation and recognition within the field.
Beginning in July of 2004, the Federal Reserve changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic interest rate low, to one of tempered but gradual interest
rate increases. In keeping with this new policy since July 2004, the Federal
Reserve has increased the Federal Funds Rate by one quarter percentage point
(1/4 of one percent) at each of its last five meetings to 2.25% as of March 22,
2005. This deliberate upward change in the Federal Funds Rate has caused short
term interest rates to rise, and to a lesser degree, pushed longer term rates up
as well. Nationally and more specifically in Northern California, the location
of the majority of our lending activities, the economies are recovering from the
economic downturn from 2000 to 2003. Employment and job creation is improving
but is still lower than desirable. During 2004, the residential and commercial
real estate markets in Northern California enjoyed a solid year of price
appreciation. With the prospect of solid real estate values, low interest rates,
and an improving economy, lenders of all types are anxious to lend money to
borrowers secured by their real estate. Competition for loans is fierce.
Additionally, those borrowers that had waited hoping to find the bottom of the
interest rate cycle, have decided that the time has come to refinance their
existing higher rate loans. This has caused a significant amount of loan runoff
to lower interest rate lenders than the partnership. These two factors have made
it difficult, particularly in the final quarter of the year 2004, to stay as
fully invested as is optimum. It is anticipated that significant competition for
loans will continue. Excess cash will be invested in short-term alternative
investments, such as money market funds yielding considerably less than the
current loan investment portfolio.
4
Secured Loan Portfolio
A summary of the Partnership's secured loan portfolio as of December 31,
2004 is set forth below.
Loans as a Percentage of Appraised Values
First Trust Deed Loans $ 5,937,736
Appraised Value of Properties at Time of Loan 7,971,833
---------------
Total First Trust Deeds as a % of Appraisal 74.48%
===============
First Trust Deed Loans 5,937,736
Second Trust Deed Loans 1,450,742
---------------
7,388,478
Priority positions due other Lenders at Time of Loan
First Trust Deed Loans due other Lenders 1,944,172
---------------
Total Debt $ 9,332,650
===============
Appraised Property Value at Time of Loan $13,089,113
Total Loans as a % of Appraisal based on appraisals and prior
liens at date of loan 71.30%
===============
Number of Secured Loans Outstanding 28
---------------
Average Secured Loan 263,874
Average Secured Loan as a % of Secured Loans Outstanding 3.57%
Largest Secured Loan Outstanding 800,000
Largest Secured Loan as a % of Secured Loans Outstanding 10.83%
Largest Secured Loan as a % of Partnership Assets 8.69%
Secured Loans as a Percentage of Total Secured Loans Percent
----------------------------------------------------------------------------------------------
First Trust Deed Loans 80.36%
Second Trust Deed Loans 19.64%
---------------
Total Trust Deed Loan Percentage 100.00%
===============
Secured Loans by Type of Property Amount Percent
----------------------------------------- -----------------------------------------------
Owner Occupied Homes $ 2,532,045 34.27%
Non-Owner Occupied Homes 1,961,474 26.55%
Apartments 971,864 13.15%
Commercial 1,923,095 26.03%
-------------- ----------
Total $ 7,388,478 100.00%
============== ==========
5
The following is a distribution of secured loans outstanding as of December
31, 2004 by Counties.
Total
California County Secured Loans Percent
-------------------------------- ------------------ ------------
San Francisco Bay Area Counties
Alameda $ 1,820,817 24.64%
San Francisco 1,275,581 17.26%
Santa Clara 883,780 11.96%
San Mateo 561,591 7.60%
Contra Costa 360,377 4.88%
-------------- ------------
4,902,146 66.34%
============== ============
San Francisco Bay Area Adjacent
Counties
Monterey 200,000 2.71%
Solano 159,749 2.16%
Merced 145,417 1.97%
San Joaquin 140,360 1.90%
Stanislaus 64,850 0.88%
-------------- ------------
710,376 9.62%
Other California Counties
Sacramento 866,168 11.72%
San Diego 800,000 10.83%
Madera 109,788 1.49%
-------------- -----------
1,775,956 24.04%
Total $ 7,388,478 100.00%
============== ============
Statement of Condition of Secured Loans:
Number of Secured Loans in Foreclosure: 1
Scheduled maturity dates of secured loans as of December 31, 2004
are as follows:
Year Ending December 31, Amount
----------------------------------- --------------
2005 $ 817,184
2006 1,872,944
2007 1,246,754
2008 198,272
2009 3,041,833
Thereafter 211,491
--------------
Total $ 7,388,478
==============
The Partnership's largest loan in the principal amount of $800,000
represents 10.83% of outstanding secured loans and 8.69% of Partnership assets.
Larger loans sometimes increase above 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs.
The scheduled maturities for 2005 include two loans totaling approximately
$64,850 which are past maturity at December 31, 2004. Interest payments on these
past maturity loans were not delinquent over 90 days. The Partnership allows
borrowers to occasionally continue to make the payments on debt past maturity
for periods of time. The Partnership, in most instances, receives the benefit of
a higher interest rate than would otherwise be available in the currently
existing loan marketplace.
The loan portfolio had three loans with principal outstanding of $984,880
where interest payments were overdue in excess of 90 days. The principal
outstanding of these three loans represents 13.33% of the Partnership's secured
portfolio as of December 31, 2004.
6
Included in the loans with interest payments overdue in excess of 90 days
is one loan, with principal outstanding of $96,716 (1.31% of the secured loan
portfolio), which was considered impaired at December 31, 2004. A loan is
considered impaired when events and/or changes in circumstances cause the
management to have serious doubts about the collectibility of the contractual
payments and interest is no longer accrued.
At December 31, 2004, total past maturity loans, overdue interest payments
in excess of 90 days, and impaired loans totaled $1,049,730 representing five
loans which were 14.20% of the secured loan portfolio
Item 2 - Properties
The Partnership took back vacant land through a deed in lieu of foreclosure
in 2004. The land is located in Stanislaus County, California. It is comprised
of three separate lots, which total approximately 14 acres. This property is
owned together with two affiliated partnerships. The Partnership's net
investment in the land at December 31, 2004 was $1,752,836. The property will be
put on the market for sale during 2005. The general partners believe that the
property will return the Partnership's investment upon sale. The Partnership
also owned a commercial property located in Walnut Creek, California. This
property was sold during 2004 at a loss of approximately $613,800. This loss was
offset against reserves previously set aside for real estate owned properties.
During 2002, the Partnership took back the collateral security on one of its
loans through foreclosure. This loan was originally fractionalized and owned
with another affiliated Partnership. In order to reduce potential liabilities
the Partnership transferred at its book value the real estate taken back to a
newly formed Limited Liability Company called Stockton Street Property Company,
LLC. The real estate security was six condominium units. Management of the LLC
was through its managing member, Michael Burwell, a general partner of the
Partnership. By the end of 2003 all the units were sold resulting in a loss to
the Partnership of approximately $42,000. It is anticipated that in 2005 the
Stockton Street Property Company, LLC will be closed and its operations will
cease.
The Partnership also owns (through previous foreclosure) one other
property: an undeveloped parcel of land located in East Palo Alto. The land is
owned with two other affiliated partnerships. The Partnership's net investment
in the land at December 31, 2004 is $62,720. Currently the property is on the
market for sale. The Partnership's net investment of $62,720 is less than 1% of
Partnership assets. The general partners believe that the property is worth
considerably more than its net investment, but it may take a considerable amount
of additional time to sell the property and realize its full potential. The
property is unique in that it may only be utilized for commercial or industrial
uses. Until recently, land sales activity has been slow. Interest in land sales
for commercial sites has been improving.
Item 3 - Legal Proceedings
In the normal course of business the Partnership may become involved in
various types of legal proceedings such as assignments of rents, bankruptcy
proceedings, appointments of receivers, unlawful detainers, judicial
foreclosures, 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. As of the date hereof, the Partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related
Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through
broker-dealer member firms of the National Association of Securities Dealers on
a "best efforts" basis (as indicated in Part I item 1). Investors have the
option of withdrawing earnings on a monthly, quarterly, or annual basis or
reinvesting and compounding the earnings. Limited partners may withdraw from the
Partnership in accordance with the terms of the Partnership Agreement subject to
possible early withdrawal penalties. There is no established public trading
market.
A description of the Partnership Units, transfer restrictions and
withdrawal provisions is more fully described under the section entitled
"Description of Units" and "Summary of Limited Partnership Agreement", pages 47
to 50 of the Prospectus, a part of the referenced Registration Statement, which
is incorporated by reference.
7
Item 6 - Selected Financial Data
Redwood Mortgage Investors VII began operations in December 1989.
