As filed with the Securities and Exchange Commission
on April 21, 2004
Registration No. 333-106900
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT NO. 333-106900
AS FILED ON OCTOBER 7, 2003
Under
THE SECURITIES ACT OF 1933
REDWOOD MORTGAGE INVESTORS VIII
(Exact name of registrant as specified in its charter)
CALIFORNIA 6611 94-3158788
- ---------------------------- ----------------------- --------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
900 Veterans Blvd., Suite 500, Redwood City, California 94063 (650)
365-5341 (Address and telephone number of principal executive offices)
900 Veterans Blvd., Suite 500, Redwood City, California 94063 (650)
365-5341 (Address of principal place of business or intended principal place of
business)
Michael R. Burwell
900 Veterans Blvd., Suite 500, Redwood City, California 94063 (650)
365-5341 (Name, address, including zip code and telephone number, including area
code of agent for service)
Copies to:
Stephen C. Ryan, Esq.
Cox Castle & Nicholson LLP
555 Montgomery Street Fifteenth Floor
San Francisco, California 94111
Approximate date of commencement
of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: |X|
Supplement No. 2 dated April 21, 2004
to the Prospectus Dated October 7, 2003
Redwood Mortgage Investors VIII,
A California Limited Partnership
The following information updates the Prospectus of Redwood Mortgage
Investors VIII, a California limited partnership (the "Partnership") dated
October 7, 2003 ("the Prospectus"). This Supplement No. 2 replaces in its
entirety, Supplement No. 1. You should no longer refer to or rely on the
information contained in Supplement No. 1.
In addition to updating the financial information for the Partnership and
its General Partners, this Supplement also updates the Minimum Suitability
Standards of the Partnership as shown on Page 1 of the Prospectus. New Minimum
Suitability Standards are as follows:
o a net worth (exclusive of home, furnishings and automobiles) of at least
$60,000 plus an annual gross income of at least $60,000, or
o irrespective of annual gross income, a net worth of $225,000 (exclusive
of home, furnishings and automobiles). In the case of sales to fiduciary
accounts, such conditions must be met by the fiduciary, by the fiduciary account
or by the donor who directly and indirectly supplied the funds for the purchase
of units.
Important additional information regarding the business of the Partnership
and the risks involved in investing in the Partnership are contained in the
Prospectus. You should carefully read the Prospectus along with this Supplement.
1. Summary of Partnership Activities. The Partnership is engaged in
business as a mortgage lender. The Partnership makes loans to individuals and
business entities secured by residential, investment or commercial property. In
order to ensure repayment of the loans, the loans are secured by first and
second, and in some limited cases, third deeds of trust on the property. For a
more detailed discussion of deeds of trust and other factors affecting the loans
made by the Partnership, you should carefully review the Section of the
Prospectus entitled "CERTAIN LEGAL ASPECTS OF PARTNERSHIP LOANS."
|X| Current Offering. In October 2003, we elected to continue offering
Units in the Partnership in order to increase the Partnership's loan portfolio.
By increasing the Partnership's loan portfolio, we can continue to increase
diversity and add additional safety to the portfolio. In October 2003, the
Partnership began offering Units in its fifth Offering of $75,000,000.
|X| Status of Current Offering. As of March 31, 2004, the Partnership had
sold $14,635,000 of Units from the current Offering. The total aggregate
proceeds received from inception of the Partnership are $139,544,000 as of March
31, 2004. The Partnership had outstanding secured loans with a total principal
balance of 138,220,000 as of March 31, 2004. As of March 31, 2004, the
Partnership had, in connection with its current offering of $75,000,000 of
Units, incurred no organizational costs and $241,000 in syndication costs.
|X| No Adverse Business Development. As of the date of this Supplement,
there have been no adverse business developments or conditions in the
Partnership, or any prior limited partnerships in which the General Partners are
involved, that would be material to a prospective investor.
1
2. Financial Statements.
Financial Statements of the Partnership. The Financial Statements of the
Partnership included in this Supplement have been audited by Armanino McKenna,
LLP, independent auditors as of December 31, 2003.
Financial Statements of Corporate General Partners. The Balance Sheet of
Redwood Mortgage Corp., as of September 30, 2003 included in this Supplement has
been audited by Armanino McKenna, LLP, independent auditors. The Balance Sheet
of GYMNO Corporation., as of December 31, 2003 included in this Supplement has
been audited by Armanino McKenna, LLP, independent auditors.
3. Prior Performance Tables.
The prior performance tables in the Prospectus contain information on
programs previously sponsored by the General Partners as well as information
regarding previous offerings in the Partnership. The purpose of these tables is
to provide information on the performance of these partnerships to assist
prospective investors in evaluating the experience of the General Partners as
sponsors of such partnerships. These tables have been updated as of December 31,
2003 and are included as part of this Supplement.
Additional information regarding the Partnership and its operations can be
obtained by reviewing the Partnership annual and quarterly reports filed with
the Securities and Exchange Commission pursuant to the Securities and Exchange
Act of 1934, as amended. You may review these reports at the office of the
Commission in Washington, DC, 20549. Additionally, the Commission maintains a
website that contains these reports, the Partnership's Registration Statements
and other information regarding the Partnership and the General Partners. The
address of the Commission's website is HTTP://www.sec.gov.
2
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
INDEPENDENT AUDITORS' REPORT
To the Partners
Redwood Mortgage Investors VIII
Redwood City, California
We have audited the accompanying consolidated balance sheets of Redwood
Mortgage Investors VIII (a California limited partnership) as of December 31,
2003 and 2002 and the related consolidated statements of income, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Redwood
Mortgage Investors VIII as of December 31, 2003 and 2002 and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 2003, 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 consolidated financial statements taken as a whole. Schedule II and IV are
presented for purposes of additional analysis and are not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
ARMANINO McKENNA LLP
/s/ Thomas E Gard
- --------------------------
San Ramon, California
February 13, 2004
3
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(in thousands)
ASSETS
2003 2002
----------- ----------
Cash and cash equivalents $ 8,921 $ 7,188
----------- ----------
Loans
Loans secured by deeds of trust 147,174 83,650
Loans, unsecured 34 -
Allowance for loan losses (2,649) (3,021)
----------- ----------
Net loans 144,559 80,629
----------- ----------
Interest and other receivables
Accrued interest and late fees 4,735 3,913
Advances on loans 416 279
Other receivables - 888
----------- ----------
Total interest and other receivables 5,151 5,080
----------- ----------
Other assets
Loan origination fees, net 44 22
Real estate held for sale, net 3,979 9,286
----------- ----------
Total other assets 4,023 9,308
----------- ----------
Total assets $ 162,654 $ 102,205
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 22,000 $ -
Accounts payable 224 449
Payable to affiliate 448 294
Deferred interest - 112
Note payable - 1,782
----------- ----------
Total liabilities 22,672 2,637
----------- ----------
Minority interest - 1,213
----------- ----------
Investors in applicant status 1,210 2,578
----------- ----------
Partners' capital
Limited partners' capital, subject to redemption,
net of unallocated syndication costs of $875
and $592 for 2003 and 2002, respectively; and
net of formation loan receivable of $7,550
and $5,258 for 2003 and 2002, respectively 138,649 95,690
General partners' capital, net of unallocated
syndication costs of $9 and $6 for 2003 and
2002, respectively 123 87
----------- ----------
Total partners' capital 138,772 95,777
----------- ----------
Total liabilities and partners' capital $ 162,654 $ 102,205
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands, except for per limited partner amounts)
2003 2002 2001
------------ ----------- ----------
Revenues
Interest on loans $ 12,496 $ 11,416 $ 8,920
Late fees 201 114 99
Other 262 161 69
----------- ----------- ----------
12,958 11,691 9,088
----------- ----------- ----------
Expenses
Mortgage servicing fees 1,057 1,098 552
Interest expense 71 516 972
Amortization of loan origination fees 23 12 14
Provision for losses on loans 782 780 957
Provision for losses on real estate - 500 -
Asset management fees 468 325 158
Clerical costs from Redwood Mortgage Corp. 290 266 241
Professional services 111 66 13
Broker expense 181 444 -
Amortization of discount on imputed interest 195 154 53
Other 228 44 35
----------- ----------- ----------
3,406 4,205 2,995
----------- ----------- ----------
Income before minority interest 9,552 7,486 6,093
Minority interest share of subsidiary loss 42 - -
----------- ----------- ----------
Net income $ 9,594 $ 7,486 $ 6,093
=========== =========== ==========
Net income
General partners (1%) $ 96 $ 75 $ 61
Limited partners (99%) 9,498 7,411 6,032
----------- ----------- ----------
$ 9,594 $ 7,486 $ 6,093
=========== =========== ==========
Net income per $1,000 invested by limited partners
for entire period
Where income is reinvested and compounded $ 78 $ 87 $ 90
Where partner receives income in monthly distributions $ 75 $ 84 $ 86
The accompanying notes are an integral part of these consolidated financial
statements.
5
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands)
Limited Partners
---------------------------------------------------------
Partners Capital Total
In Account Unallocated Formation Limited
Applicant Limited Syndication Loan, Partners'
Status Partners' Costs Gross Capital
----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 $ 225 $ 56,502 $ (311) $ (3,011) $ 53,180
Contributions on application 19,712 - - - -
Formation loan increases - - - (1,462) (1,462)
Formation loan payments received - - - 300 300
Interest credited to partners in applicant
status 1 - - - -
Transfers to partners' capital (19,265) 19,245 - - 19,245
Net income - 6,032 - - 6,032
Syndication costs incurred - - (291) - (291)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,317) - - (3,317)
Early withdrawal penalties - (70) 24 46 -
------------ ----------- ----------- ----------- -----------
Balances at December 31, 2001 673 78,214 (400) (4,127) 73,687
Contributions on application 21,563 - - - -
Formation loan increases - - - (1,677) (1,677)
Formation loan payments received - - - 530 530
Interest credited to partners in applicant
status 1 - - - -
Transfers to partners' capital (19,659) 19,659 - - 19,659
Net income - 7,411 - - 7,411
Syndication costs incurred - - (377) - (377)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,543) - - (3,543)
Early withdrawal penalties - (23) 7 16 -
------------ ----------- ----------- ----------- -----------
Balances at December 31, 2002 2,578 101,540 (592) (5,258) 95,690
Contributions on application 40,030 - - - -
Formation loan increases - - - (2,929) (2,929)
Formation loan payments received - - - 575 575
Interest credited to partners in applicant
status 37 - - - -
Interest withdrawn (14) - - - -
Transfers to partners' capital (41,421) 41,421 - - 41,421
Net income - 9,498 - - 9,498
Syndication costs incurred - - (478) - (478)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (5,128) - - (5,128)
Early withdrawal penalties - (79) 17 62 -
------------ ----------- ----------- ----------- -----------
Balances at December 31, 2003 $ 1,210 $ 147,074 $ (875) $ (7,550) $ 138,649
============ =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (continued)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands)
General Partners
-------------------------------------------
Capital Total
Account Unallocated General Total
General Syndication Partners' Partners'
Partners' Costs Capital Capital
----------- ----------- ----------- -----------
Balances at December 31, 2000 $ 51 $ (3) $ 48 $ 53,228
Contributions on application - - - -
Formation loan increases - - - (1,462)
Formation loan payments received - - - 300
Interest credited to partners in applicant status - - - -
Capital contributed 20 - 20 19,265
Net income 61 - 61 6,093
Syndication costs incurred - (3) (3) (294)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (59) - (59) (3,376)
Early withdrawal penalties - - - -
----------- ----------- ----------- -----------
Balances at December 31, 2001 71 (4) 67 73,754
Contributions on application - - - -
Formation loan increases - - - (1,677)
Formation loan payments received - - - 530
Interest credited to partners in applicant status - - - -
Capital contributed 22 - 22 19,681
Net income 75 - 75 7,486
Syndication costs incurred - (4) (4) (381)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (73) - (73) (3,616)
Early withdrawal penalties - - - -
----------- ----------- ----------- -----------
Balances at December 31, 2002 93 (6) 87 95,777
Contributions on application - - - -
Formation loan increases - - - (2,929)
Formation loan payments received - - - 575
Interest credited to partners in applicant status - - - -
Interest withdrawn - - - -
Capital contributed 40 - 40 41,461
Net income 96 - 96 9,594
Syndication costs incurred - (5) (5) (483)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (95) - (95) (5,223)
Early withdrawal penalties - - - -
----------- ----------- ----------- -----------
Balances at December 31, 2003 $ 132 $ (9) $ 123 $ 138,772
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands)
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities
Net income $ 9,594 $ 7,486 $ 6,093
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of loan fees 23 12 14
Imputed interest income (195) (154) (53)
Amortization of discount 195 154 53
Provision for loan and real estate losses 782 1,280 957
Realized loss on sale of real estate 127 - -
Minority interest share of subsidiary loss (42) - -
Change in operating assets and liabilities
Unsecured loans - 4 50
Accrued interest and late fees (3,448) (1,253) (2,306)
Advances on loans (500) (312) (23)
Other receivables 888 (888) -
Loan origination fees (45) (28) (7)
Accounts payable (225) 375 44
Payable to affiliate 154 185 109
Deferred interest (112) 112 (82)
----------- ----------- -----------
Net cash provided by operating activities 7,196 6,973 4,849
----------- ----------- -----------
Cash flows from investing activities
Loans originated (96,820) (32,601) (47,512)
Principal collected on loans 35,097 26,083 33,239
Payments for development of real estate (706) (219) -
Proceeds from disposition of real estate 6,036 - -
----------- ----------- -----------
Net cash used in investing activities (56,393) (6,737) (14,273)
----------- ----------- -----------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net 22,000 (11,400) (5,000)
Repayments on note payable (1,782) (7) -
Contributions by partner applicants 40,093 21,586 19,713
Partners' withdrawals (5,223) (3,616) (3,376)
Syndication costs paid (483) (381) (294)
Formation loan lending (2,929) (1,677) (1,462)
Formation loan collections 575 530 300
Distributions to minority interest (1,321) - -
----------- ----------- -----------
Net cash provided by financing activities 50,930 5,035 9,881
----------- ----------- -----------
Net increase in cash and cash equivalents 1,733 5,271 457
Cash and cash equivalents - beginning of year 7,188 1,917 1,460
----------- ----------- -----------
Cash and cash equivalents - end of year $ 8,921 $ 7,188 $ 1,917
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest, net $ 71 $ 516 $ 972
The accompanying notes are an integral part of these consolidated financial
statements.
8
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. Organizational and General
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993. The general partners are Michael R.
Burwell, an individual, Gymno Corporation and Redwood Mortgage Corp., both
California corporations. 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., a general partner. At December 31, 2003, the Partnership
was in its fifth offering stage, wherein contributed capital totaled
$131,269,000 of approved aggregate offerings of $200,000,000. As of December 31,
2003 and 2002, $1,210,000 and $2,578,000, respectively, remained in applicant
status, and total Partnership units sold were in the aggregate of $131,269,000
and $91,239,000, respectively.
A minimum of $250,000 and a maximum of $15,000,000 in Partnership units
were initially offered through qualified broker-dealers. This initial offering
closed in October 1996. In December 1996, the Partnership commenced a second
offering of an additional $30,000,000, which closed on August 30, 2000. On
August 31, 2000, the Partnership commenced a third offering for an additional
$30,000,000, which closed in April 2002. On October 31, 2002, the Partnership
commenced a fourth offering for an additional $50,000,000, which closed in
October 2003. On October 7, 2003, the Partnership commenced a fifth offering for
an additional $75,000,000. As loans are identified, partners are transferred
from applicant status to admitted partners participating in loan operations.
Sales commissions - formation loans
Sales commissions are not paid directly by the Partnership out of the
offering proceeds. Instead, the Partnership loans to Redwood Mortgage Corp., one
of the general partners, amounts to pay all sales commissions and amounts
payable in connection with unsolicited orders. This loan is unsecured and
non-interest bearing and is referred to as the "formation loan."
The formation loan relating to the initial offering ($15,000,000) totaled
$1,075,000, which was 7.2% of limited partners' contributions of $14,932,000. It
is being repaid, without interest, in ten annual installments of $107,000, which
commenced on January 1, 1997, following the year the initial offering closed.
The formation loan relating to the second offering ($30,000,000) totaled
$2,272,000, which was 7.6% of limited partners' contributions of $29,993,000. It
is being repaid, without interest, in ten equal annual installments of $201,000,
which commenced on January 1, 2001, following the year the second offering
closed. Additional payments on this loan were also made during the offering
period.
The formation loan relating to the third offering ($30,000,000) totaled
$2,218,000, which was 7.4% of the limited partners' contributions of
$29,999,000. It is to be repaid, without interest, in ten annual installments of
$178,000, which commenced on January 1, 2003. Additional payments on this loan
were also made during the offering stage.
The formation loan relating to the fourth offering ($50,000,000) totaled
$3,777,000, which was 7.6% of the limited partners contributions of $49,985,000.
It is to be repaid, without interest, in ten annual installments of $365,000,
which will commence on January 1, 2004. Additional payments on this loan were
also made during the offering stage.
The formation loan relating to the fifth offering ($75,000,000) totaled
$453,000 as of December 31, 2003, which was 7.1% of the limited partners
contributions of $6,360,000 through December 31, 2003. An equal annual repayment
schedule on this loan, without interest, will commence in the year subsequent to
the closing of this offering.
9
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. Organizational and General (continued)
Sales commissions - formation loans (continued)
For the offerings, sales commissions paid to brokers range from 0% (units
sold by general partners) to 9% of gross proceeds. The Partnership anticipates
that the sales commissions will approximate 7.6% based on the assumption that
65% of investors will elect to reinvest earnings, thus generating full 9%
commissions. The principal balance of the formation loan will increase as
additional sales of units are made. The amount of the annual installment payment
to be made by Redwood Mortgage Corp., during the offering stage, will be
determined at annual installments of one-tenth of the principal balance of the
formation loan as of December 31 of each year.
The following summarizes formation loan transactions to December 31, 2003
(in thousands):
Initial Subsequent Third Fourth Fifth
Offering of Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 $75,000 Total
------------ ------------- ------------ ------------ ------------ ------------
Limited Partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 6,360 $ 131,269
============ ============= ============ ============ ============ ============
Formation loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 453 $ 9,795
Discount on
imputed interest (48) (435) (367) (757) (86) (1,693)
------------ ------------- ------------ ------------ ------------ ------------
Formation loan
made, net 1,027 1,837 1,851 3,020 367 8,102
Repayments to date (690) (837) (384) (130) - (2,041)
Early withdrawal
penalties applied (63) (88) (53) - - (204)
------------ ------------- ------------ ------------ ------------ ------------
Formation loan, net
at December 31, 2003 274 912 1,414 2,890 367 5,857
Unamortized discount
on imputed interest 48 435 367 757 86 1,693
------------ ------------- ------------ ------------ ------------ ------------
Balance,
December 31, 2003 $ 322 $ 1,347 $ 1,781 $ 3,647 $ 453 $ 7,550
============ ============= ============ ============ ============ ============
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.1% 7.5%
The formation loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced. Interest has been imputed at
the market rate of interest in effect at the date the offerings closed. During
2003, 2002 and 2001 amortization expenses of $195,000, $154,000 and $53,000,
respectively, were recorded related to the discount on imputed interest.
Syndication costs
The Partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses and filing fees. Syndication costs are charged against partners'
capital and are being allocated to individual partners consistent with the
partnership agreement.
10
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. Organizational and General (continued)
Syndication costs (continued)
Through December 31, 2003, syndication costs of $2,553,000 had been
incurred by the Partnership with the following distribution (in thousands):
Costs incurred $ 2,553
Early withdrawal penalties applied (88)
Allocated to date (1,581)
-----------
December 31, 2003 balance $ 884
===========
Syndication costs attributable to the initial offering ($15,000,000) were
limited to the lesser of 10% of the gross proceeds or $600,000 with any excess
being paid by the general partners. Applicable gross proceeds were $14,932,000.
Related expenditures totaled $582,000 ($570,000 syndication costs plus $12,000
organization expense) or 3.9%.
Syndication costs attributable to the second offering ($30,000,000) were
limited to the lesser of 10% of the gross proceeds or $1,200,000 with any excess
being paid by the general partners. Gross proceeds of the second offering were
$29,993,000. Syndication costs totaled $598,000 or 2% of contributions.
Syndication costs attributable to the third offering ($30,000,000) were
limited to the lesser of 10% of the gross proceeds or $1,200,000 with any excess
being paid by the general partners. Gross proceeds of the third offering were
$29,999,000. Syndication costs totaled $643,000 or 2% of contributions.
