UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 000-19992
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
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 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
-------------- -------------
1
Part I - Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
BALANCE SHEETS
JUNE 30, 2005 and DECEMBER 31, 2004 (unaudited)
ASSETS
June 30, December 31,
2005 2004
--------------- ---------------
Cash and cash equivalents $ 744,852 $ 346,393
--------------- ---------------
Loans
Loans, secured by deeds of trust 6,193,151 7,388,478
Loans, unsecured, net discount of $96,690 and $107,433 for
June 30, 2005 and December 31, 2004, respectively 243,475 238,484
--------------- ---------------
6,436,626 7,626,962
Allowance for loan losses (740,984) (745,476)
--------------- ---------------
Net loans 5,695,642 6,881,486
Interest and other receivables
Accrued interest and late fees 122,701 190,105
Advances on loans 714 8,188
Prepaid expenses 527 -
--------------- ---------------
Total interest and other receivables 123,942 198,293
--------------- ---------------
Investment in limited liability company 876,940 -
Real estate held for sale, net 1,825,548 1,782,182
--------------- ---------------
Total assets $ 9,266,924 $ 9,208,354
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 477 $ 4,951
Payable to affiliate 73,636 74,987
--------------- ---------------
Total liabilities 74,113 79,938
--------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 9,180,838 9,116,443
General partners' capital 11,973 11,973
--------------- ---------------
Total partners' capital 9,192,811 9,128,416
--------------- ---------------
Total liabilities and partners' capital $ 9,266,924 $ 9,208,354
=============== ===============
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2005 and 2004 (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues
Interest on loans $148,797 $192,253 $320,055 $395,472
Interest - interest bearing accounts 1,040 463 1,235 1,806
Late fees 1,824 5,990 3,748 10,588
Other 558 8,698 1,670 17,192
----------- ----------- ----------- -----------
152,219 207,404 326,708 425,058
----------- ----------- ----------- -----------
Expenses
Mortgage servicing fees 14,259 19,631 31,963 39,762
Interest expense - 336 - 1,068
Clerical costs through Redwood Mortgage Corp. 2,943 4,598 6,786 9,416
Asset management fees 8,599 8,498 17,182 16,987
Provisions for (recovery of) losses on loans and
real estate held for sale (28,002) 14,898 (37,865) 26,253
Professional services 14,345 8,810 25,524 29,773
Printing, supplies and postage 2,875 1,996 4,431 4,286
Other 1,852 10,192 4,243 18,972
----------- ----------- ----------- -----------
16,871 68,959 52,264 146,517
----------- ----------- ----------- -----------
Net income $135,348 $138,445 $274,444 $278,541
=========== =========== =========== ===========
Net income: to general partners (1%) 1,353 1,384 2,744 2,785
to limited partners (99%) 133,995 137,061 271,700 275,756
----------- ----------- ----------- -----------
$135,348 $138,445 $274,444 $278,541
=========== =========== =========== ===========
Net income per $1,000 invested by limited
partners for entire period
-where income is compounded and retained $ 15 $ 15 $ 30 $ 34
=========== =========== =========== ===========
-where partner receives income in monthly
distributions $ 15 $ 15 $ 30 $ 34
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004 (unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2005 2004
--------------- --------------
Cash flows from operating activities
Net income $ 274,444 $ 278,541
Adjustments to reconcile net income to net cash provided
by operating activities
Provisions for (recovery of) losses on loans and real estate (37,865) 26,253
Early withdrawal penalty credited to income (1,404) (1,061)
Amortization of discount on unsecured loans (10,743) (10,743)
Change in operating assets and liabilities
Accrued interest and advances on loans 14,405 (109,049)
Accounts payable and other liabilities (5,825) 11,197
Prepaid expenses (527) -
--------------- --------------
Net cash provided by operating activities 232,485 195,138
--------------- --------------
Cash flows from investing activities
Principal collected on loans 2,754,099 1,628,777
Loans originated (2,335,000) (1,788,527)
Payments on real estate held for sale (9,994) 17,010
Investment in limited liability company (40,238) -
Proceeds from (payments on) unsecured loans 5,752 (2,689)
--------------- --------------
Net cash provided by (used in) investing activities 374,619 (145,429)
--------------- --------------
Cash flows from financing activities
Net decrease in line of credit - 350,000
Partners' withdrawals (208,645) (244,792)
--------------- --------------
Net cash provided by (used in) financing activities (208,645) 105,208
--------------- --------------
Net increase in cash and cash equivalents 398,459 154,917
Cash and cash equivalents - beginning of period 346,393 321,114
--------------- --------------
Cash and cash equivalents - end of period 744,852 476,031
=============== ==============
Cash payments for interest $ - $ 1,068
=============== ==============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2004 filed with the Securities and Exchange
Commission. The results of operations for the six month period ended June 30,
2005 are not necessarily indicative of the operating results to be expected for
the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loans, secured by deeds of trust
At June 30, 2005 and December 31, 2004 there was one loan categorized as
impaired by the Partnership in the total aggregate amount of $96,716. In
addition, the impaired loan had accrued interest and advances totaling $4,421
and $6,936 at June 30, 2005 and December 31, 2004, respectively. In 2004 it was
determined that a reduction in carrying value was no longer required on this
loan. The average recorded investment in the impaired loan was $96,716 for the
six month period ended June 30, 2005 and the year ended December 31, 2004.