Financial condition and results of operation for the Partnership as of and
for the five years ended December 31, 2004 were:
Balance Sheets
Assets
December 31,
--------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- ------------- ------------- -------------- ---------------
Cash and cash equivalents $ 346,393 $ 321,114 $1,057,845 $ 389,844 $ 269,000
Loans
Loans, secured by deeds of trust 7,388,478 8,280,826 6,423,984 10,091,195 12,794,297
Loans, unsecured 238,484 232,551 216,770 173,731 188,421
Less allowance for loan losses (745,476) (680,469) (791,882) (887,578) (850,548)
Interest and other receivables
Accrued interest and late fees 190,105 489,995 304,936 666,189 363,321
Advances on loans 8,188 6,484 17,230 50,665 29,825
Real estate held for sale, net 1,782,182 633,053 683,136 872,133 816,094
Investment in LLC - - 1,212,722 - -
-------------- ------------- ------------- -------------- ---------------
$9,208,354 $9,283,554 $9,124,741 $11,356,179 $ 13,610,410
============== ============= ============= ============== ===============
Liabilities and Partners' Capital
December 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- ------------- ------------- --------------- --------------
Liabilities
Line of credit $ - $ 200,000 $ - $ 1,907,000 $ 3,500,000
Accounts payable 4,951 4,102 2,593 11,295 4,102
Deferred interest - - 37,704 2,322 -
Payable to affiliate 74,987 51,288 32,176 3,316 -
-------------- ------------- ------------- --------------- --------------
79,938 255,390 72,473 1,923,933 3,504,102
Partners' capital
General partners 11,973 11,973 11,978 11,978 11,978
Limited partners subject
to redemption 9,116,443 9,016,191 9,040,290 9,420,268 10,094,330
-------------- ------------- ------------- --------------- --------------
Total partners' capital 9,128,416 9,028,164 9,052,268 9,432,246 10,106,308
-------------- ------------- ------------- --------------- --------------
$9,208,354 $9,283,554 $9,124,741 $11,356,179 $13,610,410
============== =============== ============= =============== ==============
8
Statements of Income
December 31,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- ------------- -------------- --------------- -------------
Gross revenue $ 868,274 $ 782,280 $ 1,078,186 $ 1,192,381 $1,437,964
Expenses 289,628 189,639 314,704 371,184 537,818
-------------- ------------- -------------- --------------- -------------
Net income $ 578,646 $ 592,641 $ 763,482 $ 821,197 $ 900,146
============== ============= ============== =============== =============
Net income to general partners (1%) 5,786 5,926 7,635 8,212 9,001
Net income to limited partners (99%) 572,860 586,715 755,847 812,985 891,145
-------------- ------------- -------------- --------------- -------------
$ 578,646 $ 592,641 $ 763,482 $ 821,197 $ 900,146
============== ============= ============== =============== =============
Net income per $1,000 invested by
limited partners for entire period:
- where income is compounded
$ 65 $ 67 $ 85 $ 85 $ 85
============== ============= ============== =============== =============
- where partner receives income
in monthly distributions $ 63 $ 65 $ 82 $ 82 $ 82
============== ============= ============== =============== =============
Annualized yields when income is compounded or distributed monthly for the
years 2000 through 2004 are outlined in the table below:
Compounded Distributed
--------------- ---------------
2000 8.52% 8.21%
2001 8.50% 8.19%
2002 8.44% 8.13%
2003 6.66% 6.47%
2004 6.49% 6.30%
Average annualized yield from inception through December 31, 2004, when
income is compounded and retained, was 7.70%.
Average annualized yield from inception through December 31, 2004, when
income is distributed monthly was 7.45%.
Item 7 - Management Discussion and Analysis of Financial Condition
and Results of Operations
Management Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and income and expenses
during the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure. At December 31, 2004, we owned four pieces of real
property.
Loans and the related accrued interest, late fees and advances are analyzed
on a regular basis for recoverability. Delinquencies are identified and followed
as part of the loan system. A provision is made for loan losses to adjust the
allowance for loan losses to an amount considered by management to be adequate,
with due consideration to collateral value, to provide for unrecoverable loans
and receivables, including impaired loans, other loans, accrued interest, late
fees and advances on loans and other accounts receivable (unsecured). The
Partnership charges off uncollectible loans and related receivables directly to
the allowance account once it is determined that the full amount is not
collectible.
9
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral. If events and or changes
in circumstances cause management to have serious doubts about the further
collectibility of the contractual payments, a loan may be categorized as
impaired and interest is no longer accrued. Any subsequent payments on impaired
loans are applied to reduce the outstanding loan balances including accrued
interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, hopes, intentions, beliefs and strategies regarding the
future. Forward-looking statements include statements regarding future interest
rates and economic conditions and their effect on the Partnership and its
assets, future sales of properties held by the Partnership and the proceeds from
such sales, trends in the California real estate market, estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals and
2005 annualized yield estimates. Actual results may be materially different from
what is projected by such forward-looking statements. Factors that might cause
such a difference include unexpected changes in economic conditions and interest
rates, the impact of competition and competitive pricing and downturns in the
real estate markets in which the Company has made loans. All forward-looking
statements and reasons why results may differ included in this Form 10-K are
made as of the date hereof, and we assume no obligation to update any such
forward-looking statement or reason why actual results may differ.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partners, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate to the general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the affiliate
to the general partners. In the past, the affiliate to the general partners has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, an affiliate of the
general partners may collect an amount equivalent to 12% of the loaned amount
until 6 months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. For the years
ended December 31, 2004, 2003 and 2002 loan brokerage commissions paid by
borrowers were $93,465, $111,927 and $24,661, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional servicing fees are recorded upon the receipt
of any subsequent payments on impaired loans. Mortgage servicing fees of
$81,442, $73,062 and $163,531 were incurred for the years ended December 31,
2004, 2003 and 2002, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the Partnership, then net income would
have been reduced by approximately $46,733. Reducing net income reduces the
annualized yields. An increase or decrease in this fee within the limits set by
the partnership agreement directly impacts the yield to the limited partners.
10
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $34,073, $34,011 and $34,869 were incurred by the Partnership for
the years ended December 31, 2004, 2003 and 2002, respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners.
o Contributed Capital The general partners jointly and severally
contributed cash equal to 1/10 of 1% of the total capital raised by the
Partnership. The general partners contributed this cash as proceeds from the
offerings were received from the limited partners. As of December 31, 2004 and
2003, a general partner, Gymno Corporation, had contributed $11,973 as capital
in accordance with Section 4.02(a) of the partnership agreement.
11
Results of Operations - For the three years ended December 31, 2004, 2003 and
2002.
On September 30, 1992, the Partnership had sold 119,983.59 Units and its
contributed capital totaled $11,998,359 of the approved $12,000,000 issue, in
Units of $100 each. As of that date, the offering was formally closed. At
December 31, 2004, Partners' Capital totaled $9,128,416.
Changes in the Partnership's operating results for the years ended December
31, 2004 and December 31, 2003 are discussed below:
Changes during Changes during
the year ended the year ended
December 31, 2004 December 31, 2003
versus 2003 versus 2002
---------------------- ---------------------
Net income increase/(decrease) $ (13,995) $(170,841)
============= =============
Revenue
Interest on loans $ 69,902 (289,092)
Late charges (4,231) (867)
Other income 20,323 (5,947)
------------- -------------
$ 85,994 $(295,906)
------------- -------------
Expenses
Mortgage servicing fees $ 8,380 $ (90,469)
Interest expense 1,832 (45,752)
Clerical costs from Redwood Mortgage Corp. (5,188) (7,558)
Asset management fees 62 (858)
Provisions for losses on loans and real estate 83,306 1,740
Professional services 5,591 3,594
Other 6,006 14,238
------------- -------------
$ 99,989 $(125,065)
------------- -------------
Net income increase/(decrease)
$ (13,995) $(170,841)
============= =============
The increase in interest on loans of $69,902 (9.34%) for the year ended
December 31, 2004, was primarily attributable to a higher average loan portfolio
balance of $7,834,652 in 2004 compared to an average balance of $7,352,405 in
2003. The increase is also attributed to an interest rate increase of 1.5% on
notes totaling $1,089,820 during 2004. The decrease in interest on loans of
$289,092 (27.86%) for the year ended December 31, 2003 versus December 31, 2002
was primarily attributable to a lower average loan portfolio balance of
$7,352,405 carried by the Partnership in 2003, versus $8,257,590 in 2002.
Additionally, the average portfolio interest rate has been declining, from
10.04% in 2002 to 9.45% in 2003 and to 9.36% in 2004. This has the effect of
reducing interest income or moderating interest income growth during periods
when the portfolio increased and exacerbating interest income declines during
periods of portfolio decreases.
The decline in late charge revenue by $4,231 for the year ended December
31, 2004 and by $867 for the year ended December 31, 2003 was primarily
attributable to improved loan collections and reduced delinquencies. The
reduction is also due to a decline in delinquent loans in 2004.
12
For 2004, the increase in other income is due to the receipt of $23,143 as
an irrevocable fee from a potential buyer of a real estate property held for
sale; offset by a reduction in miscellaneous income of $2,820. The reduction of
$5,947 for the year ended December 31, 2003, is primarily attributable to a
decline in early withdrawal penalties totaling $9,804; offset by an increase in
miscellaneous income of $3,857.