Syndication costs attributable to the fourth offering ($50,000,000) were
limited to the lesser of 10% of the gross proceeds or $2,000,000 with any excess
to be paid by the general partners. Gross proceeds of the fourth offering were
$49,985,000. Syndication costs totaled $658,000 or 1.3% of contributions.
Syndication costs attributable to the fifth offering ($75,000,000) will be
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. As of December 31, 2003, the fifth offering
had incurred syndication costs of $84,000 (1.3% of contributions).
Term of the partnership
The Partnership is scheduled to terminate on December 31, 2032, unless
sooner terminated as provided in the partnership agreement.
2. Summary of Significant Accounting Policies
Basis of presentation
The Partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiary, Russian Hill Property Company, LLC ("Russian") and
its 66%-owned subsidiary, Stockton Street Property Company, LLC ("Stockton").
All significant intercompany transactions and balances have been eliminated in
consolidation.
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year presentation.
11
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Management estimates
The preparation of consolidated 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 consolidated 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 by the effective interest method.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the 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, 2003 and 2002, there
were no loans categorized as impaired by the Partnership. The average recorded
investment in impaired loans was $0 for 2003 and $355,000 for 2002 and 2001.
At December 31, 2003 and 2002, the Partnership had sixteen and twenty loans
past due 90 days or more totaling $27,182,000 and $28,650,000, respectively. The
Partnership does not consider 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. As presented in Note 11 to the
consolidated financial statements, the average loan to appraised value of
security based upon appraised values and prior indebtedness at the time the
loans were consummated for loans outstanding at December 31, 2003 and 2002 was
53.97% and 60.61%, respectively. When loans are considered impaired, the
allowance for loan losses is updated to reflect the change in the valuation of
collateral security. However, a low loan to value ratio has the tendency to
minimize reductions for impairment.
During 2003, the Partnership restructured three loans into a new loan and
restructured two loans into an existing loan, both with lower interest rates.
The amount restructured was $15,599,000.
During 2002, the Partnership restructured three previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$1,090,000.
12
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2003
and 2002 was as follows (in thousands):
2003 2002
----------- ----------
Specified loans $ 49 $ 120
General 2,600 2,901
----------- ----------
$ 2,649 $ 3,021
=========== ==========
Activity in the allowance for loan losses is as follows for the years
ended December 31, (in thousands):
2003 2002 2001
---------- ----------- ----------
Beginning balance $ 3,021 $ 2,247 $ 1,345
Restructured loans - 11 -
Additions charged to income 782 780 957
Write-offs (1,154) (17) (55)
---------- ---------- ----------
$ 2,649 $ 3,021 $ 2,247
========== ========== ==========
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 undiscounted future cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to estimated fair value. The
Partnership increased the allowance for losses on real estate held for sale by
$500,000 during the year ended December 31, 2002.
13
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Loan origination fees
The Partnership capitalizes fees for obtaining bank financing. The fees are
amortized over the life of the financing using the straight-line method.
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated 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 held 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 selected other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2003, 2002 and 2001, late fee revenue of $201,000, $114,000 and
$99,000, respectively, was recorded. The Partnership has a recorded late fee
receivable at December 31, 2003 and 2002 of $193,000 and $133,000, respectively.
Recently issued accounting pronouncements
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires the recognition of liabilities for guarantees that are issued or
modified subsequent to December 31, 2002. The liabilities should reflect the
fair value, at inception, of the guarantor's obligations to stand ready to
perform, in the event that the specified triggering events or conditions occur.
The implementation of FIN 45 did not have any significant effect on the
Partnership.
In January 2003, FASB issued FASB Interpretation 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 is
effective immediately for any variable interest entities created after January
31, 2003 and is effective beginning in the third quarter of 2003 to any variable
interest entities created prior to the issuance of the interpretation. FIN 46
provides a new framework to identify variable interest entities and to determine
when an entity should include the assets, liabilities, non-controlling interests
and the results of activities of a variable interest entity in its financial
statements. The implementation of FIN 46 did not have any significant effect on
the Partnership.
14
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. Summary of Significant Accounting Policies (continued)
Recently issued accounting pronouncements (continued)
In December 2003, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of
Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. SOP 03-03
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. The implementation of SOP 03-03 is not anticipated to have any
significant effect on the Partnership.
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner after a general partner ceases to be a general partner other than by
removal.
Applicant status
Subscription funds received from purchasers of Partnership units are not
admitted to the Partnership until appropriate lending opportunities are
available. During the period prior to the time of admission, which is
anticipated to be between 1 - 90 days, purchasers' subscriptions will remain
irrevocable and will earn interest at money market rates, which are lower than
the anticipated return on the Partnership's loan portfolio.
During 2003, 2002 and 2001, interest totaling $37,000, $1,000 and $1,000,
respectively, was credited to partners in applicant status. As loans were made
and partners were transferred to regular status to begin sharing in income from
loans secured by deeds of trust, the interest credited was either paid to the
investors or transferred to partners' capital along with the original
investment.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elect 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.
15
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
3. Other Partnership Provisions (continued)
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.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is non-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 as stated in the notice of
withdrawal 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 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.
Guaranteed interest rate for offering period
For the first three offerings, the general partners guaranteed an earnings
rate equal to the greater of actual earnings from mortgage operations or 2%
above The Weighted Average Cost of Funds Index for the Eleventh District Savings
Institutions (Savings & Loan & Thrift Institutions) as computed by the Federal
Home Loan Bank of San Francisco on a monthly basis, up to a maximum interest
rate of 12%. The interest rate was guaranteed during the period commencing with
the day a limited partner was admitted to the Partnership and ended three months
after the initial through third offering termination date, which in all cases
was August 2002. Through August 2002, actual earnings exceeded the guaranteed
amount for each month.
16
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
4. General Partners and Related Parties
The following are commissions and/or fees, which are paid to the general
partners:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership 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. In 2003, 2002 and 2001, loan brokerage commissions paid by the
borrowers were $2,621,000, $996,000 and $1,156,000, 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., 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 thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans. Mortgage servicing fees of $1,057
000, $1,098,000 and $552,000 were incurred for 2003, 2002 and 2001,
respectively. The Partnership has a payable to Redwood Mortgage Corp. for
servicing fees of $448,000 and $294,000 at December 31, 2003 and 2002,
respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual). Asset management fees of $468,000, $325,000 and $158,000 were
incurred for 2003, 2002 and 2001, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
Redwood Mortgage Corp., a general partner, is reimbursed by the Partnership
for all operating expenses 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 2003, 2002 and 2001,
operating expenses totaling $290,000, $266,000 and $241,000, respectively, were
reimbursed to Redwood Mortgage Corp.
Contributed capital
The general partners jointly or severally are to contribute 1/10 of 1% of
limited partners' contributions in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2003 and
2002, Gymno Corporation, a general partner, had capital in accordance with
Section 4.02(a) of the Partnership Agreement.
17
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
5. Real Estate Held for Sale
During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs").
The following schedule reflects the cost of the LLCs' properties and
recorded reductions to estimated fair values at December 31, (in thousands):
2003 2002
----------- -----------
Costs of properties $ 4,479 $ 9,786
Reduction in value (500) (500)
----------- -----------
Real estate held for sale, net $ 3,979 $ 9,286
=========== ===========
Russian
During 2002, a single-family residence that secured a Partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian was formed by the Partnership to complete the
development and sale of the property. The assets, liabilities and operating
results of Russian have been consolidated into the accompanying consolidated
financial statements of the Partnership. Costs related to the sale of this
property are being capitalized; thus, there was no income or expense recognized
by Russian during 2003 and 2002. As of December 31, 2003 and 2002, the
Partnership had advanced approximately $94,000 and $37,000, respectively, to
Russian for sales costs. At December 31, 2003 and 2002, the Partnership's total
investment in Russian was $3,979,000 and $3,913,000, net of a valuation
allowance of $500,000.
Stockton
During 2002, six condominium units that secured a Partnership loan totaling
$2,163,000, including accrued interest and advances, were transferred via a
statutory warranty deed to a new entity named Stockton Street Property Company,
LLC ("Stockton"). In addition, senior debt was assumed by Stockton on the
property in the amount of $1,789,000 (see Note 7). Stockton was formed by the
Partnership and an affiliate to complete development and sales of the
condominium units. The Partnership is co-manager of Stockton along with the
other member and is to receive 66% of the profits or losses. The assets,
liabilities and operating results of Stockton have been consolidated into the
accompanying consolidated financial statements of the Partnership. Development
costs were capitalized during construction; thus, there was no income or expense
recognized by Stockton during 2002 and a portion of 2003. As of December 31,
2003 and 2002, advances of approximately $132,000 and $238,000 were made for
construction and other related development costs and $48,000 and $87,000 of
interest expense was capitalized, respectively. At December 31, 2002, the
Partnership's total investment in Stockton was $5,373,000. As of December 31,
2003, the property had been sold and a net loss of $127,000 was incurred, of
which $42,000 was allocated to the minority interest.
6. Bank Line of Credit
The Partnership has a $22,000,000 bank line of credit through November 25,
2005, with borrowings at prime and secured by its loan portfolio. The
outstanding balances were $22,000,000 and $0 at December 31, 2003 and 2002,
respectively. The interest rate was 4.00% at December 31, 2003. The line of
credit requires the Partnership to comply with certain financial covenants. The
Partnership was in compliance with these covenants at December 31, 2003 and
2002.
18
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
7. Note Payable
During 2002, the Partnership assumed a bank loan of $1,789,000 in
connection with the foreclosure on a property (see Note 5). The loan was secured
by the property and bore interest at 5.68%. As of December 31, 2003, this loan
has been paid in full upon the sale of the related property.
8. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the consolidated financial statements to the tax basis of Partnership capital
(in thousands):
2003 2002
----------- -----------
Partners' capital per consolidated financial statements $ 138,772 $ 95,777
Non-allocated syndication costs 884 598
Allowance for loan losses and real estate held for sale 3,149 3,521
Formation loans receivable 7,550 5,258
----------- -----------
Partners' capital - tax basis $ 150,355 $ 105,154
=========== ===========
In 2003 and 2002, approximately 47% 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 carrying value was $147,174,000 and $83,650,000 at
December 31, 2003 and 2002, respectively. The fair value of these loans of
$148,748,000 and $84,976,000, respectively, was estimated based upon projected
cash flows discounted at the estimated current interest rates at which similar
loans would be made. The applicable amount of the allowance for loan losses
along with accrued interest and advances related thereto should also be
considered in evaluating the fair value versus the carrying value.
10. Non-cash Transactions
During 2003, the Partnership restructured three loans that resulted in an
increase to loans receivable of $2,989,000 and a decrease to accrued interest
and advances of $2,626,000 and $363,000, respectively.
During 2003, a previously secured loan became unsecured which resulted in a
decrease to loans receivable of $34,000 and an increase to unsecured loans of
$34,000.
19
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
10. Non-cash Transactions (continued)
During 2002, the Partnership foreclosed on two properties (see Note 5),
which resulted in an increase in real estate held for sale and notes payable of
$8,354,000 and $1,789,000, respectively and a decrease in loans receivable,
accrued interest and advances of $5,986,000, $383,000 and $196,000,
respectively.
During 2002, the Partnership restructured three loans that resulted in an
increase to loans receivable and the allowance for loan losses of $345,000 and
$11,000, respectively and a decrease to accrued interest and advances of
$302,000 and $32,000, respectively.
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2003 and
2002, there were 81 and 70 secured loans outstanding, respectively, with the
following characteristics (dollars in thousands):
2003 2002
---------- ----------
Number of secured loans outstanding 81 70
Total secured loans outstanding $ 147,174 $ 83,650
Average secured loan outstanding $ 1,817 $ 1,195
Average secured loan as percent of total 1.23% 1.43%
Average secured loan as percent of partners' capital 1.31% 1.25%
Largest secured loan outstanding $ 16,010 $ 4,943
Largest secured loan as percent of total 10.88% 5.91%
Largest secured loan as percent of partners' capital 11.54% 5.16%
Number of counties where security is located (all California) 20 15
Largest percentage of secured loans in one county 26.47% 27.22%
Average secured loan to appraised value of security based on
appraised values and prior liens at time loan was consummated 53.97% 60.61%
Number of secured loans in foreclosure status 3 6
Amount of secured loans in foreclosure $ 2,931 $ 4,029
20
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
11. Asset Concentrations and Characteristics (continued)
The following secured loan categories were held at December 31, 2003 and
2002 (in thousands):
2003 2002
----------- ----------
First trust deeds $ 84,437 $ 46,117
Second trust deeds 61,247 30,930
Third trust deeds 1,490 6,603
----------- ----------
Total loans 147,174 83,650
Prior liens due other lenders at time of loan 116,870 79,846
----------- ----------
Total debt $ 264,044 $163,496
=========== ==========
Appraised property value at time of loan $ 489,219 $269,773
Total loans as a percent of appraisals 53.97% 60.61%
Loans by type of property
Owner occupied homes $ 13,656 $ 12,854
Non-owner occupied homes 52,975 23,720
Apartments 22,649 6,572
Commercial 52,502 32,089
Land 5,392 8,415
----------- ----------
$ 147,174 $ 83,650
=========== ==========
The interest rates on the loans range from 7.50% to 18.00% at December 31,
2003.
Scheduled maturity dates of secured loans as of December 31, 2003 are as
follows (in thousands):
Year Ending December 31,
2004 $ 41,774
2005 59,496
2006 31,165
2007 8,138
2008 3,390
Thereafter 3,211
-----------
$ 147,174
===========
The scheduled maturities for 2004 include nine loans totaling $10,767,000
(7.3%), which are past maturity at December 31, 2003. Interest payments on eight
of these loans were delinquent and are included in total of loans 90 days or
more delinquent presented in Note 2.
Cash deposits per bank at December 31, 2003, exceeded federal insurance
limits (up to $100,000 per bank) by approximately $9,446,000.
21
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
12. Commitments and Contingencies
Construction loans
The Partnership has construction loans on projects, which are at various
stages of completion. The Partnership has approved the borrowers up to a maximum
loan balance; however, disbursements are made during completion phases
throughout the construction process. At December 31, 2003, there was $14,742,000
of undistributed construction loans.
Workout agreements
The Partnership has negotiated various workout agreements with borrowers.
The Partnership is not obligated to fund additional money as of December 31,
2003. There are six loans totaling $4,227,000 in workout agreements as of
December 31, 2003.
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.
13. Selected Financial Information (Unaudited)
Calendar Quarter
(in thousands)
------------------------------------------------
First Second Third Fourth Annual
--------- ---------- --------- --------- ---------
Revenues
2003 $ 2,789 $ 3,072 $ 3,225 $ 3,872 $12,958
2002 $ 2,591 $ 2,515 $ 3,165 $ 3,420 $11,691
2001 $ 2,151 $ 2,195 $ 2,265 $ 2,477 $ 9,088
Expenses
2003 $ 659 $ 711 $ 722 $ 1,272 $ 3,364
2002 $ 788 $ 665 $ 1,311 $ 1,441 $ 4,205
2001 $ 802 $ 711 $ 676 $ 806 $ 2,995
Net income allocated to general partners
2003 $ 21 $ 24 $ 25 $ 26 $ 96
2002 $ 18 $ 18 $ 19 $ 20 $ 75
2001 $ 13 $ 14 $ 15 $ 19 $ 61
Net income allocated to limited partners
2003 $ 2,109 $ 2,337 $ 2,478 $ 2,574 $ 9,498
2002 $ 1,784 $ 1,831 $ 1,836 $ 1,960 $ 7,411
2001 $ 1,335 $ 1,469 $ 1,573 $ 1,655 $ 6,032
22
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
13. Selected Financial Information (Unaudited) (continued)
Calendar Quarter
(in thousands)
----------------------------------------------
First Second Third Fourth Annual
--------- --------- --------- -------- ---------
Net income per $1,000 invested
where income is reinvested
2003 $ 20 $ 19 $ 18 $ 21 $ 78
2002 $ 21 $ 21 $ 21 $ 24 $ 87
2001 $ 22 $ 22 $ 22 $ 24 $ 90
where income is withdrawn
2003 $ 20 $ 19 $ 18 $ 18 $ 75
2002 $ 21 $ 21 $ 21 $ 21 $ 84
2002 $ 22 $ 22 $ 20 $ 20 $ 86
14. Subsequent Events
Subsequent to December 31, 2003 and through the date of this report, the
Partnership has received $3,928,000 of new investor money for the current
offering and had admitted $3,067,000 of partners in applicant status into the
Partnership.
23
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
December 31, 2003
(in thousands)
Col. C
Additions
----------------------------
Col. B Col. E
Balance at Charged to Charged to Balance at
Col. A Beginning Costs & Other Col. D End of
Description of Period Expenses Accounts Deductions Period
- ---------------------------------- ------------ ----------- ----------- ------------ -----------
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for loan losses $ 3,021 $ 782 $ - $ (1,154) (a) $ 2,649
Cumulative write-down of
real estate held for sale (REO) 500 - - - 500
------------ ----------- ------------ ------------- ------------
$ 3,521 $ 782 $ - $ (1,154) (a) $ 3,149
============ =========== ============ ============= ============
Note (a) - Represents write-offs of loans.
24
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
SCHEDULE IV - mortgage loans on real estate
rule 12-29 loans on real estate
December 31, 2003
(in thousands)
Col. F Col. G Col. H
Col. C Col. D Face Carrying Pr. Col. J
Col. B Final Periodic Col. E Amt. Of Amount. Amount Col. I Geog.
Col. A Interest Maturity Payment Prior Mortgage Mortgage Subj. to Type of County
Desc. Rate Date Terms Liens Orig. Amt. Investment Delinquency Lien Location
- -----------------------------------------------------------------------------------------------------------------------------
Comm. 11.75% 12/01/09 $ 3 $ - $ 148 $ 148 $ - 1st Yuba
Comm. 14.00% 04/01/06 12 - 700 290 - 1st San Francisco
Res. 13.50% 07/01/00 7 - 579 579 579 1st San Francisco
Comm. 11.00% 10/01/07 6 - 650 626 - 1st San Francisco
Res. 18.00% 03/01/00 11 580 951 762 762 2nd San Francisco
Res. 12.00% 05/01/03 12 363 1,210 1,210 1,210 1st Marin
Land 11.00% 01/01/01 13 363 1,800 1,392 1,392 2nd Stanislaus
Land 11.00% 07/01/01 24 358 2,600 2,537 2,537 2nd Stanislaus
Apts. 12.50% 11/15/02 4 47 39 298 298 2nd Contra Costa
Land 11.00% 11/01/00 2 2,968 222 - - 3rd Stanislaus
Comm. 11.50% 02/01/05 4 493 400 396 396 2nd San Francisco
Land 11.50% 07/01/01 5 2,600 476 476 476 2nd Stanislaus
Comm. 10.50% 06/01/06 7 - 775 759 - 1st San Mateo
Apts. 12.00% 07/01/06 40 - 4,000 6,483 - 1st San Francisco
Comm. 12.00% 05/01/07 9 2,916 799 789 - 2nd Santa Clara
Res. 12.00% 03/01/01 13 - 1,325 1,325 1,325 1st Marin
Res. 12.00% 05/01/03 - - 4,117 - - 3rd Santa Clara
Apts. 11.50% 06/01/06 2 - 182 178 - 1st Merced
Res. 13.25% 12/01/02 20 582 2,188 2,188 2,188 2nd Santa Clara
Res. 13.25% 01/01/03 20 - 3,516 3,991 3,991 1st Napa
Comm. 11.50% 08/01/06 4 - 350 282 - 1st San Mateo
Res. 11.50% 12/01/06 1 167 70 69 - 2nd Stanislaus
Res. 10.25% 12/01/04 3 978 300 300 - 2nd San Francisco
Land 9.50% 02/01/04 8 - 987 987 - 1st Santa Clara
Res. 11.00% 02/01/04 6 65 708 708 - 2nd Lake
Comm. 11.00% 03/01/07 16 - 1,600 1,589 1,589 1st Alameda
Res. 10.00% 12/01/02 3 - 318 316 316 1st San Mateo
Comm. 7.50% 02/28/07 5 - 770 770 - 1st Santa Clara
Comm. 7.50% 02/28/07 2 - 320 320 - 1st Alameda
Res. 10.25% 04/01/05 14 - 1,650 2,300 - 1st Napa
Comm. 13.00% 06/01/05 41 10,000 4,550 6,020 6,020 2nd Santa Clara
Comm. 10.50% 08/01/04 32 - 3,600 3,600 - 1st Santa Clara
Res. 10.25% 08/01/04 4 1,647 263 236 - 2nd Santa Clara
Res. 10.50% 08/01/07 18 3,500 2,000 1,986 - 2nd San Francisco
Res. 10.50% 09/01/07 2 1,468 805 270 - 3rd Santa Clara
Res. 11.50% 09/01/05 12 - 1,300 1,300 1,300 1st Alameda
Res. 10.50% 09/01/05 2 710 269 269 - 2nd San Mateo
Res. 10.50% 10/01/05 16 - 1,781 1,781 1,781 1st San Mateo
Comm. 10.50% 10/01/07 4 - 441 438 - 1st San Mateo
25
SCHEDULE IV (continued)
Col. F Col. G Col. H
Col. C Col. D Face Carrying Pr. Col. J
Col. B Final Periodic Col. E Amt. Of Amount. Amount Col. I Geog.
