1
REDWOOD MORTGAGE INVESTORS VII
(a California Limited Partnership)
Index to Form 10-K
December 31, 2005
Part I
Page No.
-----------
Item 1 - Business 4
Item 2 - Properties 8
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 8
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 9
Item 6 - Selected Financial Data 9
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 17
Item 8 - Financial Statements and Supplementary Data 20
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44
Item 9a - Controls and Procedures 44
Item 9b - Other Information 44
Part III
Item 10 - Directors and Executive Officers of the Registrant 45
Item 11 - Executive Compensation 46
Item 12 - Security Ownership of Certain Beneficial Owners and Management 47
Item 13 - Certain Relationships and Related Transactions 47
Item 14 - Principal Accountant Fees and Services 47
Part IV
Item 15 - Exhibits, Financial Statements and Schedules 48
Signatures 49
Certifications 50
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, 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 or organization) (I.R.S. Employer Identification)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
(address of principal executive offices) (zip code)
(650) 365-5341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: Limited
Partnership Units
2
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act of 1933, as amended.
Yes No XX
-------------- -------------
Indicate by check mark if the registrant is not required to file pursuant
to Section 13 or Section 15(d) of the Securities Act of 1934, as amended.
Yes No XX
-------------- -------------
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
-------------- -------------
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer[ ] Accelerated Filer[ ] Non-Accelerated Filer[X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes No XX
-------------- -------------
As of June 30, 2005, the aggregate value of limited partnership units held
by non-affiliates was $9,180,838. 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.
3
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, 2005, the Partnership had a balance
in its secured loan portfolio totaling $5,448,401 with interest rates thereon
ranging from 8.50% to 10.00%.
Currently, loans secured by First Trust Deeds comprise 71.96% of the amount
of funds in the secured loan portfolio followed by Second Trust Deeds of 26.67%
and third trust deeds of 1.37%. Single Family (1-4 unit) homes total 54.04% of
the secured loans versus 60.82% in 2004. Commercial loans increased slightly
from last year, now comprising 27.29% of the secured portfolio. Loans to
apartments totaled 10.46%. Of the total secured loans, 75.07% are in six
counties of the San Francisco Bay Area, and the adjacent counties of Monterey,
San Joaquin, Santa Cruz, Stanislaus, and Solano Counties collectively make up
19.76% of the loans. The balance of loans 5.17% are primarily in Southern
California. Loan size decreased the past year, and is now averaging $236,887 per
loan, a decrease of $26,987. 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 32.82%.
Generally, the more equity, the more protection for the lender. The
Partnership's loan portfolio is in good condition with no property in
foreclosure as of December 2005.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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. As of December 31, 2005 the
Partnership's investment in this property totaled $1,756,116, 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. As such, the Partnership has not allocated any reserve against the
property. This property is jointly owned by two other affiliated partnerships.
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 $836,701 including accrued interest and
advances. This property is jointly owned by three other affiliated Partnerships.
4
Occasionally, to assist in protecting its own assets and to reduce
liability, the Partnership may transfer properties acquired through the
foreclosure process to newly formed Limited Liability companies or "LLC's". 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 established for this property 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 December 31, 2005 the Partnership
has capitalized approximately $45,940 in costs related to this property,
aggregating a total investment of $882,641 as of December 31, 2005.
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 owned
the remaining interest. Assets of this LLC were sold during 2003 and the
Partnership incurred a loss of approximately $42,000. The LLC was dissolved in
December, 2005 when its final tax return for year 2005 was filed.
In prior years, the Partnership took back two additional properties through
foreclosure. One was 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 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 meetings to 5.25% as of December 31, 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 have substantially
recovered from the economic downturn lasting from 2000 through 2003. Employment
and job creation has improved. During 2004 and 2005, the residential and
commercial real estate markets in Northern California enjoyed solid price
appreciation. During the latter half of 2005, long-term interest rates have
begun to inch upward. Residential sales volumes have declined yet median home
sales prices have remained at or near their record 2005 highs. While some
concern exists as to whether real estate values will soften, interest rates
continue to remain attractive by historical standards, unemployment remains low
and the economy is strong. Management believes these factors will contribute to
a real estate marketplace with lower appreciation in 2006 compared to 2004 and
2005. With less real estate transactions likely to exist competition for loans
will be fierce. Since it appears that the bottom of the interest rate cycle was
reached in 2004 we believe loan runoff to lower interest rates will be reduced
allowing the Partnership to retain its loans for longer periods. Excess cash
will be invested in short-term alternative investments, such as money market
funds yielding considerably less than the current loan investment portfolio.
5
Secured Loan Portfolio
A summary of the Partnership's secured loan portfolio as of December 31,
2005 is set forth below.
Loans as a Percentage of Appraised Values
First Trust Deed Loans $ 3,920,466
Appraised Value of Properties at Time of Loan 6,632,852
Total First Trust Deeds as a % of Appraisal 59.11%
==============
First Trust Deed Loans 3,920,466
Second Trust Deed Loans 1,453,054
Third Trust Deed Loans 74,881
--------------
5,448,401
Priority positions due other Lenders at Time of Loan
First Trust Deed Loans due other Lenders 4,054,646
Second Trust Deed Loans due to other Lenders 217,455
--------------
Total Debt $ 9,720,502
==============
Appraised Property Value at Time of Loan $14,470,371
Total debt as a % of Appraisal based on appraisals and prior
liens at date of loan 67.18%
==============
Number of Secured Loans Outstanding 23
--------------
Average Secured Loan 236,887
Average Secured Loan as a % of Secured Loans Outstanding 4.35%
Largest Secured Loan Outstanding 634,479
Largest Secured Loan as a % of Secured Loans Outstanding 11.65%
Largest Secured Loan as a % of Partnership Assets 6.78%
Secured Loans as a Percentage of Total Secured Loans Percent
------------------------------------------------------------------------- --------------
First Trust Deed Loans 71.96%
Second Trust Deed Loans 26.67%
Third Trust Deed Loans 1.37%
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Total Trust Deed Loan Percentage 100.00%
==============
Secured Loans by Type of Property Amount Percent
------------------------------------------------------ --------------- ---------------
Single Family (1-4 units $2,944,330 54.04%
Apartments 570,000 10.46%
Commercial 1,487,019 27.29%
Land 447,052 8.21%
--------------- ---------------
Total $5,448,401 100.00%
=============== ===============
6
The following is a distribution of secured loans outstanding as of December
31, 2005 by California Counties.