The increase in mortgage servicing fees of $8,380 in 2004 and the decline
of $90,469 in 2003 is largely attributable to the Partnership's fluctuating
average portfolio balances of $7,834,652 in 2004 and $7,352,405 in 2003. The
significant increase in mortgage servicing fees in 2002 was also due to
collection of interest, and, and hence the mortgage servicing fees, from
impaired loans which paid of in 2002. The Partnership does not accrue servicing
fees due or payable to Redwood Mortgage on impaired loans. Rather, servicing
fees on impaired loans are incurred as borrower payments are received
Interest expense increased $1,823 for the years ended December 31, 2004
versus 2003. The average line of credit borrowing for the year ended December
31, 2004 was $382,265 versus an average borrowing of $407,249 for December 31,
2003. Although the average borrowing for 2003 was higher, the average interest
rate for 2003 was 4.33%, whereas the average interest rate during 2004 was
4.93%. The decline in interest expense in 2003 versus 2002 was due to lower
average line of credit usage and reduced interest rates in 2003.
The decrease in clerical costs of $5,188 and $7,558 for the years ended
December 31, 2004 and 2003, respectively, was primarily attributable to lower
clerical costs servicing the Partnership.
Loan loss provisions/(recoveries) were $65,007, $(18,299), and $(20,039)
for the years ended December 31, 2004, 2003, and 2002, respectively. The
increase in provision for 2004 was precautionary due to the foreclosure that
existed at December 31, 2004. A negative provision of $20,039 and $18,299 in
2002 amd 2003 was due to management's assessment of the appropriate loan loss
allowance at such dates.
The general partners believe that the allowance for loan losses of $745,476
at December 31, 2004 was adequate to offset potential losses on loans.
Increases in professional fees of $5,591 and $3,594 for the years ended
December 31, 2004 and 2003, respectively, were primarily attributable to general
accounting cost increases in 2004 compared to 2003 in relation to its audit and
tax return processing.
Increases in other expenses of $6,006 and $14,238 for the years ended
December 31, 2004 and 2003, respectively, were primarily attributable to the
upkeep costs of the real estate held for sale properties. The Partnership
expensed $20,567 and $13,980 for the years ended December 31, 2004 and 2003,
respectively, on the properties.
13
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these properties,
the on real estate held for sale expenses and sales activities, borrowers
payment records, etc. Data on the local real estate market and on the national
and local economy are studied. Based upon this information and other data, loss
reserves are increased or decreased. The Partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, the Northern California real estate market slowed and the national and
local economies had slipped into recession. During 2003, the economy stabilized,
and saw improvement during 2004. Borrower foreclosures, as set forth under
Results of Operations, are a normal aspect of Partnership operations and the
general partners anticipate that they will not have a material effect on
liquidity. As of December 31, 2004, the partnership had two loans with
outstanding principal totaling $64,850 past maturity. Interest payments on these
two past maturity loans were not delinquent over 90 days. In addition, the loan
portfolio had three loans with principal outstanding of $984,880 where interest
payments were overdue in excess of 90 days. These loans, overdue in excess of 90
days, include the partnership's only outstanding notice of default filed at
December 31, 2004. This loan has a principal balance of $776,228. Loans with
interest payments that were overdue in excess of 90 days include overdue
payments relating to the partnership's only impaired loan as of December 31,
2004.. This loan has a principal balance outstanding of $96,716. At December 31,
2004, total past maturity loans, loans with overdue interest payments on excess
of 90 days, and impaired loans totaled $1,049,730 representing 5 loans which
were 14.20% of the secured loan portfolio. The Partnership enters into workout
agreements with borrowers who are past maturity or delinquent in their regular
payments. The Partnership had workout agreements on four loans totaling $260,919
as of December 31, 2004. Typically, a workout agreement allows the borrower to
extend the maturity date of the balloon payment, allows the borrower to make
current monthly payments while deferring for periods of time, past due payments,
or allows time to pay the loan in full. These workout agreements and
foreclosures generally exist within our loan portfolio to greater or lesser
degrees, depending primarily on the health of the economy. The number of
foreclosures and workout agreements will rise during difficult times and
conversely fall during good economic times. The number and amount of workout
agreements existing at December 31, 2004, in management's opinion, does not have
a material effect on our results of operations or liquidity. These workouts have
been considered when management arrived at appropriate loan loss reserves and
based on our experience, are reflective of our loan marketplace segment. Because
of the number of variables involved, the magnitude of the possible swings and
the general partners inability to control many of these factors, actual results
may and do sometimes differ significantly from estimates made by the general
partners. Management provided $65,007, ($18,299) and ($20,039), as provisions
(recoveries) for losses on loans and real estate for the years ended December
31, 2004, 2003 and 2002, respectively. The general partners believe that current
reserves for losses are adequate to handle potential losses. If conditions
change, the Partnership may increase its provisions for loan losses and real
estate held for sale.
The Partnership may restructure loans. This is done either through the
modification of an existing loan or by rewriting a whole new loan. A
modification could involve, among other conditions, an extension in maturity
date, a reduction in repayment amount, a change in interest rate, or granting of
additional loan funds.
The Partnership did not restructure any loan in 2004. During 2003 the
Partnership restructured two loans into one existing loan with a lower interest
rate. This resulted in an increase to loans receivable of $107,198 and a
decrease to accrued interest and late fees and advances of $88,685 and $18,513,
respectively.
14
Borrower Liquidity and Capital Resources.
The partnership relies upon loan payoffs, borrowers' mortgage payments,
and, to a lesser degree, its line of credit for the source of funds for loans.
Over the past several years, mortgage interest rates have decreased somewhat
from those available at the inception of the partnership. If interest rates were
to increase substantially, the yield of the partnership's loans may provide
lower yields than other comparable debt-related investments. Additionally, since
the partnership has made primarily fixed rate loans, if interest rates were to
rise, the likely result would be a slower prepayment rate for the partnership.
This could cause a lower degree of liquidity as well as a slowdown in the
ability of the partnership to invest in loans at the then current interest
rates. Conversely, in the event interest rates were to decline, the partnership
could see significant borrower prepayments, which, if the partnership can only
obtain the then existing lower rates of interest, may cause a dilution of the
partnership's yield on loans, thereby lowering the partnership's overall yield
to the limited partners. The partnership to a lesser degree relies upon its line
of credit to fund loans. Generally, the partnership's loans are fixed rate,
whereas the credit line is a variable rate loan. In the event of a significant
increase in overall interest rates, the credit line rate of interest could
increase to a rate above the average portfolio rate of interest. Should such an
event occur, the general partners would desire to pay off the line of credit.
Retirement of the line of credit would reduce the overall liquidity of the
partnership. Cash is constantly being generated from borrower payments of
interest, principal and loan payoffs. Currently, cash flow greatly exceeds
partnership expenses and earnings payout requirements. Excess cash flow is
invested in new loan opportunities, when available, and is used to reduce the
partnership credit line or for other partnership business.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the years
ended December 31, 2004, 2003 and 2002, the Partnership made distributions of
earnings to limited partners of $198,794, $211,610, and $303,020, respectively.
Distribution of earnings to limited partners, which were not withdrawn for the
years ended December 31, 2004, 2003 and 2002 were $374,066, $375,105, and
$452,827, respectively. As of December 31 2004, 2003 and 2002, limited partners
electing to withdraw earnings represented 35%, 34% and 36% of the limited
partners' capital.
The Partnership agreement also allows the limited partners to withdraw
their capital account subject to certain limitations. For the years ended
December 31, 2004, 2003 and 2002, $34,267, $22,690, and $186,716 were liquidated
subject to the 10% penalty for early withdrawal. These withdrawals are within
the normally anticipated range that the general partners would expect in their
experience in this and other partnerships. The general partners expect that a
small percentage of limited partners will elect to liquidate their capital
accounts over one year with a 10% early withdrawal penalty. In originally
conceiving the Partnership, the general partners wanted to provide limited
partners needing their capital returned a degree of liquidity. Generally,
limited partners electing to withdraw over one year need to liquidate their
investment to raise cash. The trend the Partnership is experiencing in
withdrawals by limited partners electing a one year liquidation program
represents a small percentage of limited partner capital as of December 31,
2004, 2003, and 2002, respectively.
Additionally, for the years ended December 31, 2004, 2003, and 2002,
$239,547, $376,511, and $646,089, respectively, were liquidated by limited
partners who have elected a liquidation program over a period of five years or
longer. This ability to withdraw after five years by limited partners has the
effect of providing limited partner liquidity. The general partners expect a
portion of the limited partners to take advantage of this provision. This has
the anticipated effect of the Partnership growing, primarily through
reinvestment of earnings in years one through five. The general partners expect
to see increasing numbers of limited partner withdrawals in years five through
eleven, after which time the bulk of those limited partners who have sought
withdrawal have been liquidated. After year eleven, liquidation generally
subsides.