Col. A Interest Maturity Payment Prior Mortgage Mortgage Subj. to Type of County
Desc. Rate Date Terms Liens Orig. Amt. Investment Delinquency Lien Location
- ---------------------------------------------------------------------------------------------------------------------------
Res. 10.50% 10/01/07 2 245 159 205 - 2nd San Mateo
Comm. 11.25% 12/01/07 9 718 900 896 - 1st & 3rd El Dorado
Res. 10.00% 11/01/05 11 500 1,320 1,320 1,320 2nd Napa
Comm. 10.00% 12/01/07 2 1,802 250 249 - 2nd Sonoma
Res. 12.75% 07/01/04 1 749 650 384 - 2nd Santa Clara
Comm. 10.00% 01/01/08 13 - 1,500 1,500 - 1st River Side
Comm. 13.00% 02/01/05 16 - 1,500 600 - 1st Calaveras
Comm. 9.50% 02/01/06 11 - 1,388 1,388 - 1st Santa Clara
Res. 10.00% 03/01/08 13 1,699 1,450 1,444 - 2nd El Dorado
Comm. 1.00% 12/31/04 87 - 10,440 10,440 - 1st San Francisco
Comm. 10.00% 03/01/08 1 546 137 136 - 2nd San Mateo
Apts. 10.00% 10/14/05 79 13,768 9,420 4,372 - 2nd Alameda
Comm. 9.75% 05/01/13 4 - 420 418 - 1st San Francisco
Res. 11.50% 12/01/04 41 - 7,700 5,345 - 1st San Mateo
Comm. 10.00% 04/01/05 47 - 5,293 5,816 - 1st Los Angeles
Apts. 10.00% 05/01/05 3 - 396 396 - 1st Alameda
Res. 11.50% 11/01/04 3 1,734 395 324 - 3rd San Mateo
Comm. 10.00% 06/01/06 14 5,500 1,625 1,625 - 2nd Napa
Apts. 10.00% 06/01/05 16 2,147 1,950 1,949 - 2nd Contra Costa
Apts. 13.00% 01/02/06 29 14,800 2,660 2,660 - 2nd Santa Clara
Comm. 12.00% 07/01/06 25 - 2,500 2,500 - 1st Sacramento
Apts. 10.00% 05/01/04 19 15,440 2,250 2,250 - 2nd San Mateo
Res. 11.00% 07/01/05 9 - 6,074 1,067 - 1st Fresno
Res. 10.00% 08/01/13 2 - 230 229 - 1st San Joaquin
Res. 9.00% 07/01/06 28 - 3,707 2,699 - 1st Alameda
Comm. 11.00% 07/01/06 33 - 3,570 3,570 - 1st Alameda
Res. 11.00% 08/01/10 10 940 3,185 1,389 - 2nd Marin
Res. 9.00% 02/01/06 4 893 500 500 - 2nd Sonoma
Res. 8.75% 09/01/05 103 - 15,600 8,700 - 1st Alameda
Res. 9.50% 09/01/04 16 680 2,000 2,000 - 2nd Santa Clara
Res. 8.50% 10/01/08 1 - 180 180 - 1st Contra Costa
Res. 9.00% 11/01/09 2 - 300 300 - 1st Stanislaus
Apts. 9.50% 01/01/09 4 - 413 413 - 1st San Joaquin
Comm. 9.50% 12/01/05 22 - 2,750 2,750 - 1st San Francisco
Res. 9.25% 12/01/08 1 376 130 130 - 2nd Santa Clara
Res. 8.75% 11/01/05 6 - 800 800 - 1st San Francisco
Apts. 9.50% 11/01/05 29 3,115 3,650 3,650 - 2nd River Side
Res. 8.50% 12/01/04 - 505 40 40 - 2nd Santa Clara
Res. 8.50% 12/01/04 3 1,131 400 400 - 2nd Contra Costa
Res. 11.50% 01/01/06 13 445 4,483 2,107 - 2nd Santa Clara
Comm. 9.00% 01/01/06 25 - 3,375 3,375 - 1st San Joaquin
Res. 10.00% 12/25/05 133 13,575 16,010 16,010 - 2nd Alameda
Res. 8.50% 01/01/06 8 - 1,070 1,070 - 1st Placer
Comm. 9.50% 01/01/06 13 - 1,610 1,610 - 1st Napa
--------------------------------------------------------------
Total $ 1,318 $ 111,113 $ 173,139 $147,174 $ 27,480
==============================================================
26
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
SCHEDULE IV - mortgage loans on real estate
rule 12-29 loans on real estate (continued)
(in thousands)
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Balance at beginning of year $ 83,650 $ 82,790 $ 68,571
Additions during period:
New loans 96,820 32,601 47,512
Other 2,989 1,060 -
------------ ------------ ------------
Total additions 99,809 33,661 47,512
------------ ------------ ------------
Deductions during period:
Collections of principal 35,097 26,083 33,239
Foreclosures - 5,986 -
Cost of loans sold - - -
Amortization of premium - - -
Other 1,188 732 54
------------ ------------ ------------
Total deductions 36,285 32,801 33,293
------------ ------------ ------------
Balance at close of year $ 147,174 $ 83,650 $ 82,790
============ ============ ============
27
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gymno Corporation
Redwood City, California
We have audited the accompanying balance sheet of Gymno Corporation as of
December 31, 2003. The balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Gymno Corporation as of December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Thomas E. Gard
ARMANINO McKENNA LLP
February 13, 2004
28
GYMNO CORPORATION
Balance Sheet
December 31, 2003
ASSETS
2003
------------
Cash and cash equivalents $ 93,404
Other current assets 869
------------
Total current assets 94,273
------------
Investment in partnerships
Redwood Mortgage Investors IV 7,500
Redwood Mortgage Investors V 5,000
Redwood Mortgage Investors VI 9,773
Redwood Mortgage Investors VII 11,998
Redwood Mortgage Investors VIII 131,257
------------
165,528
------------
$ 259,801
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable - related party $ 15,437
Accrued income taxes 10,101
------------
Total current liabilities 25,538
------------
Stockholders' equity
Common stock, no par, authorized 1,000,000
shares; issued and outstanding 500 shares 5,000
Additional paid-in capital 7,500
Retained earnings 221,763
------------
Total stockholders' equity 234,263
------------
$ 259,801
============
The accompanying notes are an integral part of the financial statement.
29
GYMNO CORPORATION
Notes to Balance Sheet
December 31, 2003
1. Organization
Gymno Corporation (the "Company") was formed in July 1986. The Company was
formed for the purpose of serving as the corporate general partner of certain
California limited partnerships, (presently Redwood Mortgage Investors ("RMI")
I, II, III, IV, V, VI, VII and VIII), which invest in high-yield debt
instruments, primarily promissory notes secured by deeds of trust on California
real estate.
As the corporate general partner, the Company receives management fees and
reconveyance fees from the partnerships. In addition, the Company receives its
allocation of income from the various partnerships.
2. Summary of Significant Accounting Policies
Cash and cash equivalents
Cash represents cash and short-term, highly liquid investments with
maturities of three months or less at the time of purchase.
Cash deposits periodically exceeded federal insurance limits (up to
$100,000) during 2003.
Investment in partnerships
The Company, as corporate general partner, has the ability to exercise
significant influence over the partnerships. Accordingly, the Company accounts
for its investment in partnerships using the equity method. Pursuant to the
equity method, the Company increases (decreases) its investment account for its
share of partnership earnings (losses) and cash contributions (withdrawals)
related to the partnerships.
Use of estimates
The preparation of a balance sheet in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
30
GYMNO CORPORATION
Notes to Balance Sheet
December 31, 2003
3. Investment in Partnerships
The following is a summary of the Company's investments in the RMI
partnerships as of December 31, 2003:
Gymno
Gymno Corporation
Corporation Investment
Partnership Partnership Partnership Percent of
Net Assets Net Income Investment Net Assets
-------------- --------------- -------------- ---------------
RMI IV $ 5,920,395 $ 358,913 $ 7,500 0.13%
RMI V 2,116,995 104,461 5,000 0.24%
RMI VI 6,956,240 333,116 9,773 0.14%
RMI VII 9,028,166 592,641 11,998 0.13%
RMI VIII 138,769,373 9,592,730 131,257 0.09%
-------------- --------------- --------------
$162.791,169 $ 10,981,861 $ 165,528
============== =============== ==============
4. Related Party Payable
The Company has a payable to an affiliate, Redwood Mortgage Corp. ("RMC")
in the amount of $15,437at December 31, 2003. During 2002, the Company began
incurring a monthly management fee to RMC for usage of space, utilities,
personnel and management expertise.
5. Guarantees
The Company is a guarantor on two separate line of credit agreements with
RMI VII and RMI VIII. RMI VII has a $3,500,000 line of credit agreement secured
by its loan portfolio and expiring on December 2, 2004. The balance on the line
of credit at December 31, 2003 was $200,000. RMI VIII has a $22,000,000 line of
credit agreement secured by its loan portfolio and expiring on November 25,
2005. The balance on the line of credit at December 31, 2003 was $22,000,000.
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Redwood Mortgage Corp.
Redwood City, California
We have audited the accompanying balance sheet of Redwood Mortgage Corp. as
of September 30, 2003 . This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the balance
sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining on a test
basis evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Redwood Mortgage Corp. as of
September 30, 2003, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Thomas E. Gard
ARMANINO McKENNA LLP
San Ramon, California
December 5, 2003
32
REDWOOD MORTGAGE CORP.
Balance Sheet
September 30, 2003
ASSETS
Cash and equivalents $ 2,157,791
Mutual funds 106,892
Investment in partnership 50,000
Note receivable 250,000
Due from related parties 498,813
Prepaid expenses 13,230
Accrued interest 63,336
Investment in mortgage loans 1,187,807
Income-producing property, net 1,140,258
Fixed assets, net 174,648
Deferred costs of brokerage related rights, net 5,448,981
-------------
Total assets $ 11,091,756
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 3,338
Accrued compensated absences 51,468
Deferred compensation 698,027
Note payable 747,500
Advances from partnerships, net 5,673,289
Deferred income taxes 1,405,000
-------------
Total liabilities 8,578,622
-------------
Stockholder's equity
Common stock, wholly-owned by The Redwood
Group, Ltd., at $4 stated value (1,000 shares authorized,
issued and outstanding) 4,000
Retained earnings 2,509,134
-------------
Total stockholder's equity 2,513,134
-------------
Total liabilities and stockholder's equity $ 11,091,756
=============
The accompanying notes are an integral part of the financial statement.
33
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
1. Organization
Redwood Mortgage Corp. (the "Company"), is a wholly-owned subsidiary of The
Redwood Group, LTD. (the "Parent"), which is owned by The Estate of D. Russell
Burwell and the Irrevocable Burwell Family Trust. The Company, Michael R.
Burwell (the son of D. Russell Burwell), and Gymno Corporation (owned by the
Burwells) are general partners in Redwood Mortgage Investors VIII, which invests
in high-yield debt instruments, primarily promissory notes secured by deeds of
trust on California real estate. Michael Burwell and Gymno Corporation are also
general partners in eight other related limited partnerships and another related
company is general partner in a ninth related limited partnership.
The Company maintains "trust accounts" to service mortgage investments made
principally by the aforementioned nine limited partnerships. As a real estate
broker licensed with the State of California, the Company arranges loans with
various maturities, all of which are secured by deeds of trust. At September 30,
2003, the Company was servicing a portfolio approximating $151,000,000 owned
primarily by the aforementioned partnerships.
2. Summary of Significant Accounting Policies
Accrual basis
The accompanying balance sheet was prepared on the accrual basis of
accounting.
Cash and equivalents
Cash represents cash and short-term, highly liquid investments with
maturities of three months or less. Cash deposits at September 30, 2003, that
exceeded federal insurance limits (up to $100,000), were $2,244,540.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, 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). If a loan is
categorized as impaired, interest is no longer accrued. The Company charges off
uncollectible loans and related receivables directly to the allowance account
once it is determined that the full amount is not collectible. As of September
30, 2003, management considered the loans to be fully collectible and,
accordingly, no allowance for loan losses has been provided for.
Fixed assets and income-producing property
Fixed assets and income-producing property are stated at cost. Depreciation
and amortization are computed primarily using an accelerated method over
estimated useful lives ranging from 3 to 39 years. The Company reviews
long-lived assets for impairment when circumstances indicate the carrying amount
of an asset may not be recoverable. Impairment is recognized if the sum of
undiscounted estimated future cash flows expected to result from the use of the
asset is less than the carrying value. When an impairment loss is recognized,
the asset's carrying value is reduced to its estimated fair value.
34
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
2. Summary of Significant Accounting Policies (continued)
Deferred costs of brokerage related rights
Consistent with Statement of Financial Accounting Standards No. 141 and
142, the Company has recognized as an asset rights to act as the mortgage loan
broker for various of its affiliated limited partnerships. Such rights result in
brokerage commissions to the Company. The initial costs of these rights include
fees paid to broker-dealers on behalf of affiliated partnerships. Such costs are
being amortized over the anticipated 25-year period that brokerage fee net cash
flows are expected to be received in proportion to the expected receipt of these
cash flows.
The Company evaluates the fair value of these rights to determine if the
brokerage rights have been impaired. Fair value is determined based on the
estimated brokerage fee net cash flows to be received by the Company over the
expected 25 year lives of the partnerships' underlying loan portfolios. It is
the Company's experience that the underlying loan portfolios increase as partner
capital is raised and accumulated for the first seven years of a partnership's
existence, and then will begin to decline gradually over the subsequent 18 years
of their estimated lives. If the carrying value of the deferred mortgage
brokerage rights exceeds their estimated fair value, an allowance for impairment
of value is recognized. The Company has determined that no allowance for
impairment was required against its deferred mortgage brokerage rights.
Income taxes
The Company's operating results are included in the consolidated tax
returns of the Parent, which files its income tax returns on the cash basis of
accounting. Income taxes are allocated to the Company by the Parent for those
taxes currently payable and those deferred as if the Company were filing
separate tax returns. A provision for income taxes is provided for deferred
taxes resulting from differences in the timing of reporting revenue and expense
items for financial versus tax purposes.
Use of estimates
In preparing a balance sheet in accordance with accounting principles
generally accepted in the United States of America, management is required to
make estimates that affect the reported amounts of assets and liabilities as of
the balance sheet date. Such estimates relate principally to the period of
recoverability of deferred costs of brokerage related rights and the
determination of the allowance for loan losses. Actual results could differ from
these estimates.
3. Partnership Services
The following are commissions and/or fees derived by the Company from
services provided to its affiliated partnerships:
Loan servicing fees
The Company earns loan servicing fees of up to 1/8 of 1% monthly (1.5%
annually) of the unpaid principal or such lesser amount as is reasonable and
customary in the geographic area
35
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
3. Partnership Services (continued)
where the property securing the mortgage is located. As of September 30,
2003, the Company was owed $421,760 in loan servicing fees.
Loan commissions
The Company earns loan commissions in connection with the review,
selection, evaluation, negotiation and extension of partnership mortgage
investments in an amount up to 12% of the mortgage investments until 6 months
after the termination date of a partnership offering. Only 1 of the 9 affiliated
limited partnerships is in the offering stage. Thereafter, loan commissions are
limited to an amount not to exceed 4% of the total partnership assets per year.
The loan commissions are paid by the borrowers, and thus, are not an expense of
the partnerships.
Asset management fee
The Company receives monthly fees for managing Redwood Mortgage Investors
VIII loan portfolio and operations up to 1/32 of 1% of the "net asset value"
(3/8 of 1% annual).
Other fees and charges
The limited partnership agreements provide for other fees such as
reconveyance, mortgage assumption and mortgage extension fees. Such fees are
incurred by the borrowers and are paid to the Company. In addition, the Company
is reimbursed for expenses and clerical costs associated with accounting and
related services incurred on behalf of the limited partnerships.
Subsidies to partnerships
Occasionally, the Company subsidizes a particular partnership by refunding
a portion of the loan servicing fees received from the partnership during the
year.
When the Company issues a subsidy, it may be a general subsidy or a
specific subsidy tied to loss concerns on a particular property. If the subsidy
is property specific, it may delineate the terms for repayment after the
partnership sells the impaired property. The Company is not obligated to provide
any subsidies nor does it guarantee a rate of return for the various
partnerships.
4. Investment in Mortgage Loans
At September 30, 2003, the Company had investments in mortgage loans as
follows:
Fiscal Year
of Maturity
September 30,
2004 $ 11,764
2005 113,498
2006 14,359
2007 103,075
2008 16,105
Thereafter 929,006
------------
$1,187,807
36
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
4. Investment in Mortgage Loans (continued)
The average interest rates of the mortgage loans were 6.65% as of September
30, 2003. Loans are due in either lump sum balloon payments or monthly
installments of interest and principal. Interest payments on mortgage loans are
current. The properties securing the loans are all located in the Greater San
Francisco Bay Area. Fluctuations in the value of real estate in the Greater San
Francisco Bay Area could significantly affect the underlying security value of
these mortgage loans. Fluctuations in general property values also affect the
performance of mortgage investments in the affiliated limited partnerships.
5. Note Receivable
The Company has a convertible note receivable from a limited liability
company (LLC) totaling $250,000 at September 30, 2003. The note bears interest
at 8% per annum and matures in January 2004. The Company has the sole discretion
to convert the promissory note to a membership interest in the LLC. It is
anticipated that when the LLC's project is complete, the Company will convert
the note to an investment in the LLC.
6. Income-Producing Property
Income-producing property consists of the following at September 30, 2003:
Building and improvements $ 602,832
Land 547,168
------------
1,150,000
Less accumulated depreciation and amortization (9,742)
------------
Income-producing property, net $ 1,140,258
============
The property is pledged as security for a note payable (see note 11).
7. Fixed Assets
Fixed assets consist of the following at September 30, 2003:
Furniture and equipment $285,103
Computer software 51,976
------------
337,079
Less accumulated depreciation and amortization (162,431)
------------
Fixed assets, net $174,648
============
8. Deferred Costs of Brokerage Related Rights
Deferred costs of brokerage related rights consist of the following at
September 30, 2003:
Deferred costs of brokerage related rights $6,489,076
Less accumulated amortization (1,040,095)
------------
Deferred costs of brokerage related rights, net $5,448,981
============
37
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
9. Income Taxes
The Company's annual taxable income (loss) is included in the consolidated
income tax filing of its parent, The Redwood Group, LTD and its affiliate, A & B
Financial Services, Inc. Income taxes are allocated to the Company and reflected
in its financial statements as if the Company were filing separate returns.
Significant components of the Company's net deferred tax liability includes
the following at September 30, 2003:
Cash to accrual differences $ (109,000)
Deferred costs of brokerage related rights 2,334,000
State deferred taxes (136,000)
Net operating loss carryforwards (705,000)
Other 21,000
-------------
$ 1,405,000
10. Advances from Partnerships
The Company has financed the payment of brokerage related rights with
advances from partnerships. These advances are non-interest bearing and are
being repaid equally over an approximate ten-year period from the date of the
close of a partnership offering. Interest has been imputed at the market rate of
interest in effect in the years the offerings closed.
Advances from partnerships mature as follows:
Year Ending September 30:
2004 $ 873,815
2005 873,815
2006 873,815
2007 793,565
2008 766,444
Thereafter 3,072,942
-------------
7,254,396
Less discount on imputed interest (1,581,107)
-------------
Advances from partnerships, net $5,673,289
=============
11. Note Payable
During 2003, the Company issued an interest-only note payable to a bank for
the purchase of a property. The note matures in December 2004, bears interest at
5.25%, and is secured by the property. The note balance at September 30, 2003
totaled $747,500.