As of June 30, 2005 the Partnership had a combined total of three loans
with outstanding principal balances of $161,511 that were either past due 90
days or more in interest payments and/or past maturity. These three loans
included two loans totaling $64,795 that were past maturity and one loan
totaling $96,716 that was past due 90 days or more in interest payments. This
compares to a combined total of five loans totaling $1,049,730 that were either
past due 90 days or more in interest payments and/or past maturity as of
December 31, 2004. These five loans included two loans totaling $64,850 that
were past maturity and three loans totaling $984,880 that were past due 90 days
or more in interest payments. A past maturity loan is a loan in which the
principal and/or any accrued interest is due and payable, but the borrower has
failed to make such payment of principal and/or accrued interest. The
Partnership considers the June 30, 2005 past due 90 days or more loan to be
impaired. In the opinion of management, the remaining delinquent and/or past
maturity loans have sufficient collateral to cover the amount outstanding to the
Partnership and are still accruing interest on these loans.
Allowance for loan losses
The composition of the allowance for loan losses as of June 30, 2005 and
December 31, 2004 was as follows:
June 30, December 31,
2005 2004
---------------- ----------------
Specified loans $ 290,464 $ 290,464
General 221,580 231,443
Unsecured loans 228,940 223,569
---------------- ----------------
$ 740,984 $ 745,476
================ ================
5
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the six month
period ended June 30, 2005 and the year ended December 31, 2004:
June 30, December 31,
2005 2004
--------------- ---------------
Beginning balance $ 745,476 $ 680,469
Provision for loan losses - 65,007
Recoveries (4,492) -
--------------- ---------------
$ 740,984 $ 745,476
=============== ===============
Investment in limited liability company
Investment in limited liability company ("LLC") is accounted for using the
equity method as one of the Partnership's general partners is the managing
member of the LLC. In February, 2005 the Partnership acquired an 8% interest in
Larkin Property Company, LLC (see note 5).
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.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
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.
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.
6
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and fees, which will be paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp., an affiliate of the general
partners, may collect an amount equivalent to 12% of the loaned amount until six
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.
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., 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.
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
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., an affiliate of the general partners, 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.
Redwood Mortgage Corp. waived reimbursement of approximately $755 in operating
expenses during the second quarter of 2005.
NOTE 4 - REAL ESTATE HELD FOR SALE
In 1993 the Partnership, together with two other affiliates, acquired
through foreclosure 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. As of June 30, 2005 the Partnership's
investment in this property was $62,720.
7
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 4 - REAL ESTATE HELD FOR SALE (continued)
In December 2004, the Partnership acquired undeveloped parcels of land
through a deed in lieu of foreclosure. The land is located in Stanislaus County,
California. It is comprised of three separate lots, which total approximately 14
acres. The parcels are currently for sale and are in contract with a potential
buyer. As of June 30, 2005 the Partnership's investment in this property totaled
$1,762,828, including accrued interest and advances, as of the date of the
acquisition. Management believes that the full value of this investment will be
recovered from the eventual sale of the property based upon its current estimate
of the fair value of the property and the pending contract sales price. This
property is jointly owned by two other affiliated partnerships.
In February, 2005 the Partnership acquired another property through
foreclosure (see Note 5).
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 June 30, 2005 and December 31, 2004:
June 30, December 31,
2005 2004
---------------- ---------------
Costs of properties $ 1,825,548 $ 1,815,555
Reduction in value - (33,373)
---------------- ---------------
Real estate held for sale, net $ 1,825,548 $ 1,782,182
================ ===============
NOTE 5 - INVESTMENT IN LIMITED LIABILITY COMPANY
In February, 2005, the Partnership acquired a multi-unit property through
foreclosure. This property is located in an upscale neighborhood in San
Francisco. At the time the Partnership took ownership of the property, the
Partnership's investment totaled $836,702 including accrued interest and
advances. This property is jointly owned by three other affiliated Partnerships.