Total
California County Secured Loans Percent
------------------------------------------------------ --------------- ---------------
San Francisco Bay Area Counties
San Mateo 1,219,028 22.37%
Santa Clara 979,185 17.97%
Contra Costa 797,491 14.64%
Marin 634,479 11.65%
San Francisco 400,000 7.34%
Alameda 59,906 1.10%
--------------- ---------------
4,090,089 75.07%
San Francisco Bay Area Adjacent Counties
Solano 494,343 9.07%
Monterey 250,000 4.59%
San Joaquin 138,706 2.55%
Santa Cruz 129,341 2.37%
Stanislaus 64,322 1.18%
--------------- ---------------
1,076,712 19.76%
Other California Counties
Santa Barbara 159,664 2.93%
--------------- ---------------
Tulare 121,936 2.24%
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281,600 5.17%
Total $ 5,448,401 100.00%
=============== ===============
Number of Secured Loans in Foreclosure: 0
Scheduled maturity dates of secured loans as of December 31, 2005 are as
follows:
Year Ending December 31, Amount
----------------------------------- --------------
2006 $ 884,322
2007 447,054
2008 215,000
2009 1,324,441
2010 2,577,584
--------------
Total $ 5,448,401
==============
The Partnership's largest loan in the principal amount of $634,479
represents 11.65% of outstanding secured loans and 6.78% 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 2006 include two loans totaling approximately
$64,322 which are past maturity at December 31, 2005. Interest payments on these
past maturity loans were current. 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.
7
The loan portfolio had one loan with principal outstanding of $298,545
where interest payment was overdue 90 days. The principal outstanding of this
loan represents 5.48% of the Partnership's secured portfolio as of December 31,
2005.
In the fourth quarter of 2005, the Partnership's previously impaired loan
with principal outstanding of $96,716 was repaid. 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.
Item 2 - Properties
In February, 2005, the Partnership acquired a multi-unit property through
foreclosure. This property is located in an upscale neighborhood in San
Francisco. 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, Larkin Property
Company, LLC. 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 December 31, 2005 the Partnership's total
investment in this property was $882,641.
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, 2005 was $1,756,116. The property is on
the market for sale. The general partners believe that the property will return
the Partnership's investment upon sale.
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, 2005 is $62,720. 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.
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. This LLC was formally wound up when
its final tax return for 2005 was filed in December, 2005
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.
8
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. As of December 31, 2005, 480 limited partners had a capital balance of
$9,270,243.
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.
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, 2005 were:
Balance Sheets
ASSETS
December 31,
----------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- --------------
Cash and cash equivalents $1,627,384 $ 346,393 $ 321,114 $ 1,057,845 $ 389,844
Loans
Loans, secured by deeds of trust 5,448,401 7,388,478 8,280,826 6,423,984 10,091,195
Loans, unsecured, net 161,987 238,484 232,551 216,770 173,731
Less allowance for loan losses (700,536) (745,476) (680,469) (791,882) (887,578)
Interest and other receivables
Accrued interest and late fees 64,304 190,105 489,995 304,936 666,189
Advances on loans 6 8,188 6,484 17,230 50,665
Real estate held for sale, net 1,870,027 1,782,182 633,053 683,136 872,133
Investment in limited liability 882,641 - - 1,212,722 -
company
------------- ------------- ------------- ------------- --------------
$9,354,214 $ 9,208,354 $ 9,283,554 $ 9,124,741 $11,356,179
============= ============= ============= ============= ==============
9
LIABILITIES AND PARTNERS' CAPITAL
December 31,
----------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------ -------------
Liabilities
Line of credit $ - $ - $ 200,000 $ - $ 1,907,000
Accounts payable - 4,951 4,102 2,593 11,295
Deferred interest - - - 37,704 2,322
Payable to affiliate 71,998 74,987 51,288 32,176 3,316
------------- ------------- ------------- ------------ --------------
71,998 79,938 255,390 72,473 1,923,933
Partners' capital
General partners 11,973 11,973 11,973 11,978 11,978
Limited partners subject
to redemption 9,270,243 9,116,443 9,016,191 9,040,290 9,420,268
------------- ------------- ------------- ------------ --------------
Total partners' capital 9,282,216 9,128,416 9,028,164 9,052,268 9,432,246
------------- ------------- ------------- ------------ --------------
$ 9,354,214 $9,208,354 $9,283,554 $9,124,741 $ 11,356,179
============= ============= ============= ============ ==============
STATEMENTS OF INCOME
December 31,
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------ ------------- --------------
Gross revenue $ 691,385 $ 868,274 $ 782,280 $ 1,078,186 $ 1,192,381
Expenses 153,830 289,628 189,639 314,704 371,184
------------- ------------- ------------ ------------- --------------
Net income $ 537,555 $ 578,646 $ 592,641 $ 763,482 $ 821,197
============= ============= ============ ============= ==============
Net income to general partners (1%) 5,376 5,786 5,926 7,635 8,212
Net income to limited partners (99%) 532,179 572,860 586,715 755,847 812,985
------------- ------------- ------------ ------------- --------------
$ 537,555 $ 578,646 $ 592,641 $ 763,482 $ 821,197
============= ============= ============ ============= ==============
Net income per $1,000 invested by
limited partners for entire period:
- where income is compounded $ 59 $ 65 $ 67 $ 85 $ 85
============= ============= ============ ============= ==============
- where partner receives income
in monthly distributions $ 58 $ 63 $ 65 $ 82 $ 82
============= ============= ============ ============= ==============
Annualized yields when income is compounded or distributed monthly for the
years 2001 through 2005 are outlined in the table below:
Compounded Distributed
--------------- ---------------
2001 8.50% 8.19%
2002 8.44% 8.13%
2003 6.66% 6.47%
2004 6.49% 6.30%
2005 5.94% 5.78%
Average annualized yield from inception through December 31, 2005, when
income is compounded and retained, was 7.58%. Average annualized yield from
inception through December 31, 2005, when income is distributed monthly was
7.35%.
10
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, 2005, we owned five pieces of real
property.
Loans and the related accrued interest, late fees and advances are analyzed
on a periodic basis for recoverability. Delinquencies are identified and
followed as part of the loan system. 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.