12. Commitments and Guarantees
The Company has contracted with an independent service bureau for computer
processing services for the partnership accounting function at approximately
$4,750 per month for 36 months. The contract is subject to renewal at the end of
its term. The Company receives
38
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
12. Commitments and Guarantees (continued)
reimbursement of a major portion of its computer processing expenses from
the nine limited partnerships.
The Company is a guarantor on a line of credit for one of the partnerships.
The line of credit provides for borrowings up to $20,000,000 at prime. The
balance on the line of credit at September 30, 2003 was $6,500,000. Should the
Partnership choose not to renew the line of credit, the balance would be
converted to a three year fully amortized loan.
The Company has guaranteed certain mortgage loans issued by five of the
affiliated partnerships. The Company has guaranteed to cover losses sustained by
the partnerships related to these loans to the extent such losses exceed the
existing reserves, as defined in the agreement, and related collateral value. As
of September 30, 2003, the principal balance of the guaranteed loans totaled
$9,899,000 and the existing reserves were $1,027,000. The related collateral was
appraised in 2003 at an estimated value of $8,675,000 to $9,115,000.
In 2002, the Company entered into a noncancelable operating lease agreement
for office space to replace their previous space. The lease terminates July 29,
2009. The lease requires monthly payments of $14,083, with stated annual
increases. The Company also has the option to renew this lease for an additional
five years.
In 2001, the Company entered into several noncancelable operating leases
for office space that expire in June 2004. The leases require monthly rent of
$4,950 with stated annual rent increases. The Company also has an option to
renew these leases for an additional three years.
Noncancelable future minimum lease payments under these leases as of
September 30, 2003, are as follows:
2004 $ 222,462
2005 183,772
2006 189,288
2007 194,972
2008 200,814
Thereafter 117,712
------------
$1,109,020
In October 2002, the Company entered into a sub-lease agreement to
sub-lease some of the Company's previous office space. The sub-lease is
noncancelable, calls for monthly sub-lease payments of $853, and terminated in
October 2003.
13. Profit-Sharing Plan
The Company has a defined contribution profit-sharing plan which provides
for Company contributions of 5% of eligible wages, plus any discretionary
additional Company contributions.
39
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2003
14. Related Party Transactions
Partnership transactions
As described in Notes 1 and 3, the Company's main source of revenue is from
originating and servicing mortgage obligations from nine limited partnerships
whose general partners are related to the Company (one such general partner is
the Company). The Company has received advances from these limited partnerships
to help finance the costs of brokerage related rights.
Advances
Advances are periodically made to employees of the Company, their relatives
or to one of the related entities. At September 30, 2003, an advance of $35,000
had been made to a related party.
Investment in partnership
During 2003, the Company purchased an investment in Redwood Mortgage
Investor's VIII from a former investor. The investment balance was $50,000 at
September 30, 2003.
15. Deferred Compensation Agreement
The Company entered into a compensation agreement with the former owner to
pay a monthly consulting fee of $9,000. The Company is currently making the
monthly payment to the surviving spouse, for the remainder of her life or until
September 30, 2011, as required by the agreement. As of September 30, 2003, the
Company had accrued $698,027, which represents the net present value of the
future payments.
16. Subsequent Events
Redwood Mortgage Investors VIII, for which the Company is a general
partner, had registered an investment offering for an additional 75,000,000
units ($75,000,000), which was approved by the Securities and Exchange
Commission in October 2003.
40
PRIOR PERFORMANCE TABLES
The prior performance tables as referenced in the Prior Performance Summary
of the prospectus presents information on programs previously sponsored by the
general partners. The purpose of the tables is to provide information on the
performance of these partnerships to assist prospective investors in evaluating
the experience of the general partners as sponsors of such partnerships. In the
opinion of the general partners, all of the partnerships included in the tables
had investment objectives which were similar to those of the partnership.
Factors considered in making such determination included the type of
investments, expected benefits from investments and structure of the programs.
Each of such prior programs had the following objectives: (i) to yield a high
rate of return from mortgage lending; and (ii) preservation of the partnership's
capital. The inclusion of these tables does not imply that the investors in this
offering of the partnership will experience results comparable to those
experienced in the previous offerings of the partnership or prior programs
referred to in the tables.
The tables consist of:
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I summarizes, as a percentage basis, all funds received through
December 31, 2003, for the four prior public offerings and the current
fifth offering of the partnership.
TABLE II - COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
Table II summarizes the compensation paid to the general partners and
affiliates in connection with the 4 prior offerings and the current
fifth offering of the partnership on an aggregate basis.
TABLE III - OPERATING RESULTS OF THE PARTNERSHIP
Table III summarizes the annual operating results from inception in
1993, through December 31, 2003 for the partnership.
TABLE V - PAYMENT OF MORTGAGE LOANS
Table V presents information on the payment of the partnership and
prior partnerships' mortgages within the three (3) years ended
December 31, 2003.
Table IV which provides certain information on programs which have
concluded operations, is not included herein as no prior programs sponsored by
the general partners or their affiliates have concluded operations.
If you purchase interests in the partnership, you will not acquire any
ownership interest in any of the prior partnerships to which Table V relates.
The inclusion of the following tables in the prospectus does not imply that the
partnership will continue to make investments comparable to those reflected in
the tables with respect to cash flow, income tax consequences available to
investors, or other factors, nor does it imply that the partnership will
continue to experience returns, if any, comparable to those experienced by the
partnership in the past in any of the previous offerings of the partnership
referred to in Table V.
The general partners have sponsored two (2) other public programs
registered with the Securities and Exchange Commission. Table V also includes
information about prior non public programs whose investment objectives are
similar to those of the partnership. These partnerships were offered without
registration under the Securities Act of 1933 with reliance upon intrastate
offering, exemption from registration requirements, and/or exemption for
transactions not involving a public offering.
Additional information regarding the Description Of Open Loans Of Prior
Limited Partnerships is provided in Table VI in Part II of this Registration
Statement. The partnership will furnish, without charge to each person to whom
this prospectus is delivered, upon request, a copy of Table VI.
As of December 31, 2003, less than thirty five percent (35%) of the loans
held by the partnership are fractionalized loans and held as undivided interests
with other partnerships and third parties. The information presented in Table V
as to fractionalized loans represents only that partnership's interest in a
certain loan.
41
DEFINITIONS AND GLOSSARY OF TERMS
The following terms used in the tables have the following meanings:
"Cash Generated From Operations and Financing" shall mean excess or
deficiency of operating and financing cash receipts over operating and
financing cash expenditures.
"GAAP" shall mean accounting principles generally accepted in the United
States of America.
"Months To Invest 90% Of Amount Available For Investment" shall mean the
time period from commencement of the offering to date of close of escrow
of initial loans.
42
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
REDWOOD MORTGAGE INVESTORS VIII
(AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table I presents in tabular form on a percentage basis, all proceeds
received by Redwood Mortgage Investors VIII in its previous four public
offerings and the current 5th offering through December 31, 2003. Table I also
sets forth on a percentage basis, how the proceeds were utilized by the
partnership. In addition, Table I sets forth information with respect to the
date each offering commenced in this partnership, the length of the offering and
how long it took to commit 90% of the amount available for investment. As of
December 31, 2003, the general partners did not have any public or private
programs which have closed in the past three years other than the third and
fourth offerings in Redwood Mortgage Investors VIII. For consistency, the
general partners have included information for the first and second offerings in
Redwood Mortgage Investors VIII even though these offerings were concluded more
than three years ago. Please be advised that there can be no assurance that the
results of this offering will be comparable to those of prior offerings of the
partnership.
(in thousands)
1st Offering 2nd Offering 3rd Offering 4th Offering 5th Offering
------------- --------------- -------------- -------------- --------------
Dollar Amount Offered $15,000 $30,000 $30,000 $50,000 $75,000
Dollar Amount Raised $14,932 $29,993 $29,999 $49,985 6,360
Percentage of Amount Raised 99.55% 99.98% 100% 99.97% 8.48%
Less Offering Expenses:
Organization Expense 3.90% 2.00% 2.05% 1.30% 1.30%
Selling Commissions Paid to
Non Affiliates (1) 0 0 0 0 0
Selling Commissions Paid to Affiliates 0 0 0 0 0
Percentage Available for Investment
Net of Offering Expenses 96.10% 98.00% 97.95% 98.70% 98.70%
Loans Funded from Offering Proceeds
Secured by Deeds of Trust 87.90% 89.40% 89.55% 90.10% 72.57%
Formation Loan 7.20% 7.60% 7.40% 7.60% 7.10%
Loan Commitments 0 0 0 0 0
Loan Application or Mortgage
Processing Fees 0 0 0 0 0
Funds Available for Future
Commitments 0 0 0 0 0
Reserve 1.00% 1.00% 1.00% 1.00% 19.03%
------------- --------------- ------------- -------------- --------------
Total 96.10% 98.00% 97.95% 98.70% 98.70%
============= =============== ============= ============== ==============
Date Offering Commenced 03/03/93 12/4/96 08/31/00 10/31/02 10/07/03
Length of Offering 44 months 44 months 20 months 11 months Open
Months to Commit 90% of Amount
Available for Investment (Measured
from Beginning of Offering) 45 months 45 months 21 months 12 months N/A
(1) Commissions are paid by Redwood Mortgage Corp. through the Formation
Loan (See" PLAN OF DISTRIBUTION - Formation Loan" at Page 83 of the Prospectus).
43
TABLE II
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
(AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table II sets forth in tabular form, the compensation received by the
general partners and affiliates in connection with the four previous and current
fifth offering of units in the partnership as of December 31, 2003. This
information is presented on an aggregated basis for all offerings of the
partnership. It is impossible to trace on a dollar for dollar basis, which
dollars from which offering are being used to pay fees to the general partners.
RMI VIII
(In thousands)
----------------
Date Offering Commenced (1) 03/03/93
Dollar Amount Raised (2) $131,269
Amount Paid to General Partners and
Affiliates from:
Offering Proceeds 0
Selling Commissions 0
Loan Application or Loan Processing Fees 0
Reimbursement of Expenses, at Cost 182
Acquisition Fees 0
Advisory Fees 0
Other 0
Loan Points, Processing and Other Fees Paid
by the Borrowers to Affiliates:
Points (3) 9,721
Processing Fees (3) 158
Other (3) 32
Dollar Amount of Cash Generated from
Operations Before Deducting
Payments to General Partners and Affiliates: 53,942
Amount Paid to General Partners and Affiliates
from Operations:
Partnership Management Fees 1,146
Earnings Fee 371
Mortgage Servicing Fee 4,333
Reimbursement of Expenses, at Cost 1,192
Early Withdrawal 204
(1) Indicated the date the first offering in the partnership commenced
(2) Indicated the aggregate dollar amount raised in all four prior and the
current fifth offering of the partnership as of December 31, 2003.
(3) These sums were paid by borrowers of partnership funds, and were not
expenses of the partnership.
44
TABLE III
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table III presents the annual operating results of this partnership since
inception. This information is presented on an aggregate basis for the four
prior offerings and the ongoing fifth offering of Redwood Mortgage Investors
VIII.
$'s in thousands except for cash distribution per $1,000
-------------------------------------------------------------------
1993 1994 1995 1996
------------- ------------- ------------- --------------
Gross Revenues $119 $498 $1,050 $1,727
Less: General Partners' Mgmt Fee 0 6 12 17
Loan Servicing Fee 6 29 85 156
Administrative Expenses 4 27 51 86
Provision for Uncollected Accts 0 13 26 55
Amortization of Organization Costs 1 3 3 3
Offering Period Interest Expense to
Limited Partners 4 14 19 2
Interest Expense 0 0 26 189
------------- ------------- ------------- --------------
Net Income (GAAP Basis) dist. to
Limited Partners $104 $406 $828 $1,219
------------- ------------- ------------- --------------
Federal Taxable Income $109 $433 $873 $1,299
------------- ------------- ------------- --------------
Sources of Funds - Net Income $104 $406 $828 $1,219
Reduction in Assets 0 0 0 0
Increase in Liabilities 0 0 1,914 0
Early Withdrawal Penalties Applied to
Syndication Costs 0 0 0 4
Increase in Applicant's Deposit 129 61 0 311
Increase in Partners' Capital
Collection on Formation Loan 0 0 0 17
Admittance of New Partners 2,766 4,514 3,843 3,864
------------- ------------- ------------- --------------
Cash generated from Operations
and Financing 2,999 4,981 6,585 5,415
Use of Funds-Increase in Assets (2,364) (4,192) (5,671) (3,860)
Reduction in Liabilities (0) (0) (0) (176)
Decrease in Applicant's Deposit (0) (0) (189) (0)
Decrease in Partner's Capital
Formation Loan (206) (319) (250) (315)
Syndication Costs (200) (81) (175) (214)
Offering Period Interest Expense to
Limited Partners (2) (6) (8) (1)
Investment Income Paid to LP's (47) (166) (303) (418)
Return of Capital to LP's (0) (0) (6) (147)
------------- ------------- ------------- --------------
Net Increase (Decrease) in Cash 180 217 (17) 284
Cash at the beginning of the year 0 180 397 380
------------- ------------- ------------- --------------
Cash at the end of the year $180 $397 $380 $664
Table III continued on following pages
45
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 1996
------------- ------------- ------------- --------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $83 $81 $83 $84
Cash Distribution Data paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $80 $79 $80 $81
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $36 $33 $32 $31
Capital (1) $0 $0 $0.60 $11
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $96 $92 $96 $99
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $93 $89 $92 $95
NOTES: (1) Based upon capital balances as of January 1 for each year.
(2) Based upon cash distributions actually paid to limited partners
receiving monthly earning distributions compared to all limited
partners. Cash distributions credited to compounding limited
partners are not included for purposes of this calculation.
Table III continued on following pages
46
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table III presents the annual operating results of this partnership since
inception. This information is presented on an aggregate basis for the four
prior offerings and the ongoing fifth offering of Redwood Mortgage Investors
VIII.
$'s in thousands except for cash distribution per $1,000
-------------------------------------------------------------------
1997 1998 1999 2000
------------- ------------- -------------- ---------------
Gross Revenues $2,630 $3,406 $4,426 $6,349
Less: General Partners' Mgmt Fee 25 32 42 61
Loan Servicing Fee 190 295 359 506
Administrative Expenses 144 147 174 270
Provision for Uncollected Accts 140 163 409 375
Amortization of Organization Costs 0 0 0 0
Offering Period Interest Expense to
Limited Partners 9 4 2 5
Interest Expense 341 514 527 887
------------- ------------- -------------- ---------------
Net Income (GAAP Basis) dist. to
Limited Partners $1,781 $2,251 $2,913 $4,245
------------- ------------- -------------- ---------------
Federal Taxable Income $1,929 $2,411 $3,331 $4,755
------------- ------------- -------------- ---------------
Sources of Funds - Net Income $1,781 $2,251 $2,913 $4,245
Reduction in Assets 0 0 0 0
Increase in Liabilities 3,988 348 0 16,269
Early Withdrawal Penalties Applied to
Syndication Costs 5 8 13 10
Increase in Applicant's Deposit 0 0 330 0
Increase in Partners' Capital
Collection on Formation Loan 108 150 191 250
Admittance of New Partners 5,572 5,110 9,202 14,997
------------- ------------- -------------- ---------------
Cash generated from Operations
and Financing 11,454 7,867 12,649 35,771
Use of Funds-Increase in Assets (9,905) (6,598) (3,439) (32,472)
Reduction in Liabilities (0) (0) (5,832) (0)
Decrease in Applicant's Deposit (311) (0) (0) (105)
Decrease in Partner's Capital
Formation Loan (420) (404) (708) (1,102)
Syndication Costs (189) (126) (177) (227)
Offering Period Interest Expense to
Limited Partners (2) (2) (1) (1)
Investment Income Paid to LP's (495) (614) (826) (1,245)
Return of Capital to LP's (133) (257) (592) (762)
------------- ------------- -------------- ---------------
Net Increase (Decrease) in Cash (1) (134) $1,074 $(143)
Cash at the beginning of the year 664 663 529 1,603
------------- ------------- -------------- ---------------
Cash at the end of the year $663 $529 $1,603 $1,460
Table III continued on following pages
47
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1997 1998 1999 2000
------------- ------------- -------------- ---------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $84 $84 $84 $86
Cash Distribution Paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $81 $81 $81 $83
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $31 $29 $31 $34
Capital (1) 8 12 $22 $21
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $100 $98 $102 $102
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $97 $95 $99 $98
NOTES: (1) Based upon capital balances as of January 1 for each year.
(2) Based upon cash distributions actually paid to limited partners
receiving monthly earning distributions compared to all limited
partners. Cash distributions credited to compounding limited
partners are not included for purposes of this calculation.
Table III continued on following pages
48
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table III presents the annual operating results of this partnership since
inception. This information is presented on an aggregate basis for the four
prior offerings and the ongoing fifth offering of Redwood Mortgage Investors
VIII.
$'s in thousands except for cash
distribution per $1,000
--------------------------------------------------------
2001 2002 2003
--------------- --------------- ---------------
Gross Revenues $9,088 $11,691 $12,958
Less: General Partners' Mgmt Fee 158 325 468
Loan Servicing Fee 552 1,098 1,057
Administrative Expenses 416 1,060 1,045
Provision for Uncollected Accts 957 1,280 782
Amortization of Organization Costs 0 0 0
Offering Period Interest Expense to
Limited Partners 1 1 37
Interest Expense 972 516 71
--------------- --------------- ---------------
Net Income (GAAP Basis) dist. to
Limited Partners $6,032 $7,411 $9,498
--------------- --------------- ---------------
Federal Taxable Income $6,926 $8,719 $9,072
--------------- --------------- ---------------
Sources of Funds - Net Income $6,032 $7,411 $9,498
Reduction in Assets 0 0 0
Increase in Liabilities 0 0 18,822
Early Withdrawal Penalties Applied to
Syndication Costs 24 6 17
Increase in Applicant's Deposit 448 1,905 0
Increase in Partners' Capital
Collection on Formation Loan 346 546 637
Admittance of New Partners $19,266 $19,680 41,461
--------------- --------------- ---------------
Cash generated from Operations
and Financing 26,116 29,548 70,435
Use of Funds-Increase in Assets (15,480) (10,924) (58,716)
Reduction in Liabilities (5,038) (7,733) (0)
Decrease in Applicant's Deposit (0) (0) (1,368)
Decrease in Partner's Capital
Formation Loan (1,462) (1,677) (2,929)
Syndication Costs (291) (377) (482)
Offering Period Interest Expense to
Limited Partners (0) (0) (0)
Investment Income Paid to LP's (1,962) (2,517) (3,361)
Return of Capital to LP's (1,426) (1,049) (1,846)
--------------- --------------- ---------------
Net Increase (Decrease) in Cash $457 $5,271 1,733
Cash at the beginning of the year 1,460 1,917 7,188
--------------- --------------- ---------------
Cash at the end of the year $1,917 $7,188 $8,921
Table III continued on following page
49
TABLE III (continued)
OPERATING RESULTS OF REDWOOD MORTGAGE INVESTORS VIII
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2003)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
2001 2002 2003
--------------- --------------- ---------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $90 $87 $78
Cash Distribution Paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $87 $84 $75
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $37 $34 $35
Capital (1) $27 $19 $19
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $106 $105 $76
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $103 $101 $73
NOTES: (1) Based upon capital balances as of January 1 for each year.
(2) Based upon cash distributions actually paid to limited partners
receiving monthly earning distributions compared to all limited
partners. Cash distributions credited to compounding limited
partners are not included for purposes of this calculation.
50
TABLE V
PAYMENT OF LOANS
CORPORATE MORTGAGE INVESTORS I & II
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table V presents information on the payment of loans for the partnership
and the previous public and non public programs sponsored by the general
partners and their affiliates for the three years ended December 31, 2003. The
information concerning the payment of loans in the partnership is presented on
an aggregated basis for all four prior offerings of the partnership.