15
Earnings and capital liquidations, including early withdrawals, during the
three years ended December 31, 2004 were:
Years ended December 31,
Earnings Capital
Liquidation Liquidation Total
-------------- --------------- ----------------
2004 $ 198,794 *$273,814 $ 472,608
2003 $ 211,610 *$399,204 $ 610,814
2002 $ 303,020 *$832,805 $ 1,135,825
* These are gross amounts, which are not net of early withdrawal penalties.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties.
Current Economic Conditions.
From July 1 through December 31, 2004, the Federal Reserve increased the
Federal Funds Rate four times by one quarter percentage point (1/4 of one
percent) each time to 2.00%. These were the first Federal Funds Rate increase in
more than three years and may indicate that the Federal Reserve has changed its
interest rate policy to increased rates for the foreseeable future. A 1.00%
upward shift in the Federal Funds Rate will not have a material effect upon the
interest rates the Partnership charges borrowers. If, however, there are future
interest rate increases or if they remain at their current levels, borrowers
will no longer be encouraged through continually declining interest rates to
prepay their debts through refinancing of their obligations. This could mean
that the Partnership may begin experiencing less prepayments by borrowers in its
portfolio. This would reduce the need for the Partnership to replace these
prepaid loans with new loans at lower interest rates. Additionally, the overall
real estate marketplace has become much more active in the last twelve months,
particularly in Northern California. The general partners believe that the
average loan portfolio interest rate may decline as some remaining borrowers
that did not refinance their loans to lower interest rates take advantage of the
current low rates of interest available. Based upon existing note rates in the
portfolio and the Partnership's expectations of stable interest rates in the
near future, the Partnership anticipates that the average loan portfolio
interest rate will stabilize during 2005. From the general partners' experience,
we anticipate that the annualized yield for 2005 will range between 6.00% and
6.50%.
16
The Partnership makes loans primarily in Northern California. As of
December 31, 2004, approximately 66.34% ($4,902,146) of the secured loans held
by the Partnership were in five of the San Francisco Bay Area Counties. The
remaining loans held were secured primarily by Northern California real estate
outside the San Francisco Bay Area. Like the rest of the nation, during
2000-2002, the San Francisco Bay Area felt the recession and accompanying slow
down in economic growth and increasing unemployment. The technology companies of
Silicon Valley, the airline industry, the tourism industry and other industries
are feeling the effects of the overall United States economy, which includes
lower earnings, job losses and layoffs.
Recently the national Northern California economies seem to be improving.
Job creation remains a concern, as little job creation seems to be evident. The
partnership makes loans primarily in Northern California and real estate values
of residential, commercial, multi-family properties and land are of particular
interest to the partnership. Real estate is the primary security for the
partnership's loans.
The residential real estate market in California continues to appreciate.
The San Francisco Chronicle dated January 20, 2005 reported that "Despite
earlier forecasts of softer housing demand in 2004, low interest rates drove the
Bay Area real estate market to record levels last year. The median sale price of
a single-family home in 2004 was $532,000, a 17% rise over $455,000 in 2003 and
the highest for any year since 1988, real estate information firm DataQuick
reported Wednesday. A total of 134,848 houses and condos changed hands in the
nine counties in 2004, blowing past the previous peak of 122,149 set in 2003.
December, traditionally a slow time for real estate sales, closed out 2004 in
strong - although not record-setting - fashion. The median price for a
single-family home hit $554,000, a 17% jump over the December 2003 median. The
record median of $560,000 was set in November. The housing boom wasn't expected
to last through 2004. In the face of anticipated interest rate hikes, many
economists had predicted that local and national real estate markets would cool.
But after mortgage rates rose for several weeks in the spring, disappointing job
growth reignited fears about the economy, driving rates lower. The uncertainty
created by both rising and falling rates prompted buyers to jump into the
housing market. John Karevoll, [a researcher at DataQuick in La Jolla (San Diego
County)] expects appreciation rates to ease from the mid to high teens to the
single digits once the benchmark 30-year fixed mortgage rate climbs closer to
6.5 or 7.0% later in the year. Last week, mortgage giant Freddie Mac said the
30-year fixed rate hit 5.74%."
While the residential market outlook remains strong overall the commercial
real estate market appears equally strong.
As reported in the San Francisco Business Times for the week of January
7-13, 2005 "The numbers are in and they're looking pretty. San Francisco office
market fundamentals improved during the last quarter of 2004, with overall
vacancy shrinking to between 15.4% and 19%, depending on which brokerage firm is
crunching the numbers. Main reasons? Dwindling supply due to stalemated
construction, a handful of residential conversions and a hopped-up tally of
positive net absorption. According to Tove Nilsen, Colliers International's
director of market research, the S.F office market as a whole logged 699,843
square feet of positive absorption during the last quarter of the year, bringing
the annual total to 1.2 million square feet. Cushman & Wakefield Senior Research
Associate Brad Van Blois (who counts 1.198 Million square feet of overall net
absorption for the year) attributes a big chunk of that - 302,610 square feet -
to fresh companies moving to town. Space-hungry/expanding companies also made
this the sixth consecutive quarter for positive net absorption - a marked
turnaround from the exodus of mid-2000 to mid-2003. And rents? They stabilized.
For the year, city-wide Class A direct rent decreased 1.9% to $28.80 per
square foot, Class B space slipped 1.6% to $22.80 and Class C declined 4.3% to
$19.44, according to Cushman & Wakefield. Class A rents in the commercial
business district also dropped, to $30.48 in the fourth quarter compared to
$30.60 during the same period last year, also according to Van Blois. But prime
Class A space in the financial district is getting harder to come by, with the
sweetest sublease space now soaked up by other tenants and mostly commodity
space left. Class A space in the financial district was $31.15, up from $30.36
the previous quarter, according to Nilsen. As expected, commercial building
sales - the hot ticket for all of last year - beat all previous records. Low
interest rates and pent up demand pushed dozens of investors to buy a whopping
$2.5 billion in commercial buildings in the city this year, beating the $2.4
billion record set in 2000, according to Nilsen. [Van Blois] added: "The market
fundamentals have improved each quarter, and it's encouraging, but overall we
still have a long way to go." Sales stayed steady through the year end, with 23
commercial and industrial properties closing escrow during the month of
November, according to Jennifer Raike of Old Republic Title Co.'s monthly list
of transactions."
As of December 31, 2004, the Partnership had an average loan to value ratio
based on appraisals and prior liens as of the date the loan was made of 71.30%.
This did not account for any increases or decreases in property values since the
date the loan was made, nor does it include any reductions in prior lien
principal through amortization of payments after the loan was made.
17
This low loan to value ratio will assist the Partnership in weathering loan
delinquencies and foreclosures should they eventuate.
Contractual Obligations: None
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and on our
line of credit as of December 31, 2004. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2005 through 2009 and separately
aggregates the information for all maturities arising after 2009. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2004:
2005 2006 2007 2008 2009 Thereafter Total
------------- ------------ ------------- ------------ ------------ ------------ -------------
Interest earning assets:
Money market accounts $ 309,458 $ 309,458
Average interest rate 0.60% 0.60%
Loans secured by deeds
of trust $ 817,184 1,872,944 1,246,754 198,272 3,041,833 211,491 $7,388,478
Average interest rate 10.00% 9.46% 9.00% 10.50% 9.16% 10.00% 9.36%
Interest bearing
Liabilities:
Line of credit - -
Average interest rate 5.25% 5.25%
Market Risk.
The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The Partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the Partnership's security for its loans.
The Partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the Partnership's mortgage loans earn interest
at fixed rates. Changes in interest rates may also affect the value of the
Partnership's investment in mortgage loans and the rates at which the
Partnership reinvests funds obtained from loan repayments and new capital
contributions from limited partners. If interest rates increase, the interest
rates the Partnership obtains from reinvested funds will generally increase, but
the value of the Partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the Partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
Partnership for investment due to repayment of Partnership loans may be
reinvested at lower rates than the Partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the Partnership
at a time where the Partnership is unable to reinvest in loans of comparable
value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
18
PORTFOLIO REVIEW - For the years ended December 31, 2004, 2003 and 2002.
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of December 31, 2004,
2003 and 2002 the Partnership's loans secured by real property collateral in
five of the San Francisco Bay Area counties (San Francisco, San Mateo, Santa
Clara, Alameda and Contra Costa) represented $4,902,146 (66.34%), $5,982,000
(72.24%), and $3,353,000 (52.20%), respectively, of the outstanding secured loan
portfolio. The remainder of the portfolio represented loans secured by real
estate located primarily in Northern California.