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, 2006
annualized yield estimates, plans to develop certain properties, beliefs
regarding the Partnership recovering the full value of its investment in certain
properties, the expectation that borrower foreclosures will not have a material
effect on liquidity, and the use of excess cash flow. Actual results may be
materially different from what is projected by such forward-looking statements.
Factors that might cause such a difference include unexpected changes in
economic conditions and interest rates, the impact of competition and
competitive pricing and downturns in the real estate markets in which the
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.
11
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partners, which arranges, services, and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate and the general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the general
partners subject to limitations imposed by the partnership agreement. In the
past, the general partners have elected not to take the maximum compensation.
The following is a list of various Partnership activities for which related
parties are compensated.
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, 2005, 2004 and 2003 loan brokerage commissions paid by
borrowers were $137,913, $93,465, and $111,927, 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
$68,906, $81,442, and $73,062 were incurred for the years ended December 31,
2005, 2004 and 2003, 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 $34,453, $46,733, and $36,531 for the years
ended December 31, 2005, 2004, and 2003, respectively. 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.
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 $34,512, $34,073, and $34,011 were incurred by the Partnership for
the years ended December 31, 2005, 2004 and 2003, 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 not exceed 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, 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.
12
Results of Operations - For the three years ended December 31, 2005, 2004 and
2003
Changes in the Partnership's operating results for the years ended December 31,
2005 and December 31, 2004 are discussed below:
Changes for the years ended December 31,
--------------------------------------------
2005 2004
-------------- -------------
Net income increase/(decrease) $ (41,091) $ (13,995)
============== =============
Revenue
Interest on loans (145,403) 69,902
Late charges (8,919) (4,231)
Other income (22,567) 20,323
-------------- -------------
$ (176,889) $ 85,994
-------------- -------------
Expenses
Mortgage servicing fees (12,536) 8,380
Interest expense (10,111) 1,832
Clerical costs from Redwood Mortgage Corp. (4,163) (5,188)
Asset management fees 439 62
Provisions for losses on loans and real estate (114,752) 83,306
Professional services 877 5,591
Other 4,448 6,006
-------------- -------------
$ (135,798) $ 99,989
-------------- -------------
Net income increase/(decrease) $ (41,091) $ (13,995)
============== =============
The decrease in interest income of $145,403 (17.76%) for the year ended
December 31, 2005 versus 2004 is mainly due to a lower average loan portfolio
balance of $6,394,464 in 2005 as compared to the average loan portfolio balance
of $7,834,652 in 2004. This decline in interest income in 2005 was somewhat
offset by the Partnership gaining interest income of $42,996 in 2005 on an
impaired loan that was repaid in 2005. Prior to 2005, no interest was being
accrued against this impaired loan. 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.
Additionally, the average portfolio interest rate has been declining, from 9.45%
in 2003 to 9.36% in 2004 and to 9.25% in 2005. 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 $8,919 (45%) and by $4,231 (18%) for
the years ended December 31, 2005 and December 31, 2004, respectively, was
primarily due to improved loan collections and reduced delinquencies.
The decrease in other income of $22,567 (75.41%) in 2005 compared to 2004
and the increase of $20,323 (211.65%) is due largely to the sale of real estate
owned in 2004 which had been generating fee income. Upon sale in 2004, this
income ceased. The fee income in 2004 totaled $23,143. The decrease in other
income is also due to a decline in early withdrawal penalties to $2,014 in 2005
compared to $2,741 in 2004, offset by an increase in miscellaneous income of
$273 in 2005.
The decrease in mortgage servicing fees of $12,536 (15.39%) in 2005 and an
increase of $8,380 (11.47%) in 2004 is largely attributable to the Partnership's
fluctuating average portfolio balances of $6,394,464 in 2005 and $7,834,652 in
2004. The decrease in mortgage servicing fees in 2005 was offset by collection
of interest, and hence the mortgage servicing fees $8,870, from an impaired loan
which paid off in 2005. 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.
13
Interest expense decreased $10,111 (93.59%) for the year ended December 31,
2005 as compared to 2004. The weighted average line of credit borrowing for the
year ended December 31, 2005 was $12,500 as compared to weighted average
borrowing of $382,265 for December 31, 2004. The weighted average interest rate
for 2005 was 5.55%, whereas the weighted average interest rate during 2004 was
4.93%. The line of credit borrowing in 2005 was substantially low because of the
decline in average loan portfolio of $6,394,464 as compared to an average
portfolio balance of $7,834,652 in 2004. This lower average balance in 2005 was
due to more loan pay-offs than the Partnership's ability to fund additional
loans. Hence, loan pay-off proceeds were mainly used to fund loans without
resorting to the line of credit facility.
The decrease in clerical costs of $4,163 (23.35%) and $5,188 (22.54%) for
the years ended December 31, 2005 and 2004, respectively, was primarily due to
lower clerical costs servicing the Partnership.
Loan loss provisions/(recoveries) were $(49,745), $65,007, and $(18,299)
for the years ended December 31, 2005, 2004, and 2003, respectively. The
increase in provision for 2004 was precautionary due to the foreclosure that
existed at December 31, 2004. A negative provision of $49,745 and $18,299 in
2005 and 2003 was due to management's assessment of the appropriate loan loss
allowance at such dates the lower existing delinquencies and lower loan
balances. The general partners believe that the allowance for loan losses of
$700,536 at December 31, 2005 was adequate to offset potential losses on loans.
Increases in professional fees of $877 (1.78%) and $5,591 (12.78%) for the
years ended December 31, 2005 and 2004, respectively, were primarily due to
general accounting cost increases in 2005 and 2004 in relation to its legal
services, audit and tax return processing.
Increases in other expenses of $4,448 (14.29%) and $6,006 (23.90%) for the
years ended December 31, 2005 and 2004, respectively, were primarily
attributable to the upkeep costs of the real estate held for sale properties.
The Partnership expensed $26,242 and $20,567 for the years ended December 31,
2005 and 2004, respectively, on the properties.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these properties,
the 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 2004 and
2005 the local and national economies have been strong. 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, 2005, the Partnership had two
loans with outstanding principal totaling $64,322 90 days past maturity.
Interest payments on these two past maturity loans were not delinquent over 90
days. In addition, the loan portfolio had one loan with principal outstanding of
$298,545 where interest payments were overdue 90 days. There were no loans
against which the Partnership had notice of default filed at December 31, 2005.