Upon acquisition the Partnership transferred its interest (principally land and
building) to a limited liability company ("LLC"), Larkin Property Company, LLC
("Larkin"), which is 8% owned by the Partnership, and 92% owned by three other
affiliates. No allowance for loss has been set aside as management believes that
the fair value of the property exceeds the combined Partnerships' investment in
the property. The Partnership intends to undertake additional improvements to
the property. As of June 30, 2005 the Partnership has capitalized approximately
$40,238 in costs related to this property.
NOTE 6 - 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 as of
June 30, 2005 and December 31, 2004 and the interest rate was 6.50% (6.25% prime
plus .25%) at June 30, 2005. This line of credit expires December 2007 and
requires the Partnership to meet certain financial covenants. To the best of its
knowledge, the Partnership was in compliance with all loan covenants for the six
month period ended June 30, 2005 and for the year ended December 31, 2004. The
Partnership anticipates that the line of credit will be renewed at its maturity.
In the event that a renewal is not forthcoming, the Partnership has the option
to convert the line of credit to a three year term loan beginning December of
2007.
8
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 7 - NON-CASH TRANSACTIONS
During the six month period ended June 30, 2005 the Partnership foreclosed
on a property (see Note 5), which resulted in an increase in investment in
limited liability company of $836,702 and a decrease in loans receivable,
accrued interest, advances, and late charge receivable of $776,228, $51,598,
$5,876 and $3,000, respectively.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans had a carrying value of $6,193,151 and $7,388,478 at June 30,
2005 and December 31, 2004, respectively. The fair value of these loans of
$6,318,437 and $7,531,668, 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.
NOTE 9 - ASSET CONCENTRATIONS AND CHARACTERISTICS
Most loans are secured by recorded deeds of trust. At June 30, 2005 and
December 31, 2004 there were 26 and 28 secured loans outstanding, respectively,
with the following characteristics:
June 30, December 31,
2005 2004
---------------- ---------------
Number of secured loans outstanding 26 28
Total secured loans outstanding $ 6,193,151 $ 7,388,478
Average secured loan outstanding $ 238,198 $ 263,874
Average secured loan as percent of total secured loans 3.85% 3.57%
Average secured loan as percent of partners' capital 2.59% 2.89%
Largest secured loan outstanding $ 725,000 $ 800,000
Largest secured loan as percent of total secured loans 11.71% 10.83%
Largest secured loan as percent of partners' capital 7.89% 8.76%
Largest secured loan as percent of total assets 7.82% 8.69%
Number of counties where security is located (all California) 13 13
Largest percentage of loans in one county 20.14% 24.64%
Average secured loan to appraised value of security based on
appraised values and prior liens at time loan was consummated 69.19% 71.30%
Number of secured loans in foreclosure status None 1
Amount of secured loans in foreclosure status None $ 776,228
Over time, loans may exceed 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
9
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 9 - ASSET CONCENTRATIONS AND CHARACTERISTICS (continued)
The following categories of secured loans were held at June 30, 2005 and
December 31, 2004:
June 30, December 31,
2005 2004
--------------- ---------------
First trust deeds $ 5,297,585 $ 5,937,736
Second trust deeds 745,961 1,450,742
Third trust deeds 149,605 -
--------------- ---------------
Total loans 6,193,151 7,388,478
Prior liens due other lenders at time of loan 2,765,378 1,944,172
--------------- ---------------
Total debt $ 8,958,529 $ 9,332,650
=============== ===============
Appraised property value at time of loan $ 12,947,744 $ 13,089,113
--------------- ---------------
Total secured loans as percent of appraisals based on appraised
values and prior liens at time loan was consummated 69.19% 71.30%
--------------- ---------------
Secured loans by type of property
Owner occupied homes $ 2,700,373 $ 2,532,045
Non-owner occupied homes 359,543 1,961,474
Apartments 821,716 971,864
Commercial 2,311,519 1,923,095
--------------- ---------------
$ 6,193,151 $ 7,388,478
=============== ===============
Scheduled maturity dates of secured loans as of June 30, 2005 are as
follows:
Year Ending December 31,
----------------------------
2005 $ 64,795
2006 346,716
2007 1,971,754
2008 -
2009 2,316,611
Thereafter 1,493,275
---------------
Total $ 6,193,151
===============
The scheduled maturities for 2005 above include approximately $64,795 in
two loans, which were past maturity at June 30, 2005. Interest payments on both
of these loans were current as of June 30, 2005.