The following table sets forth the distribution of loans held by the
Partnership by property type for the years ended December 31, 2004, 2003 and
2002:
December 31,
-----------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- ------------------------- ----------------------------
Single-family homes (1-4 units)
- owner occupied $ 2,532,045 34.27% $ 853,869 10.31% $1,037,474 16.15%
Single-family homes (1-4 units)
- non-owner occupied 1,961,474 26.55% 1,589,092 19.19% 575,051 8.95%
Apartments (over 4 units) 971,864 13.15% 1,367,327 1.51% 708,648 11.03%
Commercial 1,923,095 26.03% 2,410,861 29.11% 2,045,811 31.85%
Land - - 2,059,677 24.88% 2,057,000 32.02%
-------------- ---------- ------------- ---------- ------------- -----------
Total $ 7,388,478 100.00% $ 8,280,826 100.00% $6,423,984 100.00%
============== ========== ============= ========== ============= ===========
As of December 31, 2004, the Partnership held 28 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the secured loans held by the Partnership as of December 31, 2004.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
As of December 31, 2004
# of Loans Amount Percent
------------- ------------- ------------
1st Mortgages 21 $ 5,937,736 80.36%
2nd Mortgages 7 1,450,742 19.64%
============= ============= ============
Total 28 $ 7,388,478 100.00%
Maturing in 2005 3 $ 817,184 11.06%
Maturing in 2006 4 1,872,944 25.35%
Maturing in 2007 2 1,246,754 16.87%
Maturing after 12/31/07 19 3,451,596 46.72%
============= ============= ============
Total 28 $ 7,388,478 100.00%
Average Secured Loan $ 263,874 3.57%
Largest Secured Loan 800,000 10.83%
Smallest Secured Loan 11,621 0.16%
Average Loan-to-Value based upon appraisals
and prior liens at time of loan 71.30%
The Partnership's largest secured loan in the principal amount of $800,000
represents 10.83% of outstanding secured loans and 8.69% of Partnership assets.
Larger loans sometimes increase above 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs.
19
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices.
Instead, the general partners, in connection with the periodic closing of
the accounting records of the Partnership and the preparation of the financial
statements, determine whether the allowance for loan losses is adequate to cover
potential loan losses of the Partnership. As of December 31, 2004 the general
partners have determined that the allowance for loan losses of $745,476 (8.17%
of net assets) and the allowance for real estate held for sale of $33,373 (0.37%
of net assets) is adequate in amount. Because of the number of variables
involved, the magnitude of the swings possible and the general partners'
inability to control many of these factors, actual results may and do sometimes
differ significantly from estimates made by the general partners. As of December
31, 2004, five loans were delinquent over 90 days and/or matured with
outstanding principal of $1,049,730.
The Partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2004 there were no such loans. These loans include ground up
construction of buildings and loans for rehabilitation of existing structures.
Interest on such loans is computed at simple interest method and only on the
amounts disbursed on a daily basis.
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VII are
included in Item 8:
o Report of Independent Registered Public Accounting Firm
o Balance Sheets - December 31, 2004, and December 31, 2003
o Statements of Income for the years ended December 31, 2004, 2003 and 2002
o Statements of Changes in Partners' Capital for the years ended
December 31, 2004, 2003 and 2002
o Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
o Notes to Financial Statements
B - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Inventors
VII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
20
REDWOOD MORTGAGE INVESTORS VII
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2004
21
TABLE OF CONTENTS
Page No.
---------------
Report of Independent Registered Public Accounting Firm 23
Balance Sheets 24
Statements of Income 25
Statements of Changes in Partners' Capital 26
Statements of Cash Flows 27
Notes to Financial Statements 28
Supplemental Schedules
Schedule II - Valuation and Qualifying Accounts 40
Schedule IV - Mortgage Loans on Real Estate 41
Rule 12-29 Loans on Real Estate
22
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Redwood Mortgage Investors VII
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage
Investors VII (a California limited partnership) as of December 31, 2004 and
2003 and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of Redwood Mortgage Investors VII's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Redwood Mortgage
Investors VII is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of Redwood
Mortgage Investors VII's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redwood Mortgage Investors
VII as of December 31, 2004 and 2003 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
February 14, 2005
23
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Balance Sheets
December 31, 2004 and 2003
ASSETS
2004 2003
----------------- ---------------
Cash and cash equivalents $ 346,393 $ 321,114
----------------- ---------------
Loans
Loans, secured by deeds of trust 7,388,478 8,280,826
Loans, unsecured, net of discount of $107,433 and
$128,920 in 2004 and 2003, respectively 238,484 232,551
Allowance for loan losses (745,476) (680,469)
----------------- ---------------
Net loans 6,881,486 7,832,908
----------------- ---------------
Interest and other receivables
Accrued interest and late fees 190,105 489,995
Advances on loans 8,188 6,484
----------------- ---------------
Total interest and other receivables 198,293 496,479
----------------- ---------------
Real estate held for sale, net 1,782,182 633,053
----------------- ---------------
Total assets $ 9,208,354 $ 9,283,554
================= ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ - $ 200,000
Accounts payable 4,951 4,102
Payable to affiliate 74,987 51,288
----------------- ---------------
Total liabilities 79,938 255,390
----------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 9,116,443 9,016,191
General partners' capital 11,973 11,973
----------------- ---------------
Total partners' capital 9,128,416 9,028,164
----------------- ---------------
Total liabilities and partners' capital $ 9,208,354 $ 9,283,554
================= ===============
The accompanying notes are an integral part of these financial statements.
24
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Statements of Income
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------- ------------- -------------
Revenues
Interest on loans $ 818,527 $ 748,625 $ 1,037,717
Late fees 19,822 24,053 24,920
Other 29,925 9,602 15,549
------------- ------------- -------------
868,274 782,280 1,078,186
------------- ------------- -------------
Expenses
Mortgage servicing fees 81,442 73,062 163,531
Interest expense 10,804 8,972 54,724
Clerical costs from Redwood Mortgage Corp. 17,826 23,014 30,572
Asset management fees 34,073 34,011 34,869
Provisions for (recovery of) losses on loans
and real estate held for sale 65,007 (18,299) (20,039)
Professional services 49,343 43,752 40,158
Other 31,133 25,127 10,889
------------- ------------- -------------
289,628 189,639 314,704
------------- ------------- -------------
Net income $ 578,646 $ 592,641 $ 763,482
============= ============= =============
Net income
General partners (1%) $ 5,786 $ 5,926 $ 7,635
Limited partners (99%) 572,860 586,715 755,847
------------- ------------- -------------
$ 578,646 $ 592,641 $ 763,482
============= ============= =============
Net income per $1,000 invested by limited
partners for entire period
Where income is reinvested and compounded $ 65 $ 67 $ 85
Where partner receives income in monthly
distributions $ 63 $ 65 $ 82
The accompanying notes are an integral part of these financial statements.
25
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Statements of Changes in Partners' Capital
For the Years Ended December 31, 2004, 2003 and 2002
Limited General Total
Partners' Partners' Partners'
Capital Capital Capital
-------------- ------------- --------------
Balances at December 31, 2001 $ 9,420,268 $ 11,978 $ 9,432,246
Net income 755,847 7,635 763,482
Early withdrawal penalties (11,619) - (11,619)
Partners' withdrawals (1,124,206) (7,635) (1,131,841)
-------------- ------------- --------------
Balances at December 31, 2002 9,040,290 11,978 9,052,268
Net income 586,715 5,926 592,641
Early withdrawal penalties (1,815) - (1,815)
Partners' withdrawals (608,999) (5,931) (614,930)
-------------- ------------- --------------
Balances at December 31, 2003 9,016,191 11,973 9,028,164
Net income 572,860 5,786 578,646
Early withdrawal penalties (2,741) - (2,741)
Partners' withdrawals (469,867) (5,786) (475,653)
-------------- ------------- --------------
Balances at December 31, 2004 $ 9,116,443 $ 11,973 $ 9,128,416
============== ============= ==============
The accompanying notes are an integral part of these financial statements.
26
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
-------------- ------------- --------------
Cash flows from operating activities
Net income $ 578,646 $ 592,641 $ 763,482
Adjustments to reconcile net income to
net cash provided by operating activities
Provisions for (recovery of) losses on loans and real estate 65,007 (18,299) (20,039)
Early withdrawal penalty credited to income (2,741) (1,815) (11,619)
Amortization of discount on unsecured loans (21,487) (21,487) -
Change in operating assets and liabilities
Loans, unsecured 15,554 5,706 45,292
Accrued interest and late fees (252,153) (273,744) (73,456)
Advances on loans (5,987) (7,767) (47,216)
Accounts payable 849 1,509 (8,702)
Payable to affiliate 23,699 19,112 28,860
Deferred interest - (37,704) 35,382
-------------- ------------- --------------
Net cash provided by operating activities 401,387 258,152 711,984
-------------- ------------- --------------
Cash flows from investing activities
Principal collected on loans 3,517,558 2,556,852 4,569,574
Loans originated (3,821,719) (4,349,527) (1,447,329)
Payments for real estate (17) - (11,033)
Proceeds from disposition of real estate 603,723 - -
Payments on investment in limited liability company - (149,693) (116,354)
Proceeds from investment in limited liability company - 1,362,415 -
-------------- ------------- --------------
Net cash provided by (used in) investing activities 299,545 (579,953) 2,994,858
-------------- ------------- --------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net (200,000) 200,000 (1,907,000)
Partners' withdrawals (475,653) (614,930) (1,131,841)
-------------- ------------- --------------
Net cash used in financing activities (675,653) (414,930) (3,038,841)
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents 25,279 (736,731) 668,001
Cash and cash equivalents at beginning of year 321,114 1,057,845 389,844
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 346,393 $ 321,114 $ 1,057,845
============== ============= ==============
Supplemental disclosures of cash flow information
Cash payments for interest $ 10,804 $ 8,972 $ 54,724
The accompanying notes are an integral part of these financial statements.