At December 31, 2005, total 90 days past maturity loans, and loans with interest
payments 90 days overdue, totaled $362,867 representing 3 loans which were 6.66%
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 no workout agreements as of December 31, 2005. 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. 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 for ($49,745), $65,007, and ($18,299),
as provisions (recoveries) for losses on loans and real estate for the years
ended December 31, 2005, 2004 and 2003, 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.
14
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 2005 or 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.
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 distribution 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, 2005, 2004 and 2003, the Partnership made following
allocations of earnings both to the limited partners who elected to compound
their earnings, and those that chose to distribute:
2005 2004 2003
-------------- ------------- -------------
Compounding $ 348,748 $ 374,066 $ 375,105
Distributing $ 183,432 $ 198,794 $ 211,610
As of December 31 2005, 2004 and 2003, limited partners electing to
withdraw earnings represented 36%, 35% and 34% 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, 2005, 2004 and 2003, $30,727, $34,267, and $22,690 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,
2005, 2004, and 2003, respectively.
15
Additionally, for the years ended December 31, 2005, 2004, and 2003,
$164,220, $239,547, and $376,514, 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.
Earnings and capital liquidations, including early withdrawals, during the three
years ended December 31, 2005 were:
Years ended December 31,
Earnings Capital
Liquidation Liquidation Total
-------------- -------------- ---------------
2005 $ 183,432 *$ 194,947 $ 378,379
2004 $ 198,794 *$ 273,814 $ 472,608
2003 $ 211,610 *$ 399,204 $ 610,814
* 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.
During 2005, the United States economy as a whole performed well. Gross
Domestic Product estimates for 2005 of 3.5% show a slight slowdown from the 4.2%
Gross Domestic Product of 2004. The United States average annual unemployment
rate for 2005 was 4.9% and has trended downward throughout 2005. Regionally, the
San Francisco Bay Area demonstrated a very similar unemployment rate with an
average annual unemployment rate of 5.1% for 2005 down 0.9% from 2004. The rate
of inflation concerns many with energy costs having risen significantly over the
last year. The consumer price index rose 3.4% in 2005 compared to 3.3% for 2004.
These statistics indicate an economy that is continuing to grow, which is good
for both mortgage lenders and the real estate industry as a whole. The 10 year
treasury rate is hovering around 4.5% at year end but is expected to increase in
the future. Should this occur, real estate markets may slow due to the higher
costs of money.
16
The Partnership makes loans primarily in Northern California. As such the
regional real estate market is of primary concern to the Partnership. As of
December 31, 2005, approximately 71.78%, ($153,632,000) of the 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.
In general, California residential real estate continued to appreciate in
value during 2005. In California the median price of a single family home in
December, 2005 was $548,430 which was 15.6% higher than in December, 2004. In
the nine county San Francisco Bay Area, the median price of a single-family home
in December, 2005 was $633,000 14.3% above the December, 2004 median
single-family home sales price of $554,000. The total sales volumes, the number
of homes sold, has recently been declining. This slow down in the number of
homes sold has not significantly impacted residential sales prices. Mortgage
interest rates for both fixed and adjustable rate loans have been rising,
decreasing housing affordability. Rising interest rates and decreasing sales
volumes will likely slow down the rate of housing appreciation we have seen over
the last two years. Nonetheless, a strong residential real estate marketplace
exists and as such increases lending opportunities and assists in providing
adequate equity to help repay mortgage debt should borrowers become delinquent
in their payments.
Commercial real estate in the San Francisco Bay Area continued its rebound.
Occupancy rates and rents increased during 2005 in most markets throughout the
San Francisco Bay Area. CB Richard Ellis reports that San Francisco Class A
office rents averaged $34.54, up from $32.52 in 2004 and that vacancy decreased
from 15.4% in 2004 to approximately 12% in 2005. The San Francisco leasing
market absorbed an estimated 1.5 million square feet net during 2005 according
to Grubb and Ellis. Sales of San Francisco commercial office buildings are brisk
with record per square foot prices being attained and 2005 being a record volume
sales year (Grubb & Ellis Research Fourth Quarter 2005). A healthy commercial
real estate market increases lending opportunities and assists in providing
adequate equity to repay mortgage debt should borrowers become delinquent in
their payments.
For Partnership loans outstanding as of December 31 2005, the Partnership
had an average loan-to-value ratio of 67.18%, computed based on appraised values
and senior liens as of the date the loan was made. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal on senior
indebtedness through amortization of payments after the loan was made.
Management expects this low loan-to-value ratio will assist the Partnership in
weathering loan delinquencies and foreclosures should they eventuate.
Contractual Obligations Table. None
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, secured loans held in the Partnership's portfolio and on our
line of credit as of December 31, 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 2006 through 2010 and separately
aggregates the information for all maturities arising after 2010. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2005:
2006 2007 2008 2009 2010 Thereafter Total
------------- ------------ ------------- ------------ ------------ ------------ -------------
Interest earning assets:
Money market accounts $1,601,273 $1,601,273
Average interest rate 0.60% 0.60%
Loans secured by deeds
of trust 884,322 447,054 215,000 1,324,441 2,577,584 - 5,448,401
Average interest rate 9.25% 9.50% 8.50% 9.15% 9.27% - 9.23%
Interest bearing
liabilities:
Line of credit - -
Average interest rate 7.50% 7.50%-
17
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.
PORTFOLIO REVIEW - For the years ended December 31, 2005, 2004 and 2003
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, 2005,
2004 and 2003 the Partnership's loans secured by real property collateral in six
of the San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara,
Marin, Alameda and Contra Costa) represented $4,090,089 (75.07%), $4,902,146
(66.34%), and $5,982,000 (72.24%), 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, 2005, 2004 and
2003:
2005 2004 2003
---------------------------- -------------------------- ----------------------------
Single Family (1-4 units) $ 2,944,330 54.04% $ 4,493,519 60.82% $ 2,442,961 29.50%
Apartments (over 4 units) 570,000 10.46% 971,864 13.15% 1,367,327 1.51%
Commercial 1,487,019 27.29% 1,923,095 26.03% 2,410,861 29.11%
Land 447,052 8.21% - - 2,059,677 24.88%
------------- ----------- ------------ ----------- ------------- ------------
Total $ 5,448,401 100.00% $ 7,388,478 100.00% $ 8,280,826 100.00%
============= =========== ============ =========== ============= ============
As of December 31, 2005, the Partnership held 23 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, 2005.