10
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 9 - 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 has a substantial amount of its loan receivable balance due
on two loans from one borrower. This borrower accounted for approximately 20.13%
of the loan balance and approximately 17.53% of interest revenue for the six
month period ended June 30, 2005. 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.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Workout agreements
The Partnership has negotiated a contractual workout agreement with one
borrower who is delinquent in making payments. Under the terms of the workout
agreement the Partnership is not obligated to make any additional monetary
advances for the maintenance or repair of the collateral securing the loan as of
June 30, 2005. As of June 30, 2005 the Partnership had one loan under workout
agreement totaling $96,716.
Construction loans
The Partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The Partnership approves 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 June 30, 2005, 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.
11
Part I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and 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 June 30, 2005, the partnership owned five
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.
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.
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 undiscounted future cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to estimated fair value.
Forward Looking Statements.
Certain statements in this Report on Form 10-Q which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Partnership's expectations, hopes, intentions, beliefs and strategies regarding
the future. Forward-looking statements include statements regarding 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 Partnership has made loans. All
forward-looking statements and reasons why results may differ included in this
Form 10-Q are made as of the date hereof, and we assume no obligation to update
any such forward-looking statement or reason why actual results may differ.
12
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 partner, which arranges, services, and
maintains the loan portfolio for the benefit of the Partnership. Michael R.
Burwell is President and Chief Financial Officer of Gymno Corporation and
Redwood Mortgage Corp. 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 partner. 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, Redwood Mortgage
Corp. 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. Loan
brokerage commissions paid by the borrowers were $53,650 and $49,528 for the six
month periods ended June 30, 2005 and 2004, and $23,300 and $31,894 for the
three month periods ended June 30, 2005 and 2004, 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. Mortgage servicing fees of $31,963 and $39,762 were incurred for the
six month periods ended June 30, 2005 and 2004, and $14,259 and $19,631 were
incurred for the three month periods ended June 30, 2005 and 2004, respectively.
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 $17,182 and $16,987 were incurred by the Partnership for the six
month periods ended June 30, 2005 and 2004, and $8,599 and $8,498 were incurred
for the three month periods ended June 30, 2005 and 2004, respectively.
o Other Fees The Partnership Agreement provides that the general partners
may receive other fees such as processing and escrow, reconveyance, mortgage
assumption and mortgage extension fees. Such fees are incurred by the borrowers
and are paid to the general partners. Such fees aggregated $4,155 and $5,700 for
the six month periods ended June 30, 2005 and 2004, and $1,121 and $2,309 for
the three month periods ended June 30, 2005 and 2004, respectively.
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%, which was $2,744 and
$2,785 for the six month periods ended June 30, 2005 and 2004, and $1,353 and
$1,384 for the three month periods ended June 30, 2005 and 2004, respectively.
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. Such reimbursements are reflected as expenses in the
statements of income. Operating expenses totaling $6,786 and $9,416 for the six
month periods ended June 30, 2005 and 2004, and $2,943 and $4,598 for the three
month periods ended June 30, 2005 and 2004, respectively, were reimbursed to
Redwood Mortgage Corp. In June, 2005, Redwood Mortgage Corp waived approximately
$755 of this cost.
o Contributed Capital The general partners jointly and severally
contributed 1/10 of 1% in cash contributions as proceeds from the offerings were
received from the limited partners. As of June 30, 2005 and 2004, a general
partner, Gymno Corporation, had contributed $11,973 as capital in accordance
with Section 4.02(a) of the Partnership Agreement.