27
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
1. Organization and General
Redwood Mortgage Investors VII, (the "Partnership") is a California limited
partnership organized on June 30, 1989. The general partners are Michael R.
Burwell, an individual, and GYMNO Corporation, a California corporation. The
Partnership was organized to engage in business as a mortgage lender for the
primary purpose of making loans secured by deeds of trust on California real
estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an
affiliate of the general partners.
Term of the Partnership
The Partnership is scheduled to terminate on December 31, 2029, unless
sooner terminated as provided in the Partnership Agreement.
2. Summary of Significant Accounting Policies
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued as earned.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the further collectibility of the contractual payments, a loan may
be categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances
including accrued interest and advances. At December 31, 2004 and 2003, there
was one loan categorized as impaired by the Partnership of $96,710. In addition,
the impaired loan had accrued interest and advances totaling $6,936 and $7,977
at December 31, 2004 and 2003, respectively. The reduction in carrying value of
the impaired loan of $14,596 at December 31, 2003, was included in the allowance
for loan losses. In 2004, it was determined that a reduction in carrying value
was no longer required on this loan. The average recorded investment in impaired
loans was $96,710, $96,710 and $493,074 for December 31, 2004, 2003 and 2002,
respectively.
28
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
At December 31, 2004 and 2003, the Partnership had five and six loans past
maturity or past due 90 days or more, including one impaired loan, totaling
$1,049,730 and $2,356,491, respectively. In addition, accrued interest and
advances on these loans totaled $60,233 and $408,972 at December 31, 2004 and
2003, respectively. The Partnership does not consider four of these loans to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Partnership and is still accruing interest on these loans. At December
31, 2004 and 2003, as presented in Note 11, the average loan to appraised value
of security based upon appraised values and prior indebtedness at the time the
loans were consummated was 71.30% and 60.79%, respectively. When loans are
considered impaired, the allowance is updated to reflect the change in the
valuation of collateral security. However, a low loan to value ratio has the
tendency to minimize reductions for impairment.
During 2003, the Partnership restructured two previously impaired loans
into one existing loan with a lower interest rate. The amount restructured was
$579,005.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral value, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2004
and 2003 was as follows:
2004 2003
------------- --------------
Impaired loans $ - $ 14,596
Specified loans 290,464 321,263
General 231,443 236,984
Unsecured loans 223,569 107,626
------------- --------------
$ 745,476 $ 680,469
============= ==============
29
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the years
ended December 31:
2004 2003 2002
------------ ------------ -------------
Beginning balance $ 680,469 $ 791,882 $887,578
Provision for loan losses 65,007 - 20,394
Recoveries - (18,299) (40,433)
Restructures/transfers - (50,083) (64,210)
Write-offs - (43,031) (11,447)
------------ ------------ -------------
$ 745,476 $ 680,469 $ 791,882
============ ============ =============
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.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The Partnership periodically compares the carrying value of real estate to
expected future undiscounted cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to fair value. During 2003, the
Partnership transferred $50,083 from the allowance for loan losses to the
allowance for losses on real estate held for sale.
Investment in limited liability company
Investment in limited liability company is accounted for using the equity
method. In 2003, the Company had a 34% interest in the Stockton Street Property
Company, LLC (see Note 6).
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who had their investment throughout the period and have elected
to either leave their earnings to compound or have elected to receive periodic
distributions of their net income. Individual income is allocated each month
based on the limited partners' pro rata share of partners' capital. Because the
net income percentage varies from month to month, amounts per $1,000 will vary
for those individuals who made or withdrew investments during the period, or
select other options.
30
REDWOOD MORTGAGE INVESTORS VII
(A California Limted Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2004, 2003 and 2002, late fee revenue of $19,822, $24,053 and
$24,920, respectively, was recorded. The Partnership has a late fee receivable
at December 31, 2004 and 2003 of $4,513 and $24,118.
Recently issued accounting pronouncements
In December 2003, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of
Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. SOP 03-03
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. The implementation of SOP 03-03 is not expected to have any significant
effect on the Partnership.
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of the majority of limited partners is required to elect a new
general partner to continue the Partnership business where there is no remaining
general partner after a general partner ceases to be a general partner other
than by removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected either to receive monthly, quarterly or
annual distributions of earnings allocations, or to allow earnings to compound.
Subject to certain limitations, a compounding investor may subsequently change
his election, but an investor's election to have cash distributions is
irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
31
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is not liquid. Limited partners
have no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of units.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn early and will be deducted
from the capital account.
After five years from the date of purchase of the units, limited partners
have the right to withdraw from the Partnership, on an installment basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited partner has been in the Partnership for the minimum five-year
period, no penalty will be imposed if withdrawal is made in twenty quarterly
installments or longer. Notwithstanding the five-year (or longer) withdrawal
period, the general partners may liquidate all or part of a limited partner's
capital account in four quarterly installments beginning on the last day of the
calendar quarter following the quarter in which the notice of withdrawal is
given. This withdrawal is subject to a 10% early withdrawal penalty applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital account is restricted to the availability of Partnership cash flow.
Furthermore, no more than 20% of the total limited partners' capital accounts
outstanding at the beginning of any year, shall be liquidated during any
calendar year.
4. General Partners and Related Parties
The following are commissions and fees which will be paid to the general
partners and affiliates:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, affiliates of the general partners may collect an amount
equivalent to 12% of the loaned amount until 6 months after the termination date
of the offering. Thereafter, loan brokerage commissions (points) will be limited
to an amount not to exceed 4% of the total Partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the Partnership. During 2004, 2003 and 2002, loan brokerage commissions paid by
the borrowers to Redwood Mortgage Corp. were $93,465 and $111,927 and $24,661,
respectively.
32
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
4. General Partners and Related Parties (continued)
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general
partners, based on the unpaid principal balance of the loan portfolio, or such
lesser amount as is reasonable and customary in the geographic area where the
property securing the mortgage is located. Once a loan is categorized as
impaired, mortgage servicing fees are no longer accrued. Additional service fees
are recorded upon the receipt of any subsequent payments on impaired loans.
Mortgage servicing fees of $81,442, $73,062 and $163,531 were incurred for 2004,
2003 and 2002, respectively. The Partnership has a payable to Redwood Mortgage
Corp. for servicing fees of $74,987 and $51,288 at December 31, 2004 and 2003,
respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually). Asset management fees of $34,073, $34,011 and $34,869 were
incurred for 2004, 2003 and 2002, 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 parties related to the general partners.
Operating expenses
Redwood Mortgage Corp. is reimbursed by the Partnership for all operating
expenses actually incurred by it on behalf of the Partnership, including without
limitation, out-of-pocket general and administration expenses of the
Partnership, accounting and audit fees, legal fees and expenses, postage and
preparation of reports to limited partners. During 2004, 2003 and 2002,
operating expenses totaling $17,826, $23,014 and $30,572, respectively, were
reimbursed to Redwood Mortgage Corp.
5. Real Estate Held for Sale
In December, 2004, the Partnership acquired land through a deed in lieu of
foreclosure. At this date, the Partnership's investment totaled $1,752,836
including accrued interest and advances. Management believes the full amount of
the Partnership's investment in this property will be recovered based on its
current estimate of the property's fair value.
During 2004, the Partnership sold real estate with an original investment
of $1,200,518, and a carrying value of $586,713 for $586,713. The original
investment in this property had been reduced in prior years to management's
estimate of the ultimate realizable value of the property.
33
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
5. Real Estate Held for Sale (continued)
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of December 31, 2004 and 2003:
2004 2003
-------------- --------------
Costs of properties $1,815,555 $1,263,222
Reduction in value (33,373) (630,169)
-------------- --------------
Real estate held for sale, net $1,782,182 $ 633,053
============== ==============
6. Investment in Limited Liability Company
As a result of acquiring real property through foreclosure, the Partnership
transferred its interest (principally land and building) to a limited liability
company ("LLC"), Stockton Street Property Company LLC ("Stockton"), which is
owned 34% by the Partnership and 66% by an affiliate. Development costs were
capitalized during construction; thus, there was no income or expense recognized
by Stockton during 2002 and a portion of 2003. During 2003, the LLC completed
construction and the property was sold. The Partnership recognized a loss of
$42,518 during 2003 related to this property.
7. Bank Line of Credit
The Partnership has a bank line of credit secured by its loan portfolio of
up to $2,500,000 at .25% over prime. There were no balances outstanding on this
line as of December 31, 2004 and 2003, and the interest rate was 5.25% at
December 31, 2004 and 4.25% at December 31, 2003. This line of credit expires
December 10, 2007 and requires the Partnership to meet certain financial
covenants. As of December 31, 2004 and 2003, the Partnership was in compliance
with all loan covenants.