18
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
As of December 31, 2005
# of Loans Amount Percent
------------- -------------- ------------
1st Mortgages 14 $ 3,920,466 71.96%
2nd Mortgages 8 1,453,054 26.67%
3rd Mortgages 1 74,881 1.37%
============= ============== ============
Total 23 $ 5,448,401 100.00%
Maturing in 2006 4 $ 884,322 16.23%
Maturing in 2007 1 447,054 8.20%
Maturing in 2008 1 215,000 3.95%
Maturing after 12/31/08 17 3,902,025 71.62%
============= ============== ============
Total 23 $ 5,448,401 100.00%
Average Secured Loan $ 236,887 4.35%
Largest Secured Loan 634,479 11.65%
Smallest Secured Loan 11,260 0.21%
Average Loan-to-Value based upon appraisals
and prior liens at time of loan 67.18%
The Partnership's largest secured loan in the principal amount of $634,479
represents 11.65% of outstanding secured loans and 6.78% 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.
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, 2005 the general
partners have determined that the allowance for loan losses of $700,536 (7.55%
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, 2005, three loans were delinquent 90 days and/or matured with outstanding
principal of $362,867.
The Partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2005 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.
19
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, 2005, and December 31, 2004
o Statements of Income for the years ended December 31, 2005, 2004 and 2003
o Statements of Changes in Partners' Capital for the years ended
December 31, 2005, 2004 and 2003
o Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
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
AND SUPPLEMENTAL INFORMATION
DECEMBER 31, 2005 AND 2004
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
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 42
Schedule IV - Mortgage Loans on Real Estate 43
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, 2005 and
2004 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, 2005. 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, 2005 and 2004 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
March 3, 2006
23
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Balance Sheets
December 31, 2005 and 2004
ASSETS
2005 2004
--------------- ----------------
Cash and cash equivalents $ 1,627,384 $ 346,393
--------------- ----------------
Loans
Loans secured by deeds of trust 5,448,401 7,388,478
Loans, unsecured, net of discount of $71,971 and
$107,433 in 2005 and 2004, respectively 161,987 238,484
Allowance for loan losses (700,536) (745,476)
--------------- ----------------
Net loans 4,909,852 6,881,486
--------------- ----------------
Interest and other receivables
Accrued interest and late fees 64,304 190,105
Advances on loans 6 8,188
--------------- ----------------
Total interest and other receivables 64,310 198,293
--------------- ----------------
Investment in limited liability company 882,641 -
Real estate held for sale, net 1,870,027 1,782,182
--------------- ----------------
Total assets $ 9,354,214 $ 9,208,354
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ - $ 4,951
Payable to affiliate 71,998 74,987
--------------- ----------------
Total liabilities 71,998 79,938
--------------- ----------------
Partners' capital
Limited partners' capital, subject to redemption 9,270,243 9,116,443
General partners' capital 11,973 11,973
--------------- ----------------
Total partners' capital 9,282,216 9,128,416
--------------- ----------------
Total liabilities and partners' capital $ 9,354,214 $ 9,208,354
=============== ================
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, 2005, 2004 and 2003
2005 2004 2003
------------- ------------- -------------
Revenues
Interest on loans $ 673,124 $ 818,527 $ 748,625
Late fees 10,903 19,822 24,053
Other 7,358 29,925 9,602
------------- ------------- -------------
691,385 868,274 782,280
------------- ------------- -------------
Expenses
Mortgage servicing fees 68,906 81,442 73,062
Interest expense 693 10,804 8,972
Clerical costs from Redwood Mortgage Corp. 13,663 17,826 23,014
Asset management fees 34,512 34,073 34,011
Provisions for (recovery of) losses on loans
and real estate held for sale (49,745) 65,007 (18,299)
Professional services 50,220 49,343 43,752
Other 35,581 31,133 25,127
------------- ------------- -------------
153,830 289,628 189,639
------------- ------------- -------------
Net income $ 537,555 $ 578,646 $ 592,641
============= ============= =============
Net income
General partners (1%) $ 5,376 $ 5,786 $ 5,926
Limited partners (99%) 532,179 572,860 586,715
------------- ------------- -------------
$ 537,555 $ 578,646 $ 592,641
============= ============= =============
Net income per $1,000 invested by limited partners for entire period
Where income is reinvested $ 59 $ 65 $ 67
Where partner receives income in monthly distributions $ 58 $ 63 $ 65
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, 2005, 2004 and 2003
Limited General Total
Partners' Partners' Partners'
Capital Capital Capital
---------------- ------------ ---------------
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
Net income 532,179 5,376 537,555
Early withdrawal penalties (2,014) - (2,014)
Partners' withdrawals (376,365) (5,376) (381,741)
---------------- ------------ ---------------
Balances at December 31, 2005 $ 9,270,243 $ 11,973 $ 9,282,216
================ ============ ===============
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, 2005, 2004 and 2003
2005 2004 2003
--------------- --------------- ---------------
Cash flows from operating activities
Net income $ 537,555 $ 578,646 $ 592,641
Adjustments to reconcile net income to
net cash provided by operating activities
Provisions for (recovery of) losses on loans and real estate (49,745) 65,007 (18,299)
Early withdrawal penalty credited to income (2,014) (2,741) (1,815)
Amortization of discount on unsecured loans (35,462) (21,487) (21,487)
Change in operating assets and liabilities
Loans, unsecured 83,391 15,554 5,706
Accrued interest and late fees 76,379 (252,153) (273,744)
Advances on loans 2,654 (5,987) (7,767)
Accounts payable (4,951) 849 1,509
Payable to affiliate (2,989) 23,699 19,112
Deferred interest - - (37,704)
--------------- --------------- ---------------
Net cash provided by operating activities 604,818 401,387 258,152
--------------- --------------- ---------------
Cash flows from investing activities
Principal collected on loans 5,023,486 3,517,558 2,556,852
Loans originated (3,859,637) (3,821,719) (4,349,527)
Payments for real estate (54,472) (17) -
Proceeds from disposition of real estate - 603,723 -
Payments on investment in limited liability company (51,463) - (149,693)
Proceeds from investment in limited liability company - - 1,362,415
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 1,057,914 299,545 (579,953)
--------------- --------------- ---------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net - (200,000) 200,000
Partners' withdrawals (381,741) (475,653) (614,930)
--------------- --------------- ---------------
Net cash used in financing activities (381,741) (675,653) (414,930)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,280,991 25,279 (736,731)
Cash and cash equivalents at beginning of year 346,393 321,114 1,057,845
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 1,627,384 $ 346,393 $ 321,114
=============== =============== ===============
Supplemental disclosures of cash flow information
Cash payments for interest $ 693 $ 10,804 $ 8,972
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, 2005, 2004 and 2003
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.