13
Results of Operations - For the six and three months ended June 30, 2005
and 2004
Changes in the Partnership's operating results for the six and three month
periods ended June 30, 2005 versus 2004 are discussed below:
Changes during the Changes during the
six months ended three months ended
June 30, 2005 June 30, 2005
versus 2004 versus 2004
-------------------- --------------------
Net income increase/(decrease) $ (4,097) $ (3,097)
============== ===============
Revenue
Interest on loans $ (75,417) $ (43,456)
Interest - interest bearing accounts (571) 577
Late fees (6,840) (4,166)
Other income (15,522) (8,140)
-------------- ---------------
$ (98,350) $ (55,185)
-------------- ---------------
Expenses
Mortgage servicing fees $ (7,799) $ (5,372)
Interest expense (1,068) (336)
Clerical costs through Redwood Mortgage Corp. (2,630) (1,655)
Asset management fees 195 101
Provisions for losses on loans and real estate (64,118) (42,900)
Professional services (4,249) 5,535
Printing, supplies and postage 145 879
Other (14,729) (8,340)
-------------- ---------------
$ (94,253) $ (52,088)
-------------- ---------------
Net income increase/(decrease) $ (4,097) $ (3,097)
============== ===============
The decrease in interest on loans of $75,417 (19.07%) for the six month
period and $43,456 (22.60%) for the three month period ended June 30, 2005
versus June 30, 2004 was primarily due to a decrease in the loan portfolio
outstanding to $6,193,151 as of June 30, 2005 from $8,451,319 as of June 30,
2004. Average loan portfolio balance for the six month period ended June 30,
2005 and 2004 was $6,790,815 and $8,366,072, respectively. The decrease in
interest is also attributed to a decrease in the average interest rate, which
stood at 9.16% as of June 30, 2005 versus 9.67% as of June 30, 2004.
The decrease in other income of $15,522 (90.29%) for the six month period
and $8,140 (93.58%) for the three month period ended June 30, 2005 versus June
30, 2004 was primarily due to the Partnership no longer receiving non-refundable
option payments on a property sold in October, 2004. During the first half of
2004 these option payments totaled $15,429. The property against which the
payments were being made was sold in October, 2004.
The decrease in late charges of $6,840 (64.60%) for the six month period
and $4,166 (69.55%) for the three month period ended June 30, 2005 versus June
30, 2004 was primarily due to a reduction in delinquent loans to none as of June
30, 2005 from four totaling $1,985,459 as of June 30, 2004.
The decrease in interest bearing accounts of $571 (31.62%) for the six
month period ended June 30, 2005 versus June 30, 2004 was primarily due to a
lower average monthly bank balance of $368,669 during the first half of 2005
versus $530,232 during the first half of 2004. The increase of $577 (124.62%)
for the three month period ended June 30, 2005 versus June 30, 2004 was
primarily due to a higher average monthly bank balance of $606,896 during the
second quarter of 2005 versus $296,574 during the second quarter of 2004.
14
The decrease in mortgage servicing fees of $7,799 (19.61%) for the six
month period and $5,372 (27.36%) for the three month period ended June 30, 2005
versus June 30, 2004, was primarily due to a decrease in the loan portfolio
balance to $6,193,151 as of June 30, 2005 from a portfolio balance of $8,451,319
as of June 30, 2004. Average loan portfolio balance for the six month periods
ended June 30, 2005 and 2004 was $6,790,815 and $8,366,072, respectively.
The decrease in provisions for losses on loans and real estate held for
sale of $64,118 (244.23%) for the six month period and $42,900 (287.96%) for the
three month period ended June 30, 2005 versus June 30, 2004 is due to
management's determination that the allowance for loan losses of $740,984 as of
June 30, 2005 was adequate to offset potential losses on loans. There were no
foreclosures as of June 30, 2005 and none are expected in the foreseeable
future.
The decrease in professional fees of $4,249 (14.27%) for the six month
period and increase of $5,535 (62.83%) for the three month period ended June 30,
2005 versus June 30, 2004 is primarily due to timing of billings in 2005
compared to 2004.
Partnership capital increased by $64,395 during the first six months of
2005 as both earnings distributions and capital liquidations declined below the
net income level of the Partnership. For the six month period ended June 30,
2005 limited partners' net income was $271,700 versus earnings distributions of
$90,284 and capital liquidations of $117,020, which totaled $207,304, as
compared to limited partners' net income of $275,756 versus earnings
distributions of $95,247 and capital liquidations of $147,820, which totaled
$243,067 for the corresponding period in 2004. During the second quarter of 2005
limited partners' net income was $133,995 versus earnings distributions of
$45,025 and capital liquidations of $42,791, which totaled $87,816, as compared
to limited partners' net income of $137,061 versus earnings distributions of
$47,050 and capital liquidations of $80,212, which totaled $127,262 for the
corresponding period in 2004. Earnings and capital liquidations are a factor of
limited partner elections and currently limited partners seeking liquidations of
earnings or their capital account continues to decline. Limited partner income,
which has continued to be higher than earnings distributions and capital
liquidations for the past several quarters, has grown the limited partners'
capital.