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Santa Clara 12/30/93 08/27/01 175,000.00 159,382.98 334,382.98
Napa 05/02/95 10/25/01 40,000.00 27,447.19 67,447.19
San Mateo 07/31/00 10/16/01 150,000.00 22,861.32 172,861.32
Santa Clara 11/06/01 06/05/02 100,000.00 5,901.81 105,901.81
Santa Clara 02/18/00 01/10/03 100,000.00 30,948.51 130,948.51
Stanislaus 08/13/02 04/29/03 211,358.00 16,597.47 227,955.47
Contra Costa 10/11/96 11/05/03 40,000.00 18,577.55 58,577.55
Contra Costa 12/05/02 10/03/03 161,883.95 14,932.40 176,816.35
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Alameda 03/22/00 04/19/01 100,000.00 12,577.13 112,577.13
Stanislaus 07/24/98 03/13/02 150,000.00 42,295.62 192,295.62
San Joaqin 05/10/02 06/30/03 50,000.00 5,993.88 55,993.88
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)(1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
El Dorado 02/23/95 07/08/02 44,100.00 35,017.01 79,117.01
Stanislaus 02/06/98 08/13/02 149,996.00 80,738.97 230,734.97
Riverside 03/15/97 12/20/02 100,000.00 43,058.96 143,058.96
San Mateo 10/16/01 02/12/03 285,000.00 33,001.58 318,001.58
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
51
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS I
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Mateo 01/25/00 06/27/01 69,999.20 11,235.86 81,235.06
Santa Clara 05/25/01 04/24/02 50,000.00 5,591.12 55,591.12
Sonoma 09/18/96 04/30/02 4,873.50 2,185.37 7,058.87
Santa Clara 04/24/02 05/30/02 68,750.00 864.80 69,614.80
Santa Clara 02/18/00 01/10/03 100,000.00 30,948.51 130,948.51
Sonoma 10/30/96 09/02/03 4,993.20 2,674.49 7,667.69
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)(1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Santa Clara 11/02/98 04/19/01 100,000.00 27,415.08 127,415.08
Placer 12/30/96 01/24/02 55,000.00 33,519.78 88,519.78
Alameda 11/16/93 03/29/02 150,000.00 124,797.19 274,797.19
Alameda 11/16/93 03/29/02 49,586.38 25,483.23 75,069.61
Santa Clara 01/21/94 03/29/02 178,180.70 149,309.32 327,490.02
Santa Clara 11/15/96 03/29/02 6,369.10 4,187.46 10,556.56
El Dorado 02/23/95 07/08/02 44,100.00 35,017.01 79,117.01
Riverside 03/15/97 12/20/02 100,000.00 62,617.99 162,617.99
Tuolumne 08/25/00 04/07/03 59,500.00 17,883.29 77,383.29
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
52
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS II
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Mateo 05/31/00 01/04/01 50,000.00 3,302.24 53,302.24
San Mateo 07/31/00 10/16/01 50,000.00 31,375.88 56,136.08
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)(1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Francisco 02/02/00 02/14/02 82,008.48 19,223.17 101,231.65
Alameda 11/16/93 03/29/02 100,000.00 83,198.13 183,198.13
Alameda 11/16/93 03/29/02 26,445.95 13,591.00 40,036.95
Santa Clara 01/21/94 03/29/02 123,934.27 103,852.67 227,786.94
Santa Clara 11/15/96 03/29/02 4,430.90 2,913.16 7,344.06
San Mateo 10/16/01 02/12/03 9,500.00 1,100.05 10,600.05
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
53
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS III
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
San Mateo 05/31/00 01/04/01 50,000.00 3,302.24 53,302.24
Santa Cruz 10/06/97 03/26/01 82,000.00 34,473.24 116,473.24
Alameda 04/10/01 06/07/01 56,000.00 1,303.30 57,303.30
Alameda 07/01/97 11/08/01 170,000.00 109,761.99 279,761.99
Tuolumne 06/28/01 01/25/02 89,999.00 6,136.75 96,135.75
Contra Costa 10/30/01 03/12/02 96,000.00 3,883.88 99,883.88
San Mateo 02/23/01 03/15/02 150,000.00 19,238.22 169,238.22
Alameda 11/16/93 03/29/02 150,000.00 124,797.19 274,797.19
Alameda 11/16/93 03/29/02 39,668.93 20,386.49 60,055.42
Santa Clara 05/25/01 04/24/02 150,000.00 16,773.36 166,773.36
Sonoma 09/18/96 04/30/02 7,546.48 3,383.99 10,930.47
San Mateo 07/09/02 10/22/02 67,750.00 2,078.35 69,828.35
San Mateo 01/29/99 06/09/03 67,000.00 27,738.38 94,738.38
Sonoma 10/30/96 09/02/03 7,731.83 4,141.37 11,873.20
Contra Costa 03/25/03 09/24/03 80,000.00 4,086.86 84,086.86
Alameda 06/20/02 10/21/03 70,000.00 9,879.60 79,879.60
- ------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
San Francisco 01/31/01 08/10/01 300,025.00 5,691.63 305,716.63
Alameda 11/30/02 02/11/03 149,999.50 3,281.24 153,280.74
San Joaqin 05/10/02 06/30/03 100,000.00 11,987.38 111,987.38
San Francisco 10/12/88 11/04/03 60,000.00 76,042.84 136,042.84
- ------------------------------------------------------------------------------------------------------------
54
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS IV
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county)(continued)(1)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
Contra Costa 05/31/00 02/07/01 255,000.00 22,379.13 277,379.13
Santa Clara 11/02/98 04/19/01 100,000.00 27,415.08 127,415.08
Alameda 08/08/97 09/29/01 31,500.00 15,500.93 47,000.93
San Francisco 02/02/00 02/14/02 27,891.53 6,537.91 34,429.44
Alameda 11/16/93 03/29/02 150,000.00 124,797.19 274,797.19
Alameda 11/16/93 03/29/02 39,668.93 20,386.49 60,055.42
San Mateo 06/11/02 11/22/02 100,000.00 4,936.46 104,936.46
Riverside 03/15/97 12/20/02 100,000.00 62,617.99 162,617.99
Tuolumne 08/25/00 04/07/03 59,500.00 17,883.29 77,383.29
Alameda 01/31/96 06/26/03 147,000.00 115,617.40 262,617.40
- ------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
55
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS IV
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Contra Costa 03/21/00 03/31/01 108,500.00 13,765.97 122,265.97
Sonoma 11/18/87 12/26/02 70,000.00 86,359.95 156,359.95
Sacramento 07/16/98 04/04/03 4,570.00 1,305.69 5,875.69
Stanislaus 08/13/02 04/29/03 28,179.00 2,212.83 30,391.83
San Mateo 08/07/98 07/22/03 27,000.00 15,313.22 42,313.22
San Francisco 04/08/86 09/19/03 75,000.00 144,878.32 219,878.32
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Mateo 07/16/90 05/17/01 170,000.00 212,112.03 382,112.03
San Francisco 01/31/01 08/10/01 474,980.00 9,010.62 483,990.62
Alameda 10/10/89 12/23/02 195,000.00 345,756.46 540,756.46
Sacramento 07/16/98 06/02/03 137,100.00 48,883.90 185,983.90
Sacramento 05/27/88 06/26/03 344,250.00 386,172.60 730,422.60
San Francisco 10/20/00 06/30/03 57,972.00 19,071.60 77,043.60
Contra Costa 04/25/03 11/21/03 100,000.00 5,900.20 105,900.20
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)(1)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Mateo 03/05/99 03/28/01 450,000.00 100,663.32 550,663.32
San Francisco 06/23/00 05/31/01 500,000.00 51,989.77 551,989.77
San Francisco 08/11/99 08/30/01 120,933.85 28,624.69 149,558.54
San Francisco 05/27/99 08/30/01 100,002.00 27,413.84 127,415.84
Marin 10/29/99 11/16/01 60,000.00 16,472.94 76,472.94
Stanislaus 07/24/98 03/13/02 422,000.00 56,394.16 478,394.16
Alameda 11/16/93 03/29/02 575,000.00 478,389.24 1,053,389.24
Alameda 11/16/93 03/29/02 99,172.75 50,966.46 150,139.21
Santa Clara 01/21/94 03/29/02 671,366.60 562,582.20 1,233,948.80
Santa Clara 11/15/96 03/29/02 24,000.00 15,779.17 39,779.17
Stanislaus 02/06/98 08/13/02 200,002.00 107,655.91 307,657.91
San Mateo 05/17/01 09/13/02 204,000.00 31,751.79 235,751.79
San Francisco 02/22/00 10/01/02 173,865.38 52,515.02 226,380.40
San Francisco 02/22/00 10/01/02 226,138.63 56,002.09 282,140.72
- -------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
56
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS V
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
Alameda 10/31/98 06/04/01 167,500.00 206,433.10 373,933.10
San Mateo 07/31/00 10/16/01 195,000.00 24,345.67 219,345.67
Sonoma 09/18/96 04/30/02 20,633.18 9,252.33 29,885.51
Sacramento 07/16/98 04/04/03 308.00 88.00 396.00
Sonoma 10/30/96 09/02/03 21,139.96 11,323.11 32,463.07
- ------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
San Mateo 07/16/90 05/17/01 170,000.00 212,112.03 382,112.03
San Francisco 01/31/01 08/10/01 300,025.00 5,691.63 305,716.63
Alameda 10/10/89 12/23/02 195,000.00 226,406.98 421,406.98
Sacramento 07/16/98 06/02/03 9,240.00 3,294.58 12,534.58
Sacramento 05/27/88 06/26/03 60,750.00 68,148.10 128,898.10
San Francisco 10/20/00 06/30/03 20,288.00 6,674.34 26,962.34
- ------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)(1)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
Alameda 11/16/93 03/29/02 95,000.00 79,038.22 174,038.22
Alameda 11/16/93 03/29/02 33,057.87 16,988.97 50,046.84
Santa Clara 01/21/94 03/29/02 167,841.65 140,645.55 308,487.20
Santa Clara 11/15/96 03/29/02 6,000.00 3,944.79 9,944.79
San Mateo 05/17/01 09/13/02 204,000.00 31,751.79 235,751.79
San Mateo 10/16/01 02/12/03 85,253.00 9,871.87 95,124.87
- ------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
57
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VI
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Francisco 03/13/90 01/30/01 40,000.00 55,585.80 95,585.80
San Francisco 06/19/89 01/30/01 73,000.00 102,395.46 175,395.46
Santa Clara 12/12/00 02/27/01 220,000.00 6,680.93 226,680.93
Santa Clara 07/27/00 02/28/01 50,000.00 3,457.80 53,457.80
Alameda 10/31/98 06/04/01 167,500.00 206,433.10 373,933.10
San Mateo 01/25/00 06/27/01 100,000.80 16,051.55 116,052.35
Santa Clara 06/22/01 07/13/01 200,000.00 1,584.31 201,584.31
San Mateo 07/30/00 10/16/01 150,000.00 22,861.32 172,861.32
Tuolumne 06/28/01 01/25/02 170,001.00 11,591.83 181,592.83
Sonoma 09/18/96 04/30/02 22,701.71 10,179.89 32,881.60
Santa Clara 11/06/01 06/05/02 160,000.00 9,443.10 169,443.10
San Mateo 07/09/02 10/22/02 67,750.00 2,078.35 69,828.35
Sacramento 07/16/98 04/04/03 5,122.00 1,463.40 6,585.40
San Francisco 01/30/01 08/26/03 363,700.00 102,512.32 466,212.32
Sonoma 10/30/96 09/02/03 23,259.30 12,458.28 35,717.58
San Mateo 07/16/03 09/29/03 137,500.00 2,523.03 140,023.03
Santa Clara 07/08/03 12/11/03 210,000.00 7,556.38 217,556.38
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Mateo 07/16/90 05/17/01 160,000.00 199,634.85 359,634.85
Placer 10/28/99 08/02/01 522,212.43 80,893.41 603,105.84
Placer 01/11/01 07/31/02 63,865.00 17,316.05 81,181.05
Placer 03/30/00 09/30/02 74,594.32 30,266.65 104,860.97
Sacramento 07/29/97 12/23/02 265,000.00 110,226.06 375,226.06
Alameda 10/10/89 12/23/02 169,555.45 119,349.49 288,904.94
Alameda 11/30/02 02/11/03 200,000.50 4,375.01 204,375.51
Sacramento 07/16/98 06/02/03 153,660.00 54,788.48 208,448.48
San Joaqin 05/10/02 06/30/03 76,250.00 9,140.61 85,390.61
San Francisco 10/12/88 11/04/03 60,000.00 76,042.84 136,042.84
- -------------------------------------------------------------------------------------------------------------
58
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VI
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county)(1)
- ---------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ---------------------------------------------------------------------------------------------------------------
San Francisco 08/11/99 08/30/01 120,933.85 28,624.69 149,558.54
San Francisco 05/27/99 08/30/01 100,002.00 27,413.84 127,415.84
Santa Clara 12/01/00 03/08/02 330,750.00 55,302.25 386,052.25
Alameda 11/16/93 03/29/02 575,000.00 478,389.24 1,053,389.24
Alameda 11/16/93 03/29/02 99,172.75 50,966.46 150,139.21
Santa Clara 01/21/94 03/29/02 1,376,301.53 1,153,293.52 2,529,595.05
Santa Clara 11/15/96 03/29/02 49,200.00 32,347.29 81,547.29
San Mateo 05/17/01 09/13/02 192,000.00 29,884.04 221,884.04
San Mateo 10/16/01 02/12/03 147,497.00 17,079.41 164,576.41
San Mateo 08/13/90 06/16/03 185,000.00 304,202.46 489,202.46
Alameda 01/31/96 06/26/03 63,000.00 49,550.32 112,550.32
Contra Costa 04/25/03 11/21/03 175,000.00 10,325.19 185,325.19
- ---------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
59
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Mateo 02/10/93 05/01/01 15,000.00 9,850.00 24,850.00
Alameda 10/29/93 07/11/01 81,825.00 40,416.06 122,241.06
Santa Cruz 12/23/99 07/17/01 476,250.00 87,706.92 563,956.92
Alameda 12/19/96 11/08/01 340,000.00 303,581.45 473,581.45
Sonoma 09/18/96 04/30/02 11,932.63 5,350.83 17,283.46
Los Angeles 08/28101 06/06/02 375,000.00 36,283.07 411,283.07
San Mateo 06/30/93 07/17/02 29,700.00 29,327.78 59,027.78
Marin 01/23/02 01/30/03 195,000.00 23,074.93 218,074.93
San Mateo 02/07/01 03/03/03 144,270.68 22,807.92 167,078.60
Stanislaus 08/13/02 04/29/03 563,642.00 44,261.54 607,903.54
San Mateo 10/29/99 05/15/03 130,000.00 47,845.68 177,845.68
Sonoma 10/30/96 09/02/03 12,225.71 6,548.41 18,774.12
Alameda 01/24/03 09/25/03 295,000.00 20,753.05 315,753.05
San Mateo 07/16/03 09/29/03 137,500.00 2,523.03 140,023.03
Santa Clara 07/08/03 12/11/03 210,000.00 7,556.38 217,556.38
Contra Costa 01/22/03 12/24/03 100,000.00 9,525.27 109,525.27
- --------------------------------------------------------------------------------------------------------------
60
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Alameda 03/22/00 04/19/01 150,000.00 18,865.69 168,865.69
Placer 10/28/99 08/02/01 696,255.98 107,853.66 804,109.64
Santa Clara 08/22/01 03/25/02 439,250.00 31,779.41 471,029.41
Placer 01/11/01 07/31/02 85,150.00 23,087.17 108,237.17
Placer 03/30/00 09/30/02 99,455.20 40,353.95 139,809.15
San Francisco 08/05/01 12/26/02 800,000.00 117,187.05 917,187.05
San Francisco 10/20/00 06/30/03 31,884.00 10,489.18 42,373.18
San Joaqin 05/10/02 06/30/03 100,000.00 11,987.38 111,987.38
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county)(1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Contra Costa 05/31/00 02/07/01 1,147,500.00 100,706.06 1,248,206.06
San Mateo 03/05/99 03/28/01 750,000.00 167,772.20 917,772.20
San Francisco 06/23/00 05/31/01 400,000.00 41,591.81 441,591.81
Santa Clara 12/01/00 03/08/02 330,750.00 55,302.25 386,052.25
Stanislaus 07/24/98 03/13/02 500,000.00 140,985.40 640,985.40
Alameda 11/16/93 03/29/02 412,500.00 343,192.28 755,692.28
Alameda 11/16/93 03/29/02 49,586.38 25,483.23 75,069.61
Santa Clara 01/21/94 03/29/02 335,683.30 281,291.10 616,974.40
Santa Clara 11/15/96 03/29/02 12,000.00 7,889.58 19,889.58
Stanislaus 02/06/98 08/13/02 400,004.00 215,311.81 615,315.81
San Francisco 02/22/00 10/01/02 434,653.87 131,284.65 565,938.52
San Francisco 02/22/00 10/01/02 565,334.12 140,002.14 705,336.26
Contra Costa 11/16/99 12/12/02 829,500.00 265,960.28 1,095,460.28
Alameda 11/07/00 10/08/03 205,000.00 91,615.70 296,615.70
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
61
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- -----------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -----------------------------------------------------------------------------------------------------------------
San Mateo 07/30/99 01/10/01 950,000.00 100,155.21 1,050,155.21
San Mateo 08/22/00 01/10/01 1,449,000.00 64,854.89 1,513,854.89
San Francisco 04/06/00 02/28/01 94,200.00 46,580.13 140,780.13
Santa Clara 07/27/00 02/28/01 200,000.00 13,831.20 213,831.20
San Mateo 08/29/00 03/19/01 1,497,494.68 89,797.74 1,587,292.42
Santa Clara 06/06/00 05/02/01 1,300,000.00 122,140.11 1,422,140.11
Marin 12/28/00 08/15/01 523,000.00 51,663.52 574,663.52
Marin 04/27/00 08/15/01 910,019.16 112,195.59 1,022,214.75
Lake 08/06/99 09/30/01 737,500.00 167,234.99 904,734.99
San Mateo 01/17/02 03/21/02 608,000.00 24,779.08 632,779.08
San Mateo 02/03/00 04/08/02 1,292,800.00 231,560.23 1,524,360.23
San Mateo 09/21/00 04/09/02 1,300,000.00 244,708.97 1,544,708.97
San Francisco 03/29/96 04/23/02 105,000.00 81,802.86 186,802.86
San Francisco 02/23/01 04/26/02 950,000.00 133,783.33 1,083,783.33
San Francisco 03/21/01 04/26/02 694,070.00 54,453.16 748,523.16
San Mateo 01/25/02 04/30/02 491,250.00 14,058.98 505,308.98
San Mateo 07/26/00 05/13/02 1,634,213.28 176,228.48 1,810,441.76
Santa Clara 01/04/02 05/17/02 1,849,000.00 74,590.25 1,923,590.25
Los Angeles 08/28101 06/06/02 375,000.00 36,283.07 411,283.07
Alameda 05/07/97 06/28/02 50,000.00 34,004.25 84,004.25
San Mateo 10/22/97 07/25/02 250,000.00 94,251.17 344,251.17
Contra Costa 02/15/01 08/27/02 650,000.00 116,658.77 766,658.77
San Mateo 06/14/01 09/04/02 350,000.00 55,488.03 405,488.03
Santa Clara 03/29/02 09/13/02 173,500.00 10,028.95 183,528.95
San Mateo 06/22/01 10/10/02 1,723,682.70 127,438.97 1,851,121.67
Santa Clara 05/10/02 10/11/02 500,000.00 24,454.96 524,454.96
San Mateo 02/08/02 10/23/02 1,950,000.00 153,693.72 2,103,693.72
Santa Clara 06/12/01 12/11/02 500,000.00 82,726.03 582,726.03
San Mateo 08/29/01 01/17/03 3,368,000.00 353,867.20 3,721,867.20
Santa Clara 07/25/01 02/21/03 800,000.00 141,810.55 941,810.55
Santa Clara 08/18/99 02/28/03 850,000.00 305,229.88 1,155,229.88
San Mateo 03/13/03 04/04/03 441,500.00 2,413.13 443,913.13
Stanislaus 08/13/02 04/29/03 746,821.00 58,646.18 805,467.18
San Mateo 10/09/02 05/15/03 368,000.00 25,879.97 393,879.97
Santa Clara 07/15/02 06/12/03 413,047.83 26,781.65 439,829.48
San Francisco 11/05/98 06/30/03 910,000.00 353,943.23 1,263,943.23
San Francisco 11/05/98 06/30/03 2,330,575.84 609,985.39 2,940,561.23
Alameda 08/21/02 07/14/03 346,000.00 33,980.16 379,980.16
- -----------------------------------------------------------------------------------------------------------------
62
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)(continued)
- -----------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -----------------------------------------------------------------------------------------------------------------
Marin 04/18/01 08/08/03 605,500.00 163,399.86 768,899.86
Napa 04/05/01 08/14/03 1,675,000.00 399,944.05 2,074,944.05
Santa Clara 09/19/02 11/14/03 1,117,647.10 49,483.13 1,167,130.23
Santa Clara 09/23/03 12/19/03 300,000.00 6,601.71 306,601.71
Santa Clara 07/08/03 12/11/03 500,000.00 7,556.38 507,556.38
San Mateo 10/31/01 12/09/03 1,500,000.00 325,351.65 1,825,351.65
- -----------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- ----------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ----------------------------------------------------------------------------------------------------------------
San Francisco 02/21/01 07/27/01 1,062,000.00 36,833.47 1,098,833.47
Placer 10/28/99 08/02/01 2,869,940.16 444,568.61 3,314,508.77
San Francisco 01/31/01 08/10/01 3,524,950.00 66,870.19 3,591,820.19
San Francisco 05/09/00 10/12/01 350,000.00 58,531.13 408531.13
Santa Clara 08/22/01 03/25/02 439,250.00 31,779.41 471,029.41
San Francisco 10/12/01 06/26/02 734,443.00 70,542.63 804,985.63
Placer 01/11/01 07/31/02 350,985.00 95,164.40 446,149.40
Placer 03/30/00 09/30/02 409,950.48 166,337.43 576,287.91
Santa Clara 04/09/01 11/21/02 1,830,500.00 346,907.24 2,177,407.24
San Francisco 08/05/01 12/26/02 2,000,000.00 29,267.61 2,029,267.61
Alameda 04/25/03 05/09/03 650,000.00 2,527.77 652,527.77
San Mateo 05/03/02 06/18/03 1,700,000.00 201,804.17 1,901,804.17
San Francisco 10/20/00 06/30/03 289,856.00 95,356.67 385,212.67
Alameda 02/13/02 10/06/03 100,000.00 17,951.67 117,951.67
- ----------------------------------------------------------------------------------------------------------------
63
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2003
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county)(1)
- ---------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ---------------------------------------------------------------------------------------------------------------
Contra Costa 05/31/00 02/07/01 1,147,500.00 100,706.06 1,248,206.06
San Francisco 03/30/00 03/23/01 2,200,000.00 250,048.30 2,450,048.30
San Francisco 07/21/00 03/23/01 2,532,739.09 150,211.83 2,682,950.92
San Mateo 03/05/99 03/28/01 2,800,000.00 626,349.56 3,426,349.56
Santa Clara 11/02/98 04/19/01 1,800,000.00 493,471.40 2,293,471.40
San Francisco 06/23/00 05/31/01 600,000.00 62,387.72 662,387.72
San Mateo 04/23/97 07/27/01 370,000.00 152,557.26 522,557.26
San Francisco 08/11/99 08/30/01 1,027,912.30 243,303.87 1,271,216.17
San Francisco 05/27/99 08/30/01 849,996.00 233,011.90 1,083,007.90
Fresno 06/15/95 09/30/01 130,000.00 113,562.53 243,562.53
Santa Clara 08/31/00 01/18/02 750,000.00 142,075.00 892,075.00
Alameda 12/28/00 02/08/02 7,000,000.00 988,952.97 7,988,952.97
San Mateo 02/16/96 03/13/02 75,000.00 53,582.95 128,582.95
San Mateo 08/20/96 03/13/02 65,000.00 42,985.75 107,985.75
Stanislaus 07/24/98 03/13/02 1,072,000.00 302,272.70 1,374,272.70
Alameda 11/16/93 03/29/02 192,500.00 160,156.40 352,656.40
Santa Clara 01/21/94 03/29/02 5,033,074.95 421,936.65 5,455,011.60
Santa Clara 11/15/96 03/29/02 18,000.00 11,834.37 29,834.37
San Francisco 12/09/99 06/11/02 550,000.00 151,958.67 701,958.67
Stanislaus 02/06/98 08/13/02 349,998.00 188,394.87 538,392.87
San Francisco 06/11/02 09/19/02 583,000.00 17,432.13 600,432.13
San Francisco 02/22/00 10/01/02 1,303,980.75 393,859.74 1,697,840.49
San Francisco 02/22/00 10/01/02 1,696,027.25 420,012.58 2,116,039.83
Contra Costa 11/16/99 12/12/02 1,540,500.00 493,926.24 2,034,426.24
Riverside 03/15/97 12/20/02 50,000.00 19,560.21 69,560.21
San Mateo 03/07/00 12/26/02 2,900,000.00 1,013,527.75 3,913,527.75
San Mateo 10/16/01 02/12/03 422,750.00 48,952.34 471,702.34
San Francisco 12/12/01 02/25/03 2,454,500.00 360,471.12 2,814,971.12
San Francisco 03/23/01 02/25/03 4,750,000.00 1,056,386.68 5,806,386.68
San Francisco 03/23/01 02/25/03 2,250,000.00 471,670.11 2,721,670.11
Los Angeles 05/23/00 03/28/03 4,702,959.08 1,498,216.02 6,201,175.10
San Diego 02/13/02 04/11/03 270,000.00 39,135.36 309,135.36
San Francisco 12/20/02 04/25/03 692,000.00 130,004.83 822,004.83
San Mateo 10/23/02 05/01/03 2,500,000.00 149,687.50 2,649,687.50
Alameda 11/07/00 10/08/03 205,000.00 91,615.70 296,615.70
- ---------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
64
As filed with the Securities and Exchange Commission
on October 7, 2003
Registration No. 333-106900
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
REDWOOD MORTGAGE INVESTORS VIII
(Exact name of registrant as specified in its charter)
CALIFORNIA 6611 94-3158788
- ---------------------------- ----------------------- --------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
900 Veterans Blvd., Suite 500, Redwood City, California 94063 (650)
365-5341 (Address and telephone number of principal executive offices)
900 Veterans Blvd., Suite 500, Redwood City, California 94063 (650)
365-5341 (Address of principal place of business or intended principal place of
business)
Michael R. Burwell
900 Veterans Blvd., Suite 500, Redwood City, California 94063 (650)
365-5341 (Name, address, including zip code and telephone number, including area
code of agent for service)
Copies to:
Stephen C. Ryan, Esq.