28
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
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, 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 at December 31,
2004. In 2005, the loan was paid-off in full. The average recorded investment in
impaired loans was $48,355 and $96,710 for December 31, 2005 and 2004,
respectively.
At December 31, 2005, the Partnership had three loans 90 days past maturity
or past due 90 days or more, totaling $362,867. In addition, accrued interest
and advances on these loans totaled $8,226 at December 31, 2005. The Partnership
does not consider any 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, the Partnership had five
loans 90 days past maturity or past due 90 days or more, including one impaired
loan, totaling $1,049,730. In addition, accrued interest and advances on these
loans totaled $60,233 at December 31, 2004. 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, 2005 and 2004, 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 67.18.% and
71.30%, 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.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a periodic basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral 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. 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.
29
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
The composition of the allowance for loan losses was as follows:
December 31, December 31,
------------------------------ -------------------------------
2005 2004
------------------------------ -------------------------------
Percent of
loans in Percent of
each loans in
category each
to total category to
Amount loans Amount total loans
------------- ------------ ------------- --------------
Balance at End of Year
Applicable to:
------------------------------------------
Domestic
Real estate - mortgage
Single family (1-4 units) $ 286,542 54.04% $ 82,380 60.82%
Apartments 29,026 10.46% 139,215 13.15%
Commercial 159,612 27.29% 300,312 26.03%
Land 63,368 8.21% 0 0.00%
------------- ------------ ------------- --------------
Total real estate mortgage $ 538,548 100.00% $ 521,907 100.00%
------------- ------------ ------------- --------------
Unsecured 161,988 100.00% 223,569 100.00%
------------- ------------ ------------- --------------
Total unsecured $ 161,988 100.00% $ 223,569 100.00%
------------- ------------ ------------- --------------
Total allowance for loan losses $ 700,536 100.00% $ 745,476 100.00%
============= ============ ============= ==============
30
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows:
Years Ended December 31
------------------------------------------------------------
2005 2004 2003
------------------ ----------------- ----------------
Balance at beginning of year $ 745,476 $ 680,469 $ 791,882
Charge-offs
Domestic
Real estate - mortgage
Single family (1-4 units) - - -
Apartments - - 40,573
Commercial 28,568 - 2,458
Land - - -
------------------ ----------------- ----------------
(28,568) - (43,031)
------------------ ----------------- ----------------
Recoveries
Domestic
Real estate - mortgage
Single family (1-4 units) - - -
Apartments - - -
Commercial - - -
Land - - -
------------------ ----------------- ----------------
- - -
------------------ ----------------- ----------------
Net charge-offs (28,568) - (43,031)
------------------ ----------------- ----------------
Additions (recovery) charge to operations (16,372) 65,007 (18,299)
------------------ ----------------- ----------------
Transfer to real estate held for sale reserve - - (50,083)
------------------ ----------------- ----------------
$ 700,536 $ 745,476 $ 680,469
Balance at end of year
================== ================= ================
Ratio of net charge-offs during
the period to average secured loans
outstanding during the period 0.45% 0.00% 0.59%
================== ================= ================
31
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
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 2005, the Company had an 8% interest in the Larkin Street Property
Company, LLC (see Note 6). 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.
32
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
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 2005, 2004 and 2003, late fee revenue of $10,903, $19,822 and
$24,053, respectively, was recorded. The Partnership has a late fee receivable
at December 31, 2005 and 2004 of $891 and $4,513, respectively.
Recently issued accounting pronouncements
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
No. 3, Reporting Accounting Changes in Interim Financial Statements. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. FAS 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The Partnership does not expect the
effect of FAS 154 will have material impact on its financial statements.
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.
33
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
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.
34
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
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, 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, 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 2005, 2004 and 2003, loan
brokerage commissions paid by the borrowers to Redwood Mortgage Corp. were
$137,913 and $93,465 and $111,927, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general
partners, based on the unpaid principal balance of the loan portfolio, or such
lesser amount as is reasonable and customary in the geographic area where the
property securing the mortgage is located. Once a loan is categorized as
impaired, mortgage servicing fees are no longer accrued. Additional service fees
are recorded upon the receipt of any subsequent payments on impaired loans.
Mortgage servicing fees of $68,906, $81,442 and $73,062 were incurred for 2005,
2004 and 2003, respectively. The Partnership has a payable to Redwood Mortgage
Corp. for servicing fees of $71,998 and $74,987 at December 31, 2005 and 2004,
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 $34,512, $34,073 and $34,011 were
incurred for 2005, 2004 and 2003, 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.
35
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
4. General Partners and Related Parties (continued)
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 2005, 2004 and 2003,
operating expenses totaling $13,663, $17,826 and $23,014, 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 $1,752,835
including accrued interest and advances. Management believes the full amount of
the Partnership's investment, $1,807,307 at December 31, 2005, 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.
During 1993, the Partnership acquired land through a deed in lieu of
foreclosure. Management believes the full amount of the Partnership's
investment, $62,720 at December 31, 2005, will be recovered based on its current
estimate of the property's fair value.
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, 2005 and 2004:
2005 2004
-------------- --------------
Costs of properties $ 1,870,027 $ 1,815,555
Reduction in value - (33,373)
-------------- --------------
Real estate held for sale, net $ 1,870,027 $ 1,782,182
============== ==============
6. Investment in Limited Liability Company
As a result of acquiring real properties through foreclosure, the
Partnership transferred its interests (principally land and building) to two
limited liability companies, Stockton Street Property Company, LLC ("Stockton")
and Larkin Street Property Company, LLC ("Larkin").
Larkin was created during 2005. It is owned 8% by the Partnership and 92%
by affiliates. The property is under development and development costs were
capitalized. No income or expense was recognized by Larkin during 2005.
Stockton was created in 2002. It was owned 34% by the Partnership and 66%
by an affiliate. 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.