34
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
8. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of the Partnership capital:
2004 2003
-------------- --------------
Partners' capital per financial statements $ 9,128,416 $ 9,028,164
Allowance for loan losses 745,476 680,469
Allowance for real estate losses 33,373 630,169
-------------- --------------
Partners' capital tax basis $ 9,907,265 $ 10,338,802
============== ==============
In 2004 and 2003, approximately 69% of taxable income was allocated to
tax-exempt organizations (i.e., retirement plans).
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and cash equivalents - The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans had a carrying value of $7,388,478 and $8,280,826 at
December 31, 2004 and 2003, respectively. The fair value of these loans of
$7,531,668 and $8,159,401, respectively, was estimated based upon projected cash
flows discounted at the estimated current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued interest and advances related thereto should also be considered in
evaluating the fair value versus the carrying value.
10. Non-cash Transactions
During 2004, the Partnership foreclosed on property (see Note 5), which
resulted in an increase in real estate held for sale of $1,752,836 and a
decrease in loans receivable, accrued interest and advances of $1,196,509,
$552,044 and $4,283, respectively.
During 2003, the Partnership restructured two loans that resulted in an
increase to loans receivable of $107,198 and a decrease to accrued interest and
late fees and advances of $88,685 and $18,513, respectively.
35
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2004 and
2003, there were 28 and 23 secured loans outstanding, respectively, with the
following characteristics:
2004 2003
--------------- -------------
Number of secured loans outstanding 28 23
Total secured loans outstanding $ 7,388,478 $ 8,280,826
Average secured loan outstanding $ 263,874 $ 360,036
Average secured loan as percent of total 3.57% 4.35%
secured loans
Average secured loan as percent
of partners' capital 2.89% 3.99%
Largest secured loan outstanding $ 800,000 $ 1,000,000
Largest secured loan as percent of total 10.83% 12.08%
secured loans
Largest secured loan as percent
of partners' capital 8.76% 11.08%
Largest secured loan as percent
of total assets 8.69% 10.77%
Number of counties where security
is located (all California) 13 8
Largest percentage of loans in one county 24.64% 44.11%
Average secured loan to appraised value
of security based on appraised values and
prior liens at time loan was consummated 71.30% 60.79%
Number of secured loans in foreclosure status 1 -
Amount of secured loans in foreclosure $ 776,228 $ -
36
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2004
and 2003:
2004 2003
---------------- ----------------
First trust deeds $ 5,937,736 $ 3,733,346
Second trust deeds 1,450,742 3,872,480
Third trust deeds - 675,000
---------------- ----------------
Total loans 7,388,478 8,280,826
Prior liens due other lenders at time of loan 1,944,172 4,319,281
---------------- ----------------
Total debt $ 9,332,650 $ 12,600,107
================ ================
Appraised property value at time of loan $ 13,089,113 $ 20,728,514
Total loans as percent of appraisals 71.30% 60.79%
Loans by type of property
Owner occupied homes $ 2,532,045 $ 853,869
Non-owner occupied homes 1,961,474 1,589,092
Apartments 971,864 1,367,327
Commercial 1,923,095 2,410,861
Land - 2,059,677
---------------- ----------------
$ 7,388,478 $ 8,280,826
================ ================
The interest rates on these loans ranged from 6.50% to 10.50% at December
31, 2004 and 6.125% to 11.50% at December 31, 2003.
Scheduled maturity dates of secured loans as of December 31, 2004 are as
follows:
Year Ending December 31,
-----------------------------------------
2005 $ 817,184
2006 1,872,944
2007 1,246,754
2008 198,272
2009 3,041,833
Thereafter 211,491
---------------
Total $ 7,388,478
===============
The scheduled maturities for 2005 above include approximately $64,850 in
two loans which were past maturity at December 31, 2004. None of these loans had
interest payments categorized as delinquent over 90 days. Occasionally, the
Partnership allows borrowers to continue to make the payments on debt past
maturity for periods of time.
37
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
11. Asset Concentrations and Characteristics (continued)
At times, the Partnership's cash deposits exceed federally insured limits.
Management believes deposits are maintained in financially secure financial
institutions.
The Partnership had a substantial amount of its loan receivable balance due
on two loans from one borrower in 2004 and 2003. This borrower accounted for
approximately 17% and 15% of the secured loan balance at December 31, 2004 and
2003, respectively. This borrower accounted for approximately 34%, 12% and 7% of
interest on loans for the years ended December 31, 2004, 2003 and 2002,
respectively. The value of collateral securing these loans was less than the
principal balance due under the loans. Redwood Mortgage Corp. has provided an
indemnity to the Partnership whereby it has agreed to indemnify and hold
harmless the Partnership from any expenses or losses incurred by the Partnership
by reason of the Partnership's inability to collect all principal due under the
loans after the Partnership has exhausted all reserves set aside for these loans
and all remedies available to it including foreclosure of the underlying
collateral. Therefore, these loans are not considered impaired solely because
the value of the collateral securing the loans is less than the principal
balance due to the Partnership. Neither of these loans is past due 90 days or
more on interest payments nor are they past maturity.
The Partnership also has 21% and 12% of its loan receivable balance due
from two and one borrowers at December 31, 2004 and 2003, respectively. These
borrowers accounted for approximately 19%, 1% and 0% of interest revenue for the
years ended December 31, 2004, 2003 and 2002, respectively.
12. Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The Partnership is not obligated to fund additional money as of
December 31, 2004. As of December 31, 2004 the Partnership had four loans under
workout agreements totaling $260,919.
Construction / rehabilitation loans
The Partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The Partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At December 31, 2004, there were no
undisbursed loan funds. The Partnership does not maintain a separate cash
reserve to hold the undisbursed obligations, which are intended to be funded.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
38
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
13. Selected Financial Information (Unaudited)
Calendar Quarter
----------------------------------------------------------
First Second Third Fourth Annual
----------- ----------- ------------ ------------ -------------
Revenues
2004 $217,654 $207,404 $215,309 $227,907 $868,274
----
2003 $173,306 $187,186 $192,171 $229,617 $782,280
----
Expenses
2004 $77,558 $68,959 $65,976 $77,135 $289,628
----
2003 $29,061 $21,330 $50,959 $88,289 $189,639
----
Net income allocated to general partners
2004 $1,401 $1,384 $1,493 $1,508 $5,786
----
2003 $1,442 $1,659 $1,412 $1,413 $5,926
----
Net income allocated to limited partners
2004 $138,695 $137,061 $147,840 $149,264 $572,860
----
2003 $142,803 $164,197 $139,800 $139,915 $586,715
----
Net income per $1,000 invested
where income is
Compounded
2004 $15 $15 $16 $19 $65
----
2003 $16 $16 $16 $19 $67
----
Withdrawn
2004 $15 $15 $16 $17 $63
----
2003 $16 $16 $16 $17 $65
----
39
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Schedule II
Valuation and Qualifying Accounts for the years ended
December 31, 2004, 2003, and 2002
Col B. Col. C - Additions Col E.