Cox Castle & Nicholson LLP
555 Montgomery Street Fifteenth Floor
San Francisco, California 94111
Approximate date of commencement
of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: |X|
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed
Title of Each Proposed Maximum
Class of Securities Amount Maximum Aggregate Amount of
to be Registered Being Registered Offering Per Unit (2) Offering Price Registration Fee
- ---------------- ---------------- --------------------- -------------- ----------------
Limited
Partnership
Interests (1) 75,000,000 $1.00 $75,000,000 $6,067.50
- ---------------------
(1) This Registration Statement covers all units which may be acquired by
limited partners if the maximum aggregate subscription contemplated by this
offering are obtained.
(2) Subscriptions will be accepted in the minimum amount of two thousand
(2,000) units ($2,000) for initial investments and 1,000 units ($1,000) for
additional investments for existing limited partners and for greater amounts in
multiples of one (1) unit ($1) each.
The registrant hereby amends this registration statement on such date of
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8 (a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PART I
Registration Statement Item Prospectus Caption
Number and Caption
1. Forepart of the Registration Statement and Outside Front Cover Page Front Cover Page of Prospectus
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Summary of the Offering; Inside Front
Charges Cover Page; Risks and Other Factors
4. Determination of Offering Price Inapplicable
5. Dilution Inapplicable
6. Selling Security Holders Inapplicable
7. Plan of Distribution Plan of Distribution
8. Use of Proceeds Estimated Use of Proceeds
9. Selected Financial Data Inapplicable
10. Management's Discussion and Analysis of Financial Condition and Management's Discussion and Analysis of
Results of Operations Financial Condition of the Partnership
11. General Information as to Registrant Summary of the Offering
12. Policy with Respect to Certain Activities Inapplicable
13. Investment Policies of Registrant
a. Investments in real estate or interests in real estate Inapplicable
b. Investments in real estate mortgages Risk Factors; Investment Objectives and
Criteria; Estimated Use of Proceeds
c. Securities of or interests in persons primarily engaged in real Inapplicable
estate activities
d. Investments in other securities Inapplicable
14. Description of Real Estate Inapplicable
15. Operating Data Inapplicable
16. Tax Treatment of Registrant and Its Security Holder Federal Income Tax Consequences
17. Market Price of and Dividends on the Registrant's Common Equity and Inapplicable
Related Stockholder Matters
18. Description of Registrant's Securities Terms of the Offering; Description of Units;
Summary of Limited Partnership Agreement
19. Legal Proceedings Inapplicable
20. Security Ownership of Certain Beneficial Owners and Management Inapplicable
21. Directors and Executive Officers Management
22. Executive Compensation Compensation of the General Partners and
Affiliates
23. Certain Relationships and Related Transactions Management; Compensation of the General
Partners and Affiliates; Conflicts of
Interest
24. Selection, Management and Custody of Registrant's Investment Conflicts of Interest;
Investment Objectives and Criteria
25. Policies with Respect to Certain Transactions Conflicts of Interest;
Investment Objectives and Criteria
26. Limitations of Liability Fiduciary Duty of General Partners
27. Financial Statements and Information Financial Statements
28. Interests of Named Experts and Counsel Legal Opinion; Experts
29. Disclosure of Commission Position on Indemnification for Securities Fiduciary Duty of General Partners
Act Liabilities
REDWOOD MORTGAGE INVESTORS VIII
$75,000,000 Units of Limited Partnership Interest
$1 per Unit
We are engaged in business as a mortgage lender. We make loans to
individuals and business entities secured primarily by first and second deeds of
trust on California real estate. Loans are arranged and serviced by Redwood
Mortgage Corp.
Our investment objectives are to make investments that:
o Yield a high rate of return from mortgage lending
o Preserve and protect our capital
A maximum of 75,000,000 units ($75,000,000) are being offered on a "best
efforts" basis, which means that no one is guaranteeing that any minimum number
of units will be sold, through broker dealer member firms of the National
Association of Securities Dealers. The minimum investment is 2,000 units
($2,000) for initial investments and 1,000 units ($1,000) for additional
investments for existing limited partners. As this is not our first offering of
units, all proceeds from the sale of units will be immediately available to us
for investment. This offering will terminate one year from the effective date of
the prospectus, October 7, 2003 unless we elect to extend it for one additional
year periods.
There are risks associated with an investment in the partnership (See "RISK
FACTORS" at page 8) including the following:
o We have not identified any specific loans to make with the proceeds of
this offering and this adds additional uncertainty.
o We will be subject to various conflicts of interest arising out of our
relationship to the general partners and their affiliates.
o Due to the speculative nature of the investment, there is a risk that you
could lose your entire investment.
o The formation loan to be made to Redwood Mortgage Corp. to pay sales
commissions will be unsecured and non-interest bearing and repayment is not
guaranteed.
o An investment in units involves material tax risks.
o Transfer of units is restricted; no public market for the units exists
and none is likely to develop.
o You will have a limited ability to liquidate your investment; you will be
subject to early withdrawal penalties and other restrictions and may be required
to accept less than you paid for your units (see "Transfer of Units" at page 74.
o Our use of leverage may reduce the partnership's profitability or cause
losses through liquidation.
o We will rely on appraisals which may not be accurate to determine the
fair market value of the real property used to secure loans made by the
partnership.
o Loan defaults and foreclosures may adversely affect the partnership.
o You have no right to participate in the management of the partnership and
may only vote on those matters which are set forth in the limited partnership
agreement; all decisions with respect to the management of the partnership will
be made exclusively by the general partners.
---------------------------------------------
===========================================================================================================
Price to Public Underwriting commission (1) Proceeds to partnership
- -----------------------------------------------------------------------------------------------------------
Per Unit (Minimum
Investment 2,000 units) $1 $0 $1
Total Maximum $75,000,000 $0 $75,000,000
===========================================================================================================
(1) Underwriting sales commissions will be paid by Redwood Mortgage Corp.
from proceeds borrowed from the partnership. This loan is called the formation
loan and will be repaid by Redwood Mortgage Corp. over time.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if the
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The use of projections in this offering is prohibited. Any representation
to the contrary and predictions, written or oral, as to the amount or certainty
of any present or future cash benefit or tax consequence which may flow from an
investment in the partnership is not permitted.
The date of this prospectus is October 7, 2003
TABLE OF CONTENTS
Page
INVESTOR SUITABILITY STANDARDS.................................................1
Minimum Suitability Standards..................................................1
Suitable Investors.............................................................1
Minimum Purchase Amount........................................................2
IRA Investors..................................................................2
ERISA Investors................................................................2
Blue Sky Requirements..........................................................2
Subscription Agreement Warranties..............................................2
Subscription Procedure.........................................................3
SUMMARY OF THE OFFERING........................................................3
The Partnership................................................................3
General Partners...............................................................3
Risk Factors...................................................................3
Terms Of The Offering..........................................................4
Estimated Use Of Proceeds......................................................4
Compensation Of The General Partners And Affiliates............................5
Conflicts Of Interest..........................................................6
Prior Performance Summary......................................................6
Investment Objectives And Criteria.............................................6
Federal Income Tax Consequences................................................6
Liquidity, Capital Withdrawals And Early Withdrawals...........................6
Summary Of Limited Partnership Agreement And Limited Partnership Units.........7
Additional Information.........................................................7
Subscription Procedures........................................................7
RISK FACTORS...................................................................8
Mortgage Lending And Real Estate Risks.........................................8
We Have Not Identified Any New Loans From Additional Proceeds Of This
Offering.....................................................................8
Loan Defaults And Foreclosures By Borrowers May Adversely Affect
Partnership..................................................................8
We Must Rely On Appraisals Which May Not Be Accurate Or May Be
Affected By Subsequent Events................................................8
Competition Risks..............................................................9
Risks Associated With Junior Encumbrances......................................9
Risks Associated With Construction Loans.......................................9
Risk Of Real Estate Ownership After Foreclosure................................9
Risks Of Real Estate Development On Property Acquired By Us...................10
Bankruptcy And Legal Limitations On Personal Judgments May Adversely
Affect Our Profitability....................................................10
Risks Associated With Unintended Violations Of Usury Statutes.................10
Risks Associated With High Cost Mortgages.....................................10
Loan- To-Value Ratios Are Determined By Appraisals Which May Be In
Excess Of The Ultimate Purchase Price Of The Underlying Property............11
Use Of Borrowed Money May Reduce Our Profitability Or Cause Losses
Through Liquidation.........................................................11
Changes In Interest Rates May Affect Your Return On Your Investment...........11
Suitable Mortgage Loans May Not Be Available From Time To Time................12
Marshaling Of Assets Could Delay Or Reduce Recovery Of Loans..................12
Potential Liability For Toxic Or Hazardous Substances If We Are
Considered Owner Of Real Property...........................................12
Potential Loss Of Revenue In The Event Of The Presence Of Hazardous
Substances..................................................................12
Potential Conflicts And Risks If We Invest In Loans With General
Partners Or Affiliates......................................................13
INVESTMENT RISKS..............................................................13
There Is No Assurance You Will Receive Cash Distributions.....................13
Your Ability To Recover Your Investment On Dissolution And
Termination Will Be Limited.................................................13
Certain Kinds Of Losses Can Not Be Insured Against............................13
Risks Related To Concentration Of Mortgages In The San Francisco Bay Area.....13
You Must Rely On General Partners For Management Decisions....................14
You Will Be Bound By Decision Of Majority Vote................................14
i
Net Worth Of The General Partners May Affect Ability Of General
Partners To Fulfill Their Obligations To The Partnership....................14
Risks Regarding Formation Loan And Repayment Thereof..........................14
Early Withdrawal Penalties Will Reduce Amount of Formation Loan...............14
Delays In Investment Could Adversely Affect Your Return.......................15
No Assurance Of Limitation Of Liability Of Limited Partners...................15
No Assurance That California Law Will Apply With Respect To Limitation
Of Liability Of Limited Partners............................................15
We Cannot Precisely Determine Compensation To Be Paid To General
Partners And Affiliates.....................................................15
Working Capital Reserves May Not Be Adequate..................................15
Purchase Of Units Is A Long Term Investment...................................16
We May Be Required To Forego More Favorable Investments To Avoid
Regulation Under Investment Company Act of 1940...............................16
Use Of Forward Looking Statements.............................................16
TAX RISKS.....................................................................16
Risks Associated With Partnership Status For Federal Income
Tax Purposes................................................................16
Risks Associated With Characterization Of Partnership Income As
Portfolio Income............................................................17
Risks Of Partnership Characterization As A Publicly Traded Partnership........17
Risks Relating To Taxation Of Undistributed Revenues And Gain.................17
Risks Relating To Generation Of Unrelated Business Taxable Income.............17
Risks Of Audit And Adjustment.................................................17
Risks Of Effects Of State And Local Taxation..................................18
ERISA RISKS...................................................................18
Risks Of Investment By Tax-Exempt Investors...................................18
NOTICE TO CALIFORNIA RESIDENTS................................................18
TERMS OF THE OFFERING.........................................................19
No Escrow Established.........................................................19
Investment Of Subscriptions...................................................19
Purchase By General Partners And Affiliates...................................19
Election To Receive Periodic Cash Distributions...............................19
ESTIMATED USE OF PROCEEDS.....................................................19
CAPITALIZATION OF THE PARTNERSHIP.............................................21
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES...........................21
OFFERING STAGE................................................................22
OPERATING STAGE...............................................................22
LIQUIDATING STAGE.............................................................23
CONFLICTS OF INTEREST.........................................................26
Conflicts Arising As A Result Of The General Partners' Legal and
Financial Obligations to Other Partnerships.................................26
Conflicts Arising From The General Partners' Allocation Of Time
Between The Partnership And Other Activities................................27
Amount Of Loan Brokerage Commissions Affects Rate Of Return To You............27
Arrangement Of Loans By Redwood Mortgage Corp.................................27
Terms Of Formation Loan Are Not A Result Of Arms Length Negotiations..........27
Potential Conflicts If We Invest In Loans With General Partners Or
Affiliates..................................................................28
General Partners Will Represent Both Parties In Sales Of Real Estate
Owned to Affiliates.........................................................28
Professionals Hired By General Partners Do Not Represent You Or Any
Other Limited Partner.......................................................29
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS..............................29
Present State Of The Law......................................................29
Exculpation...................................................................29
Indemnification...............................................................30
Terms Of The Partnership Agreement............................................30
PRIOR PERFORMANCE SUMMARY.....................................................30
Experience and Background Of General Partners and Affiliates..................30
Publicly Offered Programs.....................................................30
Privately Offered Programs....................................................31
Redwood Mortgage Investors VIII...............................................31
PUBLICLY OFFERED MORTGAGE PROGRAMS............................................31
Redwood Mortgage Investors VII................................................31
Redwood Mortgage Investors VI.................................................31
ii
PRIVATELY OFFERED MORTGAGE PROGRAMS...........................................32
Redwood Mortgage Investors V..................................................32
Redwood Mortgage Investors IV.................................................32
Redwood Mortgage Investors III................................................32
Redwood Mortgage Investors II.................................................32
Redwood Mortgage Investors ...................................................32
Corporate Mortgage Investors..................................................32
Additional Information........................................................32
No Major Adverse Developments.................................................33
Prior Public Partnerships.....................................................33
MANAGEMENT....................................................................33
General.......................................................................33
The General Partners..........................................................33
Michael R. Burwell............................................................33
Gymno Corporation.............................................................33
Redwood Mortgage Corp.........................................................33
Affiliates of the General Partners............................................34
The Redwood Group, Ltd........................................................34
Theodore J. Fischer...........................................................34
Diana B. Mandarino............................................................34
SELECTED OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................34
SELECTED FINANCIAL DATA.......................................................35
ORGANIZATIONAL CHART..........................................................37
INVESTMENT OBJECTIVES AND CRITERIA............................................38
Principal Objectives..........................................................38
General Standards For Loans...................................................38
Priority Of Mortgages.........................................................38
Geographic Area Of Lending Activity...........................................39
Construction Loans............................................................39
Loan-To-Value Ratios..........................................................39
Terms Of Loans................................................................40
Equity Interests In Real Property.............................................40
Escrow Conditions.............................................................40
Loans To General Partners And Affiliates......................................40
Purchase Of Loans From Affiliates And Other Third Parties.....................40
Note Hypothecation............................................................40
Loan Participation............................................................41
Diversification...............................................................41
Reserve Liquidity Fund........................................................41
Credit Evaluations............................................................41
Loan Brokerage Commissions....................................................41
Loan Servicing................................................................41
Sale Of Loans.................................................................41
Borrowing.....................................................................41
Other Policies................................................................41
CERTAIN LEGAL ASPECTS OF LOANS................................................42
Foreclosure...................................................................42
Tax Liens.....................................................................42
Anti-Deficiency Legislation...................................................42
Special Considerations In Connection With Junior Encumbrances.................43
"Due-On-Sale" Clauses.........................................................43
Due-On-Sale...................................................................43
Due-On-Encumbrance............................................................44
Prepayment Charges............................................................44
Real Property Loans...........................................................44
iii
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF
THE PARTNERSHIP.............................................................44
BUSINESS......................................................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................61
Summary Of Material Tax Aspects...............................................61
Opinion Of Counsel............................................................62
Partnership Status............................................................62
Publicly Traded Partnerships..................................................63
Results If Partnership Is Taxable As An Association...........................64
Anti-Abuse Rules..............................................................64
Taxation Of Partners - General................................................64
Allocation Of Profits And Losses..............................................64
Sale Of Partnership Units.....................................................65
Character Of Income Or Loss...................................................65
Treatment Of Loans Containing Participation Features..........................65
Repayment Or Sale Of Loan.....................................................66
Property Held Primarily For Sale; Potential Dealer Status.....................66
Tax Consequences Of Reinvestment In Loans.....................................66
Partnership Organization, Syndication Fees And Acquisition Fees...............66
Original Issue Discount.......................................................66
Deduction Of Investment Interest..............................................66
Section 754 Election..........................................................67
Termination Of The Partnership................................................67
Tax Returns...................................................................67
Audit Of Tax Returns..........................................................68
Investment By Tax-Exempt Investors............................................68
Investment By Charitable Remainder Trusts.....................................69
Foreign Investors As Limited Partners.........................................69
State And Local Taxes.........................................................69
New Legislation...............................................................70
ERISA CONSIDERATIONS..........................................................70
General.......................................................................70
Fiduciaries Under ERISA.......................................................70
Prohibited Transactions Under ERISA And The Code..............................71
Plan Assets...................................................................71
Annual Valuation..............................................................72
Potential Consequences Of Treatment As Plan Assets............................72
DESCRIPTION OF UNITS..........................................................72
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT..................................73
Rights And Liabilities Of Limited Partners....................................73
Capital Contributions.........................................................74
Rights, Powers And Duties Of General Partners.................................74
Profits And Losses............................................................74
Cash Distributions............................................................74
Meeting.......................................................................74
Accounting And Reports........................................................74
Restrictions On Transfer......................................................74
General Partners' Interest....................................................74
Term Of Partnership...........................................................75
Winding Up....................................................................75
Dissenting Limited Partners' Rights...........................................75
TRANSFER OF UNITS.............................................................75
Restrictions On The Transfer Of Units.........................................75
No Assignment Permitted On Secondary Market...................................76
Withdrawal From Partnership...................................................76
DISTRIBUTION POLICIES.........................................................78
Distributions To The Limited Partners.........................................78
Cash Distributions............................................................78
Allocation Of Net Income And Net Losses.......................................78
REPORTS TO LIMITED PARTNERS...................................................78
iv
PLAN OF DISTRIBUTION..........................................................79
Sales Commissions.............................................................79
Sales By Registered Investment Advisors.......................................79
Election Of Investors To Pay Client Fees......................................79
Client Fees Are Not Sales Commission..........................................79
Representations And Warranties Of Registered Investment Advisors..............79
Payment Of Sales Commission...................................................80
Payment Of Other Fees To Participating Broker Dealers.........................80
Suitability Requirements......................................................80
Formation Loan................................................................80
Escrow Arrangements...........................................................82
Termination Date Of Offering..................................................82
Subscription Account..........................................................82
SUPPLEMENTAL SALES MATERIAL...................................................82
LEGAL PROCEEDINGS.............................................................83
LEGAL OPINION.................................................................83
EXPERTS.......................................................................83
ADDITIONAL INFORMATION........................................................83
TABULAR INFORMATION CONCERNING PRIOR PROGRAMS.................................84
GLOSSARY......................................................................84
INDEX TO THE FINANCIAL STATEMENTS.............................................86
APPENDIX I - PRIOR PERFORMANCE TABLES
EXHIBIT A - AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
EXHIBIT B - AMENDED AND RESTATED SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
v
INVESTOR SUITABILITY STANDARDS
You should only purchase units if you have adequate financial means, desire
a relatively long term investment, and do not anticipate any need for immediate
liquidity.