36
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
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, 2005 and 2004, and the interest rate was 7.50% at
December 31, 2005 and 5.25% at December 31, 2004. This line of credit expires
December 2, 2011 and requires the Partnership to meet certain financial
covenants. As of December 31, 2005 and 2004, the Partnership was in compliance
with all loan covenants.
8. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of the Partnership capital:
2005 2004
-------------- --------------
Partners' capital per financial statements $ 9,282,216 $ 9,128,416
Allowance for loan losses 700,536 745,476
Allowance for real estate losses - 33,373
-------------- -------------
Partners' capital tax basis $ 9,982,752 $ 9,907,265
============== =============
In 2005 and 2004, approximately 68% and 69%, respectively, 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 $5,448,401 and $7,388,478 at
December 31, 2005 and 2004, respectively. The fair value of these loans of
$5,566,133 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.
37
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
10. Non-cash Transactions
During 2005, the Partnership foreclosed on property (see Note 6), which
resulted in an increase in investment in limited liability company of $831,178
and a decrease in loans receivable, accrued interest and advances of $776,228,
$49,422 and $5,528, respectively. In addition, an unsecured loan was written-off
against the allowance for loan losses in the amount of $28,568.
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.
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2005 and
2004, there were 23 and 28 secured loans outstanding, respectively, with the
following characteristics:
2005 2004
--------------- ---------------
Number of secured loans outstanding 23 28
Total secured loans outstanding $ 5,448,401 $ 7,388,478
$ $
Average secured loan outstanding 236,887 263,874
Average secured loan as percent of total secured loans 4.35% 3.57%
Average secured loan as percent of partners' capital 2.55% 2.89%
$ $
Largest secured loan outstanding 634,479 800,000
Largest secured loan as percent of total secured loans 11.65% 10.83%
Largest secured loan as percent of partners' capital 6.84% 8.76%
Largest secured loan as percent of total assets 6.78% 8.69%
Number of counties where security is located (all California) 13 13
Largest percentage of loans in one county 22.37% 24.64%
Average secured loan to appraised value of security based on
appraised values and prior liens at time loan was consummated 67.18% 71.30%
Number of secured loans in foreclosure - 1
Amount of secured loans in foreclosure $ - $ 776,228
38
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
11. Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2005
and 2004:
2005 2004
--------------- ---------------
First trust deeds $ 3,920,466 $ 5,937,736
Second trust deeds 1,453,054 1,450,742
Third trust deeds 74,881 -
--------------- ---------------
Total loans 5,448,401 7,388,478
Prior liens due other lenders at time of loan 4,272,101 1,944,172
--------------- ---------------
Total debt $ 9,720,502 $ 9,332,650
=============== ===============
Appraised property value at time of loan $ 14,470,371 $ 13,089,113
Total debt as percent of appraisals 67.18% 71.30%
Loans by type of property
Single family (1-4 units) $ 2,944,330 $ 4,493,519
Apartments 570,000 971,864
Commercial 1,487,019 1,923,095
Land 447,052 -
--------------- ---------------
$ 5,448,401 $ 7,388,478
=============== ===============
The interest rates on these loans ranged from 8.50% to 10.00% at December
31, 2005 and 6.50% to 10.50% at December 31, 2004.
Scheduled maturity dates of secured loans as of December 31, 2005 are as
follows:
Year Ending December 31,
- ----------------------------------
2006 $ 884,322
2007 447,054
2008 215,000
2009 1,324,441
2010 2,577,584
--------------
Total $ 5,448,401
==============
39
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
11. Asset Concentrations and Characteristics (continued)
The scheduled maturities for 2006 above include approximately $64,322 in
two loans which were 90 days past maturity at December 31, 2005. 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.
At times, the Partnership's cash deposits exceed federally insured limits.
Management believes deposits are maintained in financially secure financial
institutions.
In 2004 the Partnership had a substantial amount of its loan receivable
balance due on two loans from one borrower. During 2005, these loans were paid
in full. This borrower accounted for approximately 17% of the secured loan
balance at December 31, 2004. This borrower accounted for approximately 16% and
34% of interest on loans for the years ended December 31, 2005 and 2004,
respectively. The value of collateral securing these loans was less than the
principal balance due under the loans. Redwood Mortgage Corp. had 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 were not considered impaired solely because
the value of the collateral securing the loans was less than the principal
balance due to the Partnership.
The Partnership also has 22% and 21% of its receivable balance due from two
borrowers at December 31, 2005 and 2004, respectively. Loans to the two
borrowers in 2005 were funded late in the year, hence income derived from these
investments accounted for 3.10% of the interest revenue for the year ended
December 31, 2005. The other two borrowers had their loans with the Partnership
for the full term in 2004 and interest revenue accounted for approximately 19%
for the year ended December 31, 2004.
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, 2005. As of December 31, 2005 there are no loans under workout
agreement.
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, 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.
40
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
13. Selected Financial Information (Unaudited)
Calendar Quarter
--------------------------------------------------------
First Second Third Fourth Annual
--------------- ------------- -------------- -------------- --------------
Revenues
2005 $ 174,489 $ 152,219 $ 204,591 $ 160,086 $ 691,385
2004 $ 217,654 $ 207,404 $ 215,309 $ 227,907 $ 868,274
Expenses
2005 $ 35,393 $ 16,871 $ 56,016 $ 45,550 $ 153,830
2004 $ 77,558 $ 68,959 $ 65,976 $ 77,135 $ 289,628
Net income allocated to general partners
2005 $ 1,391 $ 1,353 $ 1,486 $ 1,146 $ 5,376
2004 $ 1,401 $ 1,384 $ 1,493 $ 1,508 $ 5,786
Net income allocated to limited partners
2005 $ 137,705 $ 133,995 $ 147,089 $ 113,390 $ 532,179
2004 $ 138,695 $ 137,061 $ 147,840 $ 149,264 $ 572,860
Net income per $1,000 invested where income is
Reinvested
2005 $ 15 $ 15 $ 16 $ 13 $ 59
2004 $ 15 $ 15 $ 16 $ 19 $ 65
Withdrawn
2005 $ 15 $ 15 $ 16 $ 12 $ 58
2004 $ 15 $ 15 $ 16 $ 17 $ 63
41
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Schedule II
Valuation and Qualifying Accounts for the years ended
December 31, 2005, 2004 and 2003
Col B. Col. C - Additions Col E.