------------------------------
Col A. Balance at Charged to Charged Balance
Beginning Costs and to Other Col. D at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- -------------- ------------- ------------- --------------- --------------
Year Ended December 31, 2002
Deducted from asset accounts
Allowance for loan losses $ 887,578 $ (20,039) $(64,210) (b) $ (11,447) (a) $ 791,882
Cumulative write-down of
real estate held for sale (REO) $ 380,056 $ 0 $ 200,030 (b) $ - $ 580,086
-------------- ------------- ------------- --------------- --------------
$ 1,267,634 $ (20,039) $ 135,820 $ (11,447) $ 1,371,968
============== ============= ============= =============== ==============
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for doubtful accounts $ 791,882 $ (68,382) $ - $ (43,031) (a) $ 680,469
Cumulative write-down of
real estate held for sale (REO) $ 580,086 $ 50,083 - - $ 630,169
-------------- ------------- ------------- --------------- --------------
$ 1,371,968 $ (18,299) $ - $ (43,031) $ 1,310,638
============== ============= ============= =============== ==============
Year Ended December 31, 2004
Deducted from asset accounts
Allowance for doubtful accounts $ 680,469 $ 65,007 $ - $ - $ 745,476
Cumulative write-down of
real estate held for sale (REO) 630,169 - - (596,796) (c) 33,373
-------------- ------------- ------------- --------------- --------------
$ 1,310,638 $ 65,007 $ - $(596,796) $ 778,849
============== ============= ============= =============== ==============
Note (a) - Represents write offs of loans
Note (b) - Represents restructures
Note (c) - Represents sales of REO
40
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Schedule IV
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2004
Col. H
Principal
Col. F Amount of
Face Col. G Loans
Col. C Col. D Amount of Carrying Subject to Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Col. I California
Col. A Interest Maturity Payment Prior Original Mortgage Principal or Type of Geographic
Descript. Rate Date Terms Liens Amount Investment Interest Lien Location
- ------------- ---------- ------------ ----------- -------------- -------------- -------------- ------------- --------- -------------
Apts. 6.50% 05/01/06 $541 $89,904 $75,000 $96,716 $96,716 2nd Sacramento
Apts. 12.00% 07/01/06 5,755 - 720,000 776,228 776,228 1st San Francisco
Comm. 10.00% 12/01/03 471 - 53,636 53,229 53,229 1st Stanislaus
Comm. 10.00% 12/01/03 105 82,723 11,919 11,621 11,621 2nd Stanislaus
Comm. 10.00% 07/01/11 1,995 - 219,538 211,491 - 1st Santa Clara
Comm. 7.50% 02/28/07 3,206 - 513,000 560,354 - 1st Santa Clara
Comm. 7.50% 02/28/07 4,290 - 686,400 686,400 - 1st Alameda
Comm. 9.00% 08/01/09 3,000 - 400,000 400,000 - 1st San Francisco
Apts. 10.50% 06/01/08 944 389,330 100,000 98,920 - 2nd Alameda
Res. 10.50% 07/01/08 915 - 100,000 99,353 - 1st San Francisco
Res. 8.75% 01/01/09 2,242 - 285,000 283,163 - 1st Alameda
Res. 10.00% 12/25/05 8,333 348,261 1,000,000 752,334 - 2nd Alameda
Res. 9.50% 04/01/09 1,623 - 193,000 192,219 - 1st Sacramento
Res. 9.25% 04/01/09 1,080 - 131,250 130,974 - 1st Contra Costa
Res. 9.00% 04/01/09 1,139 - 141,500 140,360 - 1st San Joaquin
Res. 9.00% 04/01/09 1,175 - 146,000 145,417 - 1st Merced
Res. 9.25% 0501/09 921 - 112,000 111,936 111,936 1st Santa Clara
Res. 9.25% 07/01/09 1,892 416,018 230,000 229,404 - 2nd Contra Costa
Res. 9.25% 07/01/09 905 - 110,000 109,788 - 1st Madera
Res. 9.25% 07/01/09 921 265,759 112,000 111,824 - 2nd San Mateo
Res. 10.50% 07/01/06 7,000 - 800,000 800,000 - 1st San Diego
Res. 8.50% 09/01/06 1,417 - 200,000 200,000 - 1st Monterey
Res. 9.25% 11/01/09 1,234 352,177 150,000 149,922 - 2nd San Mateo
Res. 9.25% 10/01/09 1,316 - 160,000 159,749 - 1st Solano
Res. 9.25% 11/01/09 2,468 - 300,000 299,844 - 1st San Mateo
Res. 9.25% 11/01/09 1,851 - 225,000 224,883 - 1st Sacramento
Res. 9.25% 11/01/09 1,440 - 175,000 174,849 - 1st Sacramento
Res. 9.25% 12/01/09 1,460 - 177,500 177,500 - 1st Sacramento
----------- -------------- -------------- -------------- -------------
Total $59,639 $1,944,172 $7,527,743 $7,388,478 $1,049,730
=========== ============== ============== ============== =============
Note: Most loans have balloon payments due at maturity.
41
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Schedule IV (continued)
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2004
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
---------------------------------------------------
2004 2003 2002
-------------- ------------- ----------------
Balance at beginning of year $ 8,280,826 $ 6,423,984 $ 10,091,195
-------------- ------------- ----------------
Additions during period
New loans 3,821,719 4,349,527 1,447,329
Other - 107,198 420,969
-------------- ------------- ----------------
Total additions 3,821,719 4,456,725 1,868,298
-------------- ------------- ----------------
Deductions during period
Collections of principal 3,517,558 2,556,852 4,569,574
Foreclosures 1,196,509 - 954,488
Cost of loans sold - - -
Amortization of premium - - -
Other - 43,031 11,447
-------------- ------------- ----------------
Total deductions 4,714,067 2,599,883 5,535,509
-------------- ------------- ----------------
Balance at close of year $ 7,388,478 $ 8,280,826 $ 6,423,984
============== ============= ================
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Partnership's independent public
accountants during the years ended December 31, 2004 and 2003.
Item 9a. - Controls and Procedures
The Partnership carried out an evaluation, under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures as of the end
of the period covered by this report pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended Based upon that evaluation, the general
partners concluded that the Partnership's disclosure controls and procedures
were effective in timely alerting the general partners to material information
related to the Partnership that is required to be included in our periodic
filings with the Securities and Exchange Commission.
There were no significant changes in the Partnership's internal control
over financial reporting during the Partnership's fourth fiscal quarter that
have materially affected, or are likely to materially affect, the Partnership's
internal control over financial reporting.
Item 9b. - Other Information
None
42
Part III
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the
Partnership are managed by the two general partners, one of whom is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a California corporation, formed in 1986. Mr. Burwell is one of the two
shareholders of Gymno Corporation, a California corporation, and has a 50%
interest in the corporation.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 48, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the estate of D. Russell Burwell. Upon the completion of the
administration of D. Russell Burwell's estate, Michael R. Burwell will have a
controlling interest in Gymno Corporation. Michael R. Burwell is a director of
Gymno and the director position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
Financial Oversight by General Partners.
The Partnership does not have a board of directors or an audit committee.
Accordingly, the general partners serve the equivalent function of an audit
committee for, among other things, the following purposes: appointment,
compensation, review and oversight of the work of our independent public
accountants, and establishing the enforcing of the Code of Ethics. However,
since the Partnership does not have an audit committee and the general partners
are not independent of the Partnership, the Partnership does not have an "audit
committee financial expert."
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the
general partners and to any agents, employees or independent contractors engaged
by the general partners to perform the functions of a principal financial
officer, principal accounting officer or controller of the Partnership, if any.
You may obtain a copy of this Code of Ethics, without charge, upon request by
calling our Investor Services Department at (650) 365-5341.
43
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in Item 10, the Partnership has no Officers or
Directors. The Partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties.
A more complete description of management compensation is found in the
Prospectus, pages 12-13, under the section "Compensation of the General Partners
and the Affiliates", which is incorporated by reference. Such compensation is
summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the year ended December 31, 2004. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
- ------------------------------------- ----------------------------------------------------------------- -------------------
I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans...................................$81,442
General Partners &/or Affiliates Asset Management Fee for managing assets.....................................$34,073
General Partners 1% interest in profits........................................................$5,786
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP) DURING THE YEAR ENDED DECEMBER 31, 2004
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and
extension
of the loans paid by the borrowers and not by the Partnership................$93,465
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with fees
notary, document preparation, credit investigation, and escrow
payable by the borrowers and not by the Partnership...........................$8,233
Gymno Corporation Reconveyance Fee..............................................................$1,241
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME DURING THE YEAR ENDED DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,826
44
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners are to own an aggregate total of 1% of the Partnership
including a 1% portion of income and losses.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II
item 8, which describes related party fees and data.
Also refer to the Prospectus dated October 20, 1989 (incorporated herein by
reference) on page 12 "Compensation of General Partners and Affiliates" and page
14 "Conflicts of Interest".
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the Partnership by the principal accountant
for 2004 and 2003 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2004 and 2003 for professional services rendered for the audit of the
Partnership's annual financial statements included in the Partnership's Annual
Report on Form 10-K and review of financial statements included in the
Partnership's Quarterly Reports on Form 10-Q were $40,643 and $37,513,
respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2004 and 2003 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2004 and 2003, were $4,854 and $3,495, respectively. These fees
relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended
December 31, 2004 and 2003.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the Partnership.
45
Part IV
Item 15 - Exhibits, Financial Statements and Schedules
A. Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Financial Statements.
2. The Financial Statement Schedules are listed in Part II - Item 8
under B - Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
- ------------------ ---------------------------------------------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a)Form of Note secured by Deed of Trust which provides for principal and interest payments.
(b)Form of Note secured by Deed of Trust which provides principal and interest payments and
right of assumption
(c)Form of Note secured by Deed of Trust which provides for
interest only payments
(d)Form of Note
10.4 (a)Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a), and (c)
(b)Deed of Trust and Assignment of Rents to accompany Exhibit 10.3 (b)
(c)Deed of Trust to accompany Exhibit 10.3 (d)
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
All of the above exhibits, other than 31.1, 31.2, 32.1 and 32.2, were
previously filed as the exhibits to Registrant's Statement on Form S-11
(Registration No. 33-30427 and incorporated by reference herein).
B. See A (3) above.
C. See A (2) above. Additional reference is made to the prospectus (S-11
filed as part of the Registration statement) dated October 20, 1989 to
pages 65 through 67 and Supplement #5 dated February 14, 1992 for
financial data related to Gymno Corporation, a general partner.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 31st day of March
2005.
REDWOOD MORTGAGE INVESTORS VII
By: /S/ Michael R. Burwell
---------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
-------------------------------------------
Michael R. Burwell, President, Secretary
& Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 31st day of March 2005.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell General Partner March 31, 2005
/S/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell President, Secretary & Chief March 31, 2005
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
47
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation, and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ----------------------------
Michael R. Burwell, General Partner
March 31, 2005
48
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- --------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2005
49
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
March 31, 2005
50
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation, General Partner of the Partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2005
51