The decrease in clerical costs of $2,630 (27.93%) for the six month period
and $1,655 (35.99%) for the three month period ended June 30, 2005 versus June
30, 2004 is primarily due to lower clerical costs servicing the Partnership and
partial costs, approximately $755, for June, 2005 being waived by Redwood
Mortgage Corp.
The decrease in interest expense of $1,068 (100%) for the six month period
and $336 (100%) for the three month period ended June 30, 2005 versus June 30,
2004, is due to non-usage of the line of credit during the first half of 2005.
Average line of credit usage during the six and three month periods ended June
30, 2005 was $0 and $0 versus an average use of $50,258 and $31,624 during the
six and three month periods ended June 30, 2004, respectively.
The decrease in other expense of $14,729 (77.64%) for the six month period
and $8,340 (81.83%) for the three month period ended June 30, 2005 versus June
30, 2004 was primarily due to a reduction in upkeep costs for the real estate
held for sale properties. The Partnership spent $1,629 during the first half and
$391 during the second quarter of 2005 versus $15,486 during the first half and
$8,141 during the second quarter of 2004. The real estate held for sale property
that incurred most of the upkeep costs was sold in October, 2004.
At June 30, 2005 there were no outstanding loans with filed notices of
default.
Redwood Mortgage Corp., an affiliate of the general partners, received
mortgage brokerage commissions from loan borrowers of $53,650 and $23,300 for
the six and three month periods ended June 30, 2005 as compared to $49,528 and
$31,894 for the six and three month periods ended June 30, 2004. The increase of
$4,122 for the six month period ended June 30, 2005 versus June 30, 2004 is due
to more loans that were funded totaling $2,335,000 and $1,788,527, respectively.
The decrease of $8,594 for the three month period ended June 30, 2005 versus
June 30, 2004 is primarily due to lower fees charged on loans of $1,190,000
versus $1,123,750, respectively.
15
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of Partnership operations. The Partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2002 and 2003, the California economy stabilized. During 2004 and continuing in
2005 the economy and the Northern California Real Estate Market has
strengthened. At June 30, 2005 the Partnership had one loan past due 90 days or
more in interest payments totaling $96,716 with no loans in foreclosure. This
loan was also categorized as impaired. In addition, two loans with total
principal balance of $64,795 were current in interest payments but were past
maturity as of June 30, 2005.
Periodically, the Partnership enters into workout agreements with borrowers
who are past maturity or delinquent in their regular payments. The Partnership
has one impaired loan totaling $96,716 in a workout agreement with the borrower.
Typically, a workout agreement allows the borrower to extend the maturity date
of the balloon payment and/or allows the borrower to make current monthly
payments while deferring for periods of time, past due payments and balloon
payments and allows time to pay the loan in full. 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 generally rise during difficult
economic times and conversely fall during good economic times. The number and
amount of workout agreements existing at June 30, 2005, in management's opinion,
does not have a material effect on our results of operations or liquidity.
Workout agreements are considered when management arrives at an appropriate
allowance for loan losses, and based on our experience; they are reflective of
our loan marketplace segment. In the remainder of 2005, we may initiate
foreclosure by filing notices of default on delinquent borrowers or borrowers
who become delinquent during the year. Borrower foreclosures are a normal aspect
of Partnership operations and the general partners anticipate that they will not
have a material effect on liquidity. As a prudent guard against potential
losses, the general partners have made provisions for losses on loans and real
estate held for sale through foreclosure of $740,984 at June 30, 2005. These
provisions for losses were made to guard against collection losses. The total
provision for losses as of June 30, 2005 is considered by the general partners
to be adequate. 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. Total provision for losses on loans of $740,984 as
of June 30, 2005 is considered to be reasonable.
As of June 30, 2005, the Partnership had an average loan to value ratio
computed based on appraised values and prior liens as of the date the loan was
made of 69.19%. This percentage does not account for any increases or decreases
in property values since the date the loan was made, nor does it include any
reductions in principal through amortization of payments after the loan was
made. This low loan to value ratio will assist the Partnership in weathering
loan delinquencies and foreclosures should they eventuate.
PORTFOLIO REVIEW - For the six months ended June 30, 2005 and 2004
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 June 30, 2005 and
2004 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $4,318,061 (69.72%) and $5,424,371 (64.18%)
of the outstanding secured loan portfolio. The remainder of the portfolio
represented loans secured by real estate located primarily in Northern
California.