Minimum Suitability Standards - We have established a minimum suitability
standard which requires that you have either:
o a net worth (exclusive of home, furnishings and automobiles) of at least
$150,000 plus an annual gross income of at least $65,000, or
o irrespective of annual gross income, a net worth of $250,000 (determined
with the same exclusions). In no event may the investment exceed 10% of the
investor's net worth. In the case of sales to fiduciary accounts, such
conditions must be met by the fiduciary, by the fiduciary account or by the
donor who directly and indirectly supplied the funds for the purchase of units.
We have established these standards because the purchase of units is an
illiquid investment. You will be required to represent to us that:
o you comply with the applicable standards; or
o you are purchasing in a fiduciary capacity for a person meeting such
standards; or
o the standards are met by a donor who directly or indirectly supplies the
funds for the purchase of units.
The participating broker dealers will make reasonable inquiry to assure
that every prospective investor complies with the investor suitability
standards. The general partners will not accept subscriptions from you if you
are unable to represent in your subscription agreement that you meet such
standards. Under the laws of certain states, transferees may be required to
comply with the suitability standards set forth herein as a condition to
substitution as a limited partner. We will require certain assurances that such
standards are met before agreeing to any transfer of the units.
You should only purchase units if you have adequate financial means, desire
a relatively long term investment, and do not anticipate any need for immediate
liquidity.
Suitable Investors - Investment in the partnership involves certain risks
and, accordingly, is suitable only for entities or persons of adequate means.
Due to the nature of the partnership loans, it is likely that all or
substantially all of the income of the partnership will be taxable to you as
ordinary income (See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" at page 61). The
units may, therefore, be suitable for:
o Corporate pension or profit sharing plan
o A Keogh Plan account
o Individual retirement account
o A simplified employee pension
o Persons seeking current, taxable income
An investment in units may not be suitable for Charitable Remainder Trusts
or other entities exempt from federal income taxation, certain foundations and
other charitable organizations.
All persons or entities considering an investment in units should consult
their own legal and/or financial advisor with respect to whether an investment
in units is appropriate.
1
Minimum Purchase Amount - The general partners have established the minimum
initial purchase at 2,000 units ($2,000). The general partners may accept
subscriptions in excess of $2,000. The minimum purchase for existing limited
partners in the partnership is 1,000 units ($1,000). No person may become an
assignee of record or a substituted limited partner unless he is the owner of a
minimum of 2,000 units ($2,000). If you are seeking to transfer your units, you
will be subject to the securities or "blue sky" laws of the state in which the
transfer is to take place (See "DESCRIPTION OF UNITS" at page 72 and "SUMMARY OF
THE LIMITED PARTNERSHIP AGREEMENT - Restrictions on Transfer" at page 74).
IRA Investors - A minimum of 2,000 units ($2,000) may be purchased,
transferred, assigned or retained by an Individual Retirement Account ("IRA")
and incremental amounts in excess thereof for spousal IRA's established under
Section 408 of the Internal Revenue Code of 1986, as amended ("Code"). You
should be aware, however, that an investment in the partnership will not, in and
of itself, create an IRA for you and that, in order to create an IRA, you must
comply with the provisions of Section 408 of the Code.
ERISA Investors - The investment objectives and policies of the partnership
have been designed to make the units suitable investments for employee benefit
plans under current law. In this regard, the Employee Retirement Income Security
Act of 1974 ("ERISA") provides a comprehensive regulatory scheme for "plan
assets." The general partners will manage the partnership so as to assure that
an investment in the partnership by a qualified plan will not, solely by reason
of such investment, be considered to be an investment in the underlying assets
of the partnership so as to make the assets of the partnership "plan assets."
The final regulations are also applicable to an IRA. (See "ERISA RISKS -Risks of
Investment by Tax-Exempt Investors." at page 18).
The general partners are not permitted to allow the purchase of units with
assets of any qualified plans if the general partners (i) have investment
discretion with respect to the assets of the qualified plan invested in the
partnership, or (ii) regularly give individualized investment advice that serves
as the primary basis for the investment decisions made with respect to such
assets. This prohibition is designed to prevent violation of certain provisions
of ERISA.
Blue Sky Requirements - If we qualify units for sale in states which have
established suitability standards and minimum purchase requirements different
from those set by the partnership, such suitability standards and minimum
purchase requirements shall be set forth in a supplement to this prospectus. No
such additional requirements exist at this time.
Subscription Agreement Warranties - The subscription agreement requires
that you warrant that:
o you have received, read and understood the prospectus and that you are
relying on it for your investment;
o you meet the applicable suitability standards set forth in the
prospectus;
o you are aware that the subscription may be rejected by the general
partners;
o your investment is subject to certain risks described in the prospectus
and there will be no public market for the units;
o you have been informed by your participating broker dealer of all facts
relating to lack of liquidity or marketability;
o you understand the restrictions on transferability;
o you have sufficient liquid assets to provide for current needs and
personal contingencies or, if a trustee, that limited liquidity will not affect
its ability to make timely distributions;
o you have the power, capacity and authority to make the investment;
o you are capable of evaluating the risks and merits of the investment; and
o you are making the investment for your own account or your family's or in
your fiduciary capacity and not as an agent for another.
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The purpose of the warranties is to ensure that you fully understand the
terms of our offering, the risks of an investment with us and that you have the
capacity to enter into a subscription agreement. The general partners, on behalf
of the partnership, intend to rely on the warranties in accepting a
subscription. In any claim or action against the general partners or
partnership, the general partners or partnership may use the warranties against
you as a defense or basis for seeking indemnity from you.
Subscription Procedure - In order to subscribe to units in the partnership,
you must read carefully and execute the "SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY." For each unit subscribed, you must tender the sum of $1 per unit. The
minimum initial investment is 2,000 units ($2,000). The minimum additional
investment for existing limited partners is 1,000 units ($1,000).
SUMMARY OF THE OFFERING
This summary highlights selected information contained elsewhere in this
prospectus. It does not contain all the information that is important to your
decision to invest in the partnership. To understand this offering fully, you
should read the entire prospectus carefully, including the "Risk Factors"
section and the financial statements. Any capitalized terms used in the
prospectus are defined in the glossary on page 84.
The Partnership - We are Redwood Mortgage Investors VIII and we commenced
operations on or about April 12, 1993. We are located at 900 Veterans Blvd.,
Suite 500, Redwood City, California 94063 and our telephone number is (650)
365-5341.
We are engaged in business as a mortgage lender. We make loans to
individuals and business entities secured by residential, investment or
commercial property. In order to secure repayment of the loans, the loans are
secured by first and second, and in some limited cases, third deeds of trust on
the property. While we have an existing portfolio of loans, we have not
committed to or identified any loans that will be made from the proceeds of this
offering.
General Partners - The general partners of the partnership are Michael R.
Burwell, an individual, Gymno Corporation, a California corporation and Redwood
Mortgage Corp., a California corporation. The general partners manage and
control the partnership affairs and will make all investment decisions for us.
The loans are arranged and serviced by Redwood Mortgage Corp. The general
partners' offices are located at 900 Veterans Blvd., Suite 500, Redwood City, CA
94063 and their telephone number is (650) 365-5341.
Risk Factors - An investment in the partnership involves certain risks. The
following are the most significant risks relating to an investment in the
partnership:
o Although you will have an opportunity to review the partnership's
existing portfolio, you will not have an opportunity to review loans to be made
by the partnership from the proceeds of this offering until after the loans have
been made. Such decisions will be made exclusively by the general partners.
o No escrow will be established. All proceeds from the sale of units will
be immediately available for investment in loans.
o The general partners and their affiliates will receive fees from the
partnership. Most fees will be paid regardless of the economic return to you and
other limited partners or how successful the partnership is. The compensation to
be received by the general partners and their affiliates is based, in large part
upon the net asset value of the partnership and upon the principal balances of
the loans. The principal balances of the loans and the net asset value of the
partnership will be continually changing as new investments are made and as
income is allocated to your capital account or as cash distributions are made to
you.
o There are limits on your ability to transfer units. No public market
exists for units and none is likely to develop. Thus you may not be able to sell
your units quickly or profitably if the need arises.
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Before you invest in the partnership, you should see the complete
discussion of the "Risk Factors" beginning on page 8 of this prospectus.
Terms of the Offering - Up to 75,000,000 units ($75,000,000) of limited
partnership interest in the partnership are offered in units of $1 each. The
units are being offered by selected registered broker dealers who are members of
the National Association of Securities Dealers, Inc. (the "participating broker
dealers"). They are being offered on a "best efforts" basis, which means that no
one is guaranteeing that any minimum number of units will be sold. We may also
accept orders from you if you utilize the services of a registered investment
advisor. This offering will terminate one year from the effective date of this
prospectus unless, the general partners in their discretion, terminate the
offering earlier or extend the offering for one year periods.
Estimated Use of Proceeds. - The partnership will use the proceeds from the
sale of its units to make loans and pay expenses relating to the organization
and operation of the partnership. After the repayment of the formation loan, we
estimate that approximately 96% of the proceeds of this offering will be used to
make loans or be held as cash reserves. The remaining proceeds will be used to
pay expenses relating to the organization and operation of the partnership.
Until the formation loan is repaid, a minimum of 87% of the proceeds will be
used to make loans or be held as cash reserves. However, because of the time
value of money, the amount of proceeds available to make loans (96%) upon the
repayment of the formation loan may be less than if 96% of the proceeds of this
offering were available to make loans today. If all of the units we are offering
are not sold, the amount of proceeds available to make loans will be less. We
are permitted under the terms of the partnership agreement to borrow money for
the purpose of making loans and have done so to date. The maximum amount that we
may borrow is 50% of the outstanding principal balance of our loan portfolio.
Estimated 50%
Maximum Offering (1) Offering Sold (1)(2)
75,000,000 Units 37,500,000 Units
($75,000,000)sold ($37,500,000) sold
=========================================================================================================================
Dollar Amount % Dollar Amount %
- -------------------------------------------------------------------------------------------------------------------------
Gross Proceeds $75,000,000 100% $37,500,000 100%
Leveraged Funds 0 0 0 0
Total Partnership Funds $75,000,000 100% $37,500,000 100%
Less: Public Offering Expenses (3) and
Organizational and Offering Expenses (4) $3,000,000 4% $3,000,000 8%
Total Offering Expenses $3,000,000 4% $3,000,000 8%
Amount Available for Investment $72,000,000 96% $34,500,000 92%
Less:
Formation Loan to pay sales commissions (5) $6,750,000 9% $3,375,000 9%
Reserve Liquidity Fund (6) $1,500,000 2% $750,000 2%
Cash Available for Extension of Loans (7) $63,750,000 85% $30,375,000 81%
- --------------------
(1) Does not include a capital contribution of the general partners in the
amount of 1/10th of 1% of the gross proceeds (See "SUMMARY OF THE LIMITED
PARTNERSHIP AGREEMENT - Capital Contributions" at page 74).
(2) Although there is no minimum offering amount, this column represents
how the gross offering proceeds will be utilized assuming that only 50% of the
amount being offered is sold.
4
(3) Consists of expenses incurred in connection with the offering of the
units. These expenses include legal and accounting fees and expenses, printing
costs, filing fees and other disbursements in connection with the sale and
distribution of units.
(4) Redwood Mortgage Corp. will be reimbursed for offering expenses
including, but not limited to attorneys' fees, accounting fees, printing costs
and other selling expenses equal to the lesser of 10% of the gross proceeds of
the offering or $3,000,000.
(5) The amount of the formation loan payable to Redwood Mortgage Corp. set
forth in this table is based upon the maximum sales commissions allowable of 9%.
The formation loan will not exceed nine percent (9%) of the total gross proceeds
of the offering based upon the maximum sales commissions payable, (See "PLAN OF
DISTRIBUTION - Formation Loan" at page 80). The formation loan is a loan made to
Redwood Mortgage Corp. in an amount equal to the amount of the sales commissions
to be paid in connection with the offering. Although the exact amount of sales
commissions is not known, we have assumed the maximum amount payable of 9% or
$6,750,000. From the proceeds of the formation loan, Redwood Mortgage Corp. pays
the participating broker dealers all amounts as sales commissions owed. The
partnership does not pay any sales commissions directly. Redwood Mortgage Corp.
is required to repay the formation loan to the partnership. The terms of
repayment of the formation loan are as follows. During the offering period,
Redwood Mortgage Corp. will repay annually, one tenth of the principal balance
of the formation loan as of December 31 of each year. Upon completion of the
offering, the formation loan will be amortized over 10 years and repaid in 10
equal annual installments. The formation loan is unsecured, non-interest bearing
and is not guaranteed. The amount of the formation loan and thus the amount
repaid to the partnership is reduced partially by a portion of the early
withdrawal penalties paid to the partnership. With respect to this offering, the
formation loan could range from a minimum of $3,750,000 assuming all investors
elected to receive current cash distributions to a maximum of $6,750,000
assuming all investors elected to compound their earnings.
(6) The partnership anticipates maintaining an average balance of a reserve
liquidity fund equal to two percent (2%) of the gross proceeds of the offering.
(7) These proceeds will be used to make loans (See "INVESTMENT OBJECTIVES
AND CRITERIA" at page 38). The exact amount of the cash available for extension
of loans will depend upon the amount of the formation loan, organization and
operating expenses, use of leveraged funds and cash reserves.
Compensation of the General Partners - The general partners and their
affiliates have received and will continue to receive and Affiliates substantial
compensation in connection with the offering and the investment and management
of the partnership's assets. An affiliate of a general partner includes
generally any entity in which a general partner owns 10% or more or otherwise
controls any person owning directly or indirectly, 10% or more, of a general
partner and any officer, director or partner or a general partner. The receipt
of this compensation is not the result of arms length negotiations (See
"COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES" at page 21). The amount of
compensation to be paid to the general partners and their affiliates are
estimates and actual amounts paid may vary. Except as noted, there is no limit
on the dollar amount of compensation and fees to be paid to the general partners
and their affiliates. These fees include the following:
o Reimbursement of offering expenses
o Loan brokerage commissions paid by the borrowers
o Processing and escrow fees paid by the borrowers
o Loan servicing fees paid by the borrowers
o Asset management fee paid by the partnership from operations
o Reimbursement of expenses relating to the administration of the
partnership
o Reconveyance fees paid by the borrowers
o Assumption fees paid by the borrowers
o Extension fees paid by the borrowers
5
o Interest earned on borrowers' funds held in escrow
o 1% interest in profits, losses and distributions
o Reduction in the amount of the formation loan due to early withdrawal
penalties
Conflicts of Interest - The general partners and their affiliates will
experience conflicts of interest in connection with the management of the
partnership, including the following:
o The general partners and their affiliates have legal and financial
obligations with respect to other partnerships which are similar to their
obligations with respect to the partnership.
o The general partners and their affiliates have to allocate their time
between the partnership and other activities, including other real estate
partnerships in which they are involved.
o The amount of the loan brokerage commission payable to Redwood Mortgage
Corp., a general partner, will affect the overall rate of return to the limited
partners.
o In the event of default of the formation loan, a conflict of interest
would arise on the general partners' part in connection with the enforcement of
the formation loan and continued payment of other fees and compensation to
Redwood Mortgage Corp., including, but not limited to, the loan servicing fee
and the loan brokerage fee.
Prior Performance Summary - We have previously sponsored 8 prior
partnerships with investment objectives similar to the partnership. We have made
4 prior offerings in the partnership with contributed capital as of December 31,
2002 totaling $91,238,920. Total contributed capital as of June 30, 2003 equaled
$115,932,342. We have been engaged in mortgage lending in the San Francisco Bay
Area since 1977. For a description of operations of the partnership and prior
programs of the general partners and their affiliates, see "PRIOR PERFORMANCE
SUMMARY" at page 30. Certain statistical data relating to prior partnerships
with investment objectives similar to ours is also provided in the "Prior
Performance Tables" included at the end of this prospectus.
Investment Objectives and Criteria - Our investment objectives are:
o To yield a high rate of return from mortgage lending, after the payment
of certain fees and expenses to the general partners and their affiliates, and
o Preserve and protect the partnership's capital.
Federal Income Tax Consequences - The section of this prospectus entitled
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" at page 61 contains a discussion of
the most significant federal income tax issues pertinent to the partnership.