-----------------------------
Balance at Charged to Charged Balance
Col A. Beginning Costs and to Other Col. D at End
Description of Period Expenses Accounts Deductions of Period
- ------------------------------------------ ------------- ------------- ------------ ------------- -------------
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) (a) $ 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) (b) $ 33,373
------------- ------------- ------------ ------------- --------------
$ 1,310,638 $ 65,007 $ - $ (596,796) (b) $ 778,849
============= ============= ============ ============= ==============
Year Ended December 31, 2005
Deducted from asset accounts
Allowance for doubtful accounts $ 745,476 $ (16,372) $ - $ (28,568) (a) $ 700,536
Cumulative write-down of
real estate held for sale (REO) $ 33,373 $ (33,373) $ - $ - $ -
------------- ------------- ------------ ------------- --------------
$ 778,849 $ (49,745) $ - $ (28,568) (a) $ 700,536
============= ============= ============ ============= ==============
(a) - Represents write-offs on loans.
(b) - Represents sales of REO.
42
REDWOOD MORTGAGE INVESTORS VII
(A California Limited Partnership)
Schedule IV
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2005
Col. H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principle of Geographic
Descrip. Rate Date Terms Liens Amount Investment or Interest Lien Location
- ----------- ---------- ------------ ------------ ------------- ------------- -------------- -------------- ---------- ----------
Comm. 10.00% 12/01/03 $ 471 $ - $ 53,636 $ 53,062 $ 53,062 1st Stanislaus
Comm. 10.00% 12/01/01 105 82,723 11,919 11,260 11,260 2nd Stanislaus
Res. 9.00% 04/01/09 1,139 - 141,500 138,706 - 1st San Joaquin
Res. 9.25% 07/01/09 1,892 416,018 230,000 227,491 - 2nd Contra Costa
Res. 9.25% 07/01/09 921 265,759 112,000 110,759 - 2nd San Mateo
Comm. 9.00% 08/01/09 3,000 - 400,000 400,000 - 1st San Francisco
Res. 8.50% 09/01/06 1,417 - 200,000 250,000 - 1st Monterey
Res. 9.25% 11/01/09 1,234 352,177 150,000 148,941 - 2nd San Mateo
Res. 9.25% 11/01/09 2,468 - 300,000 298,545 298,545 1st San Mateo
Res. 8.75% 02/01/10 1,180 571,769 150,000 147,565 - 2nd San Mateo
Comm. 9.50% 03/01/10 3,279 - 390,000 388,218 - 1st San Mateo
Res. 9.00% 03/01/10 1,046 - 130,000 129,341 - 1st Santa Cruz
Res. 9.25% 07/01/10 1,686 - 205,000 204,460 - 1st Solano
Res. 9.25% 08/01/10 617 627,455 75,000 74,882 - 2nd Solano
Res. 9.25% 08/01/10 4,387 1,460,802 533,250 532,131 - 2nd Santa Clara
Res. 9.25% 08/01/10 1,316 - 160,000 159,664 - 1st Santa Barbara
Res. 9.25% 09/01/10 494 295,000 60,000 59,906 - 2nd Alameda
Land 9.50% 10/01/07 3,651 - 487,500 447,054 - 1st Santa Clara
Apts. 9.50% 10/01/06 4,513 - 570,000 570,000 - 1st Contra Costa
Res. 9.25% 11/01/10 1,004 - 122,000 121,937 - 1st Tulare
Res. 8.50% 12/01/10 961 - 125,000 125,000 - 1st San Mateo
Comm. 9.50% 12/01/10 5,548 - 635,000 634,479 - 1st Marin
Res. 8.50% 01/01/08 1,523 200,398 215,000 215,000 - 2nd Solano
Total $4,272,101 $5,456,805 $5,448,401 $ 362,867
============= ============= ============= ===============
Note: Most loans have balloon payments due at maturity.
43
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, 2005
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
------------------------------------------------------
2005 2004 2003
--------------- ---------------- ---------------
Balance at beginning of year $ 7,388,478 $ 8,280,826 $ 6,423,984
--------------- ---------------- ---------------
Additions during period
New loans 3,859,637 3,821,719 4,349,527
Other - - 107,198
--------------- ---------------- ---------------
Total additions 3,859,637 3,821,719 4,456,725
--------------- ---------------- ---------------
Deductions during period
Collections of principal 5,023,486 3,517,558 2,556,852
Foreclosures 776,228 1,196,509 -
Cost of loans sold - - -
Amortization of premium - - -
Other - - 43,031
--------------- ---------------- ---------------
Total deductions 5,799,714 4,714,067 2,599,883
--------------- ---------------- ---------------
Balance at close of year $ 5,448,401 $ 7,388,478 $ 8,280,826
=============== ================ ===============
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Partnership's independent registered
public accounting firm during the years ended December 31, 2005 and 2004.
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
44
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 49, 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 Burwell trusts. Michael R. Burwell is a director of Gymno and
the director position held by D. Russell Burwell is currently vacant. Michael R.
Burwell is its President, Chief Financial Officer, and Secretary. Michael R.
Burwell has a controlling interest in this company through his ownership of
stock and as trustee of the Burwell trusts.
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.
45
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, 2005. All
such compensation is in compliance with the guidelines and limitations set forth
in the partnership agreement.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
----------------------------------- ----------------------------------------------------------------- --------------
I. Redwood Mortgage Corp. Mortgage Servicing Fee for servicing loans..............................$68,906
General Partners &/or Affiliates Asset Management Fee for managing assets................................$34,512
General Partners 1% interest in profits...................................................$5,376
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..........$137,913
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......................$9,536
Gymno Corporation Reconveyance Fee...........................................................$749
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, 2005 . . . . . . $13,663
46
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 2005 and 2004 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2005 and 2004 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 $38,054 and $40,643,
respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2005 and 2004 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2005 and 2004, were $3,588 and $4,854, 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, 2005 and 2004.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the Partnership.
47
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.
48
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 30st day of March
2006.
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 30st day of March 2006.
Signature Title Date
/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell General Partner March 30, 2006
/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell President, Secretary & Chief March 30, 2006
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
49
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ----------------------------
Michael R. Burwell, General Partner
March 30, 2006
50
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- --------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006
51
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, 2005 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.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
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Michael R. Burwell, General Partner
March 30, 2006
52
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, 2005 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.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006
53