16
As of June 30, 2005 and 2004, the Partnership held 26 and 29 loans
respectively in the following categories:
June 30, 2005 June 30, 2004
------------------------------- -------------------------------
Single Family Homes (1-4 units) $ 3,059,916 49.41% $ 3,118,197 36.90%
Apartments (5+ units) 821,716 13.27% 1,011,594 11.97%
Commercial 2,311,519 37.32% 2,276,953 26.94%
Land - - 2,044,575 24.19%
-------------- ------------- -------------- -------------
Total $ 6,193,151 100% $ 8,451,319 100%
============== ============= ============== =============
As of June 30, 2005, the Partnership held 26 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of June 30, 2005:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of June 30, 2005
# of Loans Amount Percent
------------- --------------- -------------
1st Mortgages 19 $ 5,297,585 86%
2nd Mortgages 6 745,961 12%
3rd Mortgages 1 149,605 2%
============= =============== =============
Total 26 $ 6,193,151 100%
Maturing 12/31/05 and prior 2 $ 64,795 1%
Maturing prior to 12/31/06 2 346,716 6%
Maturing prior to 12/31/07 3 1,971,754 32%
Maturing after 12/31/07 19 3,809,886 61%
============= =============== =============
Total 26 $ 6,193,151 100%
Average Secured Loan $ 238,198 4%
Largest Secured Loan 725,000 12%
Smallest Secured Loan 11,566 0.19%
Average Loan-to-Value based upon appraisals and prior
liens at time of loan 69.19%
The Partnership's largest loan in the principal amount of $725,000
represents 11.71% of outstanding secured loans and 7.82% of Partnership assets.
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made a
decision to either take distributions of earnings monthly, quarterly or annually
or to compound earnings in their capital account. For the six and three month
periods ended June 30, 2005 and 2004, the Partnership made distributions of
earnings to limited partners of $90,284 and $95,247 for the six months, and
$45,025 and $47,050 for the three months, respectively. Distribution of earnings
to limited partners, which were not withdrawn for the six and three month
periods ended June 30, 2005 and 2004 were $181,416 and $180,509 for the six
months, and $88,970 and $90,011 for the three months, respectively. As of June
30, 2005 and 2004, limited partners electing to withdraw earnings represented
34% and 34% of the limited partners' capital.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations. For the six and three month periods
ended June 30, 2005 and 2004, $17,556 and $13,263 for the six months, and $5,552
and $8,513 for the three months, respectively, 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,
17
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 June 30, 2005 and 2004.
Additionally, for the six and three month periods ended June 30, 2005 and
2004, $99,465 and $134,557 for the six months, and $37,239 and $71,699 for the
three months, 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.
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, 2004 through June 30, 2005, the Federal Reserve increased the
Federal Funds Rate to 3.25% from 1.00%. The recent upward movement in the
Federal Funds Rate during 2004 and 2005 has raised short-term rates but has not
yet raised long-term interest rates significantly. New loans will be originated
at then existing interest rates. In the future the general partners anticipate
that interest rates likely will change from their current levels. The general
partners cannot, at this time, predict at what levels interest rates will be in
the future. The general partners anticipate that new loans will be placed during
2005 at rates slightly above those that prevailed in 2004. The recent increases
in short term interest rates and to a lesser extent long term interest rates has
encouraged those borrowers with interest rates above the current going rates to
refinance their indebtedness so as to lock in these historically low interest
rates should they move higher in the future However, demand for loans from
qualified borrowers continues to be strong and as prepayments occur, the general
partners expect to replace paid off loans with loans at somewhat lower interest
rates. At this time, the general partners believe that the average loan
portfolio interest rate will remain relatively stable over the year 2005. Based
upon the rates payable in connection with the existing loans, and anticipated
interest rates to be charged by the partnership and the general partners'
experience, the general partners anticipate that the annualized yield will range
between 5.75% and 6.50% in 2005.
18
The Partnership makes loans primarily in Northern California. As of June
30, 2005, approximately 69.72%, ($4,318,061) of the secured loans held by the
Partnership were in six San Francisco Bay Area Counties. The remainder of the
loans held was secured primarily by Northern California real estate outside of
the San Francisco Bay Area.
The national and Northern California economies continue to improve. Both
are exhibiting steady economic growth, low inflation, and improving unemployment
numbers. The increases in the price of oil and the pace of real estate
appreciation remain a concern. During July of 2005 the Mortgage Bankers
Association issued their long term economic forecast through 2007 which included
predictions of a 3.5% economic growth rate, a core inflation rate of 1.5% for
the next several years, relatively low long-term interest rates rising to
perhaps 6.25% for 30-year mortgages, declining unemployment to 4.9%, job growth
of about 180,000 jobs per month and a slowdown in residential appreciation to a
more sustainable 4.5% per year. These predictions indicate an economy that is
continuing to grow and improve, which is good for both mortgage businesses and
the real estate industry as a whole.
The Northern California residential real estate market continued to exhibit
strong appreciation during the second quarter of 2005. Values of single family
homes in the six county San Francisco Bay Area rose on a June year to year
comparison by 18.2%. These price increases are significant but the real estate
market may be beginning to slow as sales volumes of homes declined by an average
of 9.4% as compared to 2004. The partnership invests a significant amount of its
portfolio in residential mortgages and a strong appreciating market assists in
creating loan demand and enhancing loan security.
The Northern California commercial real estate market continued eight
consecutive quarters of positive numbers. Space absorption in the office sector
continued throughout the Bay Area, while San Francisco was typical. Absorption
as reported by Grubb and Ellis was 507,871 square feet for the second quarter
and 689,942 for the year to date while Cushman Wakefield reported 447,646 for
the second quarter and 860,827 for the year to date. This steady positive
absorption continues the progress of whittling down the available office
inventory which stood at approximately 22% in San Francisco as little a two
years ago. Cushman Wakefield reports overall San Francisco vacancies of 17.6%.
Despite the high vacancy rate, rents have begun to increase. C.B. Richard Ellis
reported that San Francisco rents averaged $27.18 per square foot while Cushman
Wakefield reported that rents averaged $30.24 per square foot. Little new
construction is likely to occur as new construction costs run $525 per square
foot and top sales prices average $320 per square foot. The three highest per
square foot sales transactions in 2005 were $495, $467 and $434 per square foot.
Over $2 billion in property has sold in the first half of 2005, which is only
$700 million short of the total sales volume in 2004. While 2004 was a record
breaking year, it is likely that 2005 will surpass the 2004 record. The
continued improvement of the commercial market assists owners in making their
debt payments. Increased occupancies and increasing rents assist by adding value
to the real estate security of our commercial loans.
For Partnership secured loans outstanding as of June 30, 2005, the
Partnership had an average loan to value ratio of 69.19%, computed based on
appraised values and senior liens as of the date the loan was made. This
percentage does not account for any increases or decreases in property values
since the date the loan was made, nor does it include any reductions in
principal on senior indebtedness through amortization of payments after the loan
was made. This low loan to value ratio will assist the Partnership in weathering
loan delinquencies and foreclosures should they eventuate.
Contractual Obligations Table. None - There were no amounts outstanding on
the line of credit at June 30, 2005. The maximum amounts available on the line
are $2,500,000, which expires in December 2007.
19
Part I - Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, loans held in the Partnership's portfolio and loans to the
partnership pursuant to its line of credit as of June 30, 2005. 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 June 30, 2005:
2005 2006 2007 2008 2009 Thereafter Total
----------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 708,746 $ 708,746
Average interest rate 0.67% 0.67%
Unsecured loans $ 243,475 $ 243,475
Average interest rate 0% 0%
Loans secured by deeds
of trust $ 64,795 346,716 1,971,754 - 2,316,611 1,493,275 $6,193,151
Average interest rate 10.00% 7.94% 9.18% - 9.18% 9.35% 9.16%
Interest bearing liabilities:
Line of credit $ - $ -
Average interest rate 6.50% 6.50%
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.
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.
20
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. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of June 30, 2005 the general partners have determined that the
allowance for loan losses of $740,984 (8.06% 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 June 30, 2005, one loan totaling $96,716 was
delinquent 90 days or more in interest payments. This loan was also categorized
as impaired. Management believes that there is sufficient collateral to cover
the amount outstanding to the Partnership on this loan. The allowance for loan
losses of $740,984 as of June 30, 2005 is considered reasonable to offset
potential loss in loan collections in the future.
Part I - Item 4. CONTROLS AND PROCEDURES
As of June 30, 2005, 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 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 are effective in
timely alerting the general partners to material information relating 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
second fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Partnership's internal control over financial reporting.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in various legal
actions. Please refer to Note 10 of the Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
31.1 Certification of General Partner pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
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
22
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 15th day of August
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/Treasurer & Chief Financial Officer
23
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 internal
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, General Partner
August 15, 2005
24
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 internal
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
August 15, 2005
25
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 Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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
August 15, 2005
26
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 Quarterly Report of Redwood Mortgage Investors VII
(the "Partnership") on Form 10-Q for the period ending June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & 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,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
August 15, 2005
27