Other tax issues of relevance to other taxpayers should be reviewed carefully by
such investors to determine special tax consequences of an investment prior to
their subscription.
Liquidity, Capital Withdrawals and Early Withdrawals - You have no right to
withdraw from the partnership or to obtain the return of all or any portion of
sums paid for the purchase of units (or reinvested earnings with respect
thereto) for one (1) year after the date such units are purchased. In order to
provide a certain degree of liquidity, after the one year period, you may
withdraw all or part of your capital accounts from the partnership in four equal
quarterly installments beginning the calendar quarter following the quarter in
which the notice of withdrawal is given. Such notice must be given thirty (30)
days prior to the end of the preceding quarter subject to a ten percent (10%)
early withdrawal penalty. The ten percent (10%) penalty is applicable to the
amount withdrawn as stated in the notice of withdrawal. The ten percent (10%)
penalty will be deducted, pro rata, from the four quarterly installments paid to
the limited partner. Withdrawal after the one year holding period and before the
five year holding period will be permitted only upon the terms set forth above.
6
You will also have the right after five years from the date of purchase of
the units to withdraw from the partnership. This will be done on an installment
basis, generally, over a five-year period (in 20 equal quarterly installments),
or over such longer period of time as the limited partner may desire or as may
be required in light of partnership cash flow. During this five-year (or longer)
period, we will pay any distributions with respect to units being liquidated
directly to the withdrawing limited partner. No penalty will be imposed on
withdrawals made in twenty quarterly installments or longer. However,
withdrawals exceeding 20% per year are subject to a 10% penalty even after the
five year waiting period. There is also a limited right of liquidation for your
heirs upon your death.
Summary of Limited Partnership Agreement and Limited Partnership Units -
Your rights and obligations in the partnership and your relationship with the
general partners will be governed by the partnership agreement. Please refer to
the "SUMMARY OF LIMITED PARTNERSHIP AGREEMENT" section at page 73 of this
prospectus for more detailed information concerning the terms of the partnership
agreement. A complete copy of the partnership agreement is attached as Exhibit A
to this prospectus. Some of the significant features of the partnership
agreement include: a majority of the limited partners may vote to:
o terminate the partnership;
o amend the partnership agreement, subject to certain limitations;
o remove and replace the general partner; and
o approve or disapprove the sale, pledge, retain any or exchange all or
substantially all of the partnership's assets.
In the event of any such vote, you will be bound by the majority vote even
if you did not vote with the majority.
Mergers and Consolidations. We may not merge or consolidate without
approval by a majority of limited partners.
Once you have been accepted as an investor in the partnership, you will be
entitled to receive distributions which you may elect to receive in cash
distributions or retain in your capital account. You are also entitled to
receive distributions from the partnership based on your percentage ownership,
after payment of certain expenses including fees payable to the general partners
and the set aside for reserves. Although anticipated, there is no guarantee that
there will be sufficient cash to make such distributions (See `RISK FACTORS" at
page 8). There is no assurance you will receive distributions. On average, the
estimated time from the date your subscription is accepted until you receive
distributions is 60 days.
Additional Information - We have filed a registration statement under the
Securities Act of 1933, as amended. The partnership has filed with the
Securities and Exchange Commission, Washington, D.C. 20549, as amended, with
respect to the units offered pursuant to this prospectus. For further
information regarding the partnership, the general partners and their
activities, you should review the registration statement and to the exhibits
thereto which are available for inspection at no fee in the Office of the
Commission in Washington, D.C. 20549. Additionally, the Commission maintains a
website that contains reports, proxy information statements and other
information regarding registrants such as the partnership who file
electronically. The address of the Commission website is http://www.sec.gov.
Subscription Procedures - In order to subscribe for units, you will be
required to deliver the following:
1. One executed copy of the subscription agreement, which incorporates a
power of attorney to the general partners.
7
2. The minimum purchase is 2,000 units ($2,000) for initial investments and
1,000 units ($1,000) for additional investments by existing limited partners.
All checks should be made payable to "Redwood Mortgage Investors VIII," and
should be delivered to the partnership's offices.
The subscription documents referred to above are contained in the "Investor
Subscription Documents" provided to prospective investors under separate cover
herewith.
RISK FACTORS
Investing in units involves a high degree of risk. You should specifically
consider the following risks:
Mortgage Lending and Real Estate Risks
We Have Not Identified Any New Loans From Additional Proceeds of This
Offering - We have not yet identified any specific loans with respect to the
additional proceeds we will receive from this offering. This means:
o You must rely entirely on the judgment of the general partners in
investing the proceeds of this offering.
o You will be unable to evaluate, in advance, any of the terms of the loans
including the selection of borrowers, and the terms of the loans that will be
made.
o You will have no ability to evaluate the identification or location of,
or any other important economic and financial data pertaining to, the underlying
properties that secure the loans. Our current loan portfolio is summarized in
the sections of the prospectus entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE PARTNERSHIP" at page 44 and "BUSINESS" at page 55 of
this prospectus.
Loan Defaults and Foreclosures By Borrowers May Adversely Affect
Partnership - We are in the business of lending money and, as such, take the
risk that borrowers may be unable to repay the loans we have made to them. Most
loans will be interest only or interest with small repayments of principal. This
means:
o the loans are structured to provide for relatively small monthly payments
with a large "balloon" payment of principal due at the end of the term. Many
borrowers are unable to repay such loans at maturity out of their own funds and
are compelled to refinance or sell their property.
o Fluctuations in interest rates, a weak economy and the unavailability of
money could make it difficult for borrowers to refinance their loans at maturity
or sell their property. During 2002, the number of partnership loans over 90
days past due exceeded historical averages. This is due in part to a weak
economy and significant layoffs in the Bay Area. Over the past 6 months, the
number of partnership loans over 90 days past due has decreased as borrowers
have paid off their loans or refinanced and have leveled off at historical
averages (See "ASSET QUALITY" at page 54 and "DELINQUENCIES" at page 56).
o If a borrower is unable to repay the loan and defaults, we may be forced
to purchase the property at a foreclosure sale. If we cannot quickly sell or
refinance such property, and the property does not produce any significant
income, the partnership's profitability will be adversely affected.
We Must Rely On Appraisals Which May Not Be Accurate or May Be Affected By
Subsequent Events - We are an "asset" rather than a "credit" lender. We are
relying primarily on the real property securing the loans to protect our
investment and not the credit worthiness of the borrower. We rely on appraisals,
prepared by unrelated third parties, to determine the fair market value of real
property used to secure our loans. We cannot guarantee that such appraisals
will, in any or all cases, be accurate. If an appraisal is not accurate or
subsequent events adversely affect the value of the property, our loan would not
be as secure as we anticipated. In the event of foreclosure, we may not be able
to recover our entire investment. Additionally, since an appraisal fixes the
8
value of real property at a given point in time, subsequent events could
adversely affect the value of real property used to secure a loan. While we are
not credit lenders and do not rely only on the credit worthiness of a borrower,
should the financial circumstances of a borrower change, he may not be able to
meet his obligations to pay monthly installments of principal and interest. If
we have made more than one loan to such a borrower, all loans to that borrower
could be potentially impaired.
Competition Risks - Increased competition for mortgage loans could lead to
reduced yields and fewer investment opportunities. The mortgage lending business
is highly competitive, and the partnership competes with numerous established
entities some of which have more financial resources and experience in the
mortgage lending business than the general partners. The partnership encounters
significant competition from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, real estate investment trusts and
other lenders with objectives similar in whole or in part of those of the
partnership. Any general increase in the availability of funds to mortgage
lenders may increase competition for loans and could reduce the yields they
produce, including those of the partnership.
Risks Associated With Junior Encumbrances - In the event of foreclosure
under a second or third deed of trust the debt secured by a senior deed(s) of
trust must be satisfied before any proceeds from the sale of the property can be
applied toward the debt owed to us. To protect our junior security interest, we
may be required to make substantial cash outlays for such items as loan payments
to senior lienholders to prevent their foreclosure, property taxes, insurance,
repairs, maintenance and any other expenses associated with the property. These
expenditures could have an adverse effect on our profitability.
Risks Associated With Construction Loans - We may make construction loans
up to a maximum of ten percent (10%) of the partnership's loan portfolio.
Construction loans are those loans made to borrowers constructing entirely new
structures or dwellings, whether residential, commercial or multi-family
properties. Investing in construction loans subjects us to greater risk than
loans related to properties with operating histories. If the partnership
forecloses on property under construction, construction will generally have to
be completed before the property can begin to generate an income stream or could
be sold. We may not have adequate cash reserves on hand with respect to
junior-encumbrances and/or construction loans at all times to protect our
security. If we did not have adequate cash reserves, we could suffer a loss of
our investment. Additionally, we may be required to obtain permanent financing
of the property in addition to the construction loan which could involve the
payment of significant fees and additional cash obligations for the partnership.
(See "CERTAIN LEGAL ASPECTS OF LOANS" at page 42).
Risks of Real Estate Ownership After Foreclosure - If a borrower is unable
to pay our loan or refinance it when it is due, we will be required to institute
foreclosure proceedings against the borrower. Although we may immediately be
able to sell the property, sometimes we will be required to own the property for
a period of time. We will be subject to certain economic and liability risks
attendant to all property ownership which could affect the partnership's
profitability. The risks of ownership will include the following:
o The property could generate less income for us than we could have earned
from interest on the loan
o If the property is a rental property we will be required to find and keep
tenants
o We will be required to oversee and control operating expenses
o We will be subject to general and local real estate and economic market
conditions which could adversely affect the value of the property
o We will be subject to any change in laws or regulations regarding taxes,
use, zoning and environmental protection and hazards
o We will be potentially liable for any injury that occurs on or to the
property
Risks of Real Estate Development On Property Acquired By Us - If we have
acquired property through foreclosure or otherwise, there may be circumstances
in which it would be in the best interest of the partnership not to immediately
sell the property, but to develop it ourselves. To date, we have not held a
9
property for development. Depending upon the location of the property and market
conditions, the development done by us could be either residential (single or
multifamily) or commercial. Development of any type of real estate involves
certain additional risks including the following:
o We will be required to rely on the skill and financial stability of third
party developers and contractors
o Any development or construction will involve obtaining local government
permits. We will be subject to the risk that our project does not meet the
requirements necessary to obtain those permits
o Any type of development and construction is subject to delays and cost
overruns
o There can be no guarantee that upon completion of the development that we
will be able to sell the property or realize a profit from the sale
o Economic factors and real estate market conditions could adversely affect
the value of the property
Bankruptcy and Legal Limitations On Personal Judgments May Adversely Affect
Our Profitability - Any borrower has the ability to delay a foreclosure sale by
us for a period ranging from several months to several years or more by filing a
petition in bankruptcy. The filing of a petition in bankruptcy automatically
stops or "stays" any actions to enforce the terms of the loan. The length of
this delay and the costs associated with it will generally have an adverse
impact on our profitability. We also may not be able to obtain a personal
judgment against a borrower (See "CERTAIN LEGAL ASPECTS OF LOANS" at page 42).
Risks Associated With Unintended Violations of Usury Statutes - Usury laws
impose restrictions on the maximum interest that may be charged on our loans.
Under California law, a loan arranged by a licensed California real estate
broker will be exempt from applicable California usury provisions. Since Redwood
Mortgage Corp., a licensed California real estate broker, will arrange our
loans, our loans should be exempt from applicable state usury provisions.
Nevertheless, unintended violations of the usury statutes may occur. In such an
event, the partnership may have insufficient cash to pay any damages, thereby
adversely affecting the operations of the partnership. We could also lose our
entire investment.
Risks Associated With High Cost Mortgages - In March 1995, the Federal
Reserve Board issued final regulations governing high cost mortgages. Although
the partnership anticipates making relatively few loans that would qualify as
high cost mortgages, the failure to comply with these regulations could
adversely affect the partnership. A high cost mortgage is any loan made to a
consumer secured by the consumer's principal residence if either (i) the annual
percentage rate exceeds by more than ten points the yield on Treasury securities
having comparable periods of maturity or (ii) the total fees payable by a
consumer at or before closing exceeds the greater of eight percent (8%) of the
total loan amount or $400. These regulations primarily focus on:
o additional disclosure with respect to the terms of the loan to the
borrower,
o the timing of such disclosures, and
o the prohibition of certain terms in the loan including balloon payments
and negative amortization.
The failure to comply with the regulations, even the unintended failure
will render the loan rescindable for up to three (3) years. The lender could
also be held liable for attorneys' fees, finance charges and fees paid by the
borrower and certain other money damages.
On October 10, 2001, Governor Davis signed into law, Assembly Bill 489
which took effect on July 1, 2002. This law provides for state regulation of
residential mortgage and consumer loans secured by liens on real property of
$250,000 or less, which have (1) an annual percentage rate at least eight
percent above the interest rate on U.S. Treasury securities of a comparable
maturity, or (2) points and fees in excess of six percent of the loan amount,
10
exclusive of the points and fees. Such loans would be considered "high cost
loans" under state law. While it is unlikely that the partnership would make
many high cost loans, the failure to comply with this law could have significant
adverse effects on the partnership. The law prohibits certain lending practices
with respect to high cost loans, including the making of a loan without regard
to the borrower's income or obligations. When making such loans, lenders must
provide borrowers with a consumer disclosure, and provide for an additional
rescission period prior to closing the loan.
The reckless or willful failure to comply with any provision of this law,
including the mandatory disclosure provisions, could result in, among other
penalties, the imposition of administrative penalties of $25,000, loss or
suspension of the offending broker's license, as well as exposure to civil
liability to the consumer/borrower (including the imposition of actual and
punitive damages).
Loan-To-Value Ratios Are Determined By Appraisals Which May Be In Excess of
the Ultimate Purchase Price of the Underlying Property - The so-called "loan to
value ratio" will not exceed the following:
o eighty percent (80%) of the appraised value for residential properties
and multi unit property,
o seventy percent (70%) of the appraised value for commercial property and
o fifty percent (50%) of the appraised value for unimproved land.
The loan-to-value ratios are determined based on the appraised value of a
property which may be in excess of the ultimate purchase price of the underlying
property. We cannot assure you that such appraisals will reflect the actual
amount buyers will pay for the property. Further, if the value of the property
declines to a value below the amount of the loan, the loan could become
under-collateralized. This would result in a risk of loss for the partnership if
the borrower defaults on the loan.
Use Of Borrowed Money May Reduce Our Profitability or Cause Losses Through
Liquidation - We are permitted and have borrowed funds for the purpose of making
loans, for increased liquidity, reducing cash reserve needs or for any other
proper partnership purpose on any terms commercially available. We may assign
all or a portion of our loan portfolio as security for such loans. The maximum
amount we may borrow is fifty percent (50%) of the outstanding principal balance
of our total loan portfolio.
Changes in the interest rate have a particularly adverse effect on us if we
have borrowed money to fund loans. Borrowed money will bear interest at a
variable rate, whereas we are likely to be making fixed rate loans. Thus, if
prevailing interest rates rise, we may have to pay more in interest on the
borrowed money than we make on loans to our borrowers. This will reduce our
profitability or cause losses through liquidation of loans in order to repay the
debt on the borrowed money. It is possible that we could default on our
obligation if we cannot cover the debt on the borrowed money. (See "INVESTMENT
OBJECTIVES AND CRITERIA - Borrowing" at page 41).
Changes In Interest Rates May Affect Your Return On Your Investment -
Mortgage interest rates are subject to abrupt and substantial fluctuations. We
have made, and anticipate to continue to make a large number of medium to long
range term (three to fifteen year) loans. Your purchase of units is an illiquid
investment. If prevailing interest rates rise above the average interest rate
being earned by our loan portfolio, you may be unable to quickly sell your units
in order to take advantage of higher returns available from other investments.
In addition, an increase in interest rates accompanied by a tight supply of
mortgage funds may make refinancing by borrowers with balloon payments difficult
or impossible. This is true regardless of the market value of the underlying
property at the time such balloon payments are due. In such event, the property
may be foreclosed upon (See "CERTAIN LEGAL ASPECTS OF LOANS" at page 42).
Moreover, the majority of the partnership's loans do not include prepayment
penalties for a borrower paying off a loan prior to maturity. The absence of a
prepayment penalty in the partnership's loans may lead borrowers to refinance
higher interest rate loans in a market of falling interest rates. This would
then require the partnership to reinvest the prepayment proceeds in loans or
11
alternative short term investments with lower interest rates and a corresponding
lower yield to partners. (See "RISK FACTORS" at page 8).
Suitable Mortgage Loans May Not be Available From Time to Time - The
general partners receive referrals from a variety of sources. The general
partners only make loans that satisfy the partnership objectives (See
"Investment Objectives and Criteria" at page 6). The ability to find suitable
loans is more difficult when the economy is weaker and there is less activity in
the real estate market. It is also more difficult to find suitable loans when
the interest rates are low as they are now when many borrowers can obtain the
financing they need from traditional banks and lending institutions. Such
decreases in demand for loans could leave the partnership with excess cash. In
such event, the partnership makes short term, interim investments with proceeds
pending investment in suitable loans. Interest returns on these investments are
usually lower than on mortgage loans, which may reduce the yield to holders of
units, depending on how long these investments are held.
Marshaling of Assets Could Delay Or Reduce Recovery of Loans - As security
for a single loan, we may require a borrower to execute deeds of trust on other
properties owned by the borrower in addition to the property the borrower is
purchasing or refinancing. In the event of a default by the borrower, we may be
required to "marshal" the assets of the borrower. Marshaling is an equitable
doctrine used to protect a junior lienholder with a security interest in a
single property from being "squeezed out" by a senior lienholder, such as us,
with security interest not only in the property, but in one or more additional
properties. Accordingly, if another creditor of the borrower forced us to
marshal the borrower's assets, foreclosure and eventual recovery of the loan
could be delayed or reduced, and our costs associated therewith could be
increased.
Potential Liability For Toxic Or Hazardous Substances If We Are Considered
Owner of Real Property - If we take an equity interest in, management control
of, or foreclose on any of the loans, we may be considered the owner of the real
property securing such loans. In the event of any environmental contamination,
there can be no assurance that we would not incur full recourse liability for
the entire cost of any such removal and cleanup, even if we did not know about
or participate in the contamination. Full recourse liability means that any of
our property, including the contaminated property, could be sold in order to pay
the costs of cleanup in excess of the value of the property at which such
contamination occurred. In addition, we could incur liability to tenants and
other users of the affected property, or users of neighboring property,
including liability for consequential damages. Consequential damages are damages
which are a consequence of the contamination but are not costs required to clean
up the contamination, such as lost profits of a business.
Potential Loss Of Revenue In The Event Of The Presence of Hazardous
Substances - If we became the "owner" of any real property containing hazardous
substances, we would also be exposed to risk of lost revenues during any
cleanup, the risk of lower lease rates or decreased occupancy if the existence
of such substances or sources on the property were a health risk. If we fail to
remove the substances or sources and clean up the property, federal, state, or
local environmental agencies could perform such removal and cleanup. Such
agencies would impose and subsequently foreclose liens on the property for the
cost thereof. A "lien" is a charge against the property of which the holder may
cause the property to be sold and use the proceeds in satisfaction of the lien.
We may find it difficult or impossible to sell the property prior to or
following any such cleanup. If such substances are discovered after we sell the
property, we could be liable to the purchaser thereof if the general partners
knew or had reason to know that such substances or sources existed. In such
case, we could also be subject to the costs described above.
If we are required to incur such costs or satisfy such liabilities, this
could have a material adverse effect on our profitability. Additionally, if a
borrower is required to incur such costs or satisfy such liabilities, this could
result in the borrower's inability to repay its loan from us.
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Potential Conflicts and Risks If We Invest In Loans With General Partners
or Affiliates - We may invest in loans acquired by the general partners or
affiliates. Our portion of the total loan may be smaller or greater than the
portion of the loan made by the general partners or affiliates, but will
generally be on terms substantially similar to the terms of our investment. You
should be aware that investing with the general partners or affiliates could
result in a conflict of interest between the partnership and the general
partners or affiliates in the event that the borrower defaults on the loan and
both the partnership and the general partners or affiliates protect their own
interest in the loan and in the underlying security.
Investment Risks
There Is No Assurance You Will Receive Cash Distributions - The general
partners and their affiliates are paid and reimbursed by the partnership for
certain services performed for the partnership and expenses paid on behalf of
the partnership (See "COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES" at
page 21). The partnership bears all other expenses incurred in its operations.
All of these fees and expenses are deducted from cash funds generated by the
operations of the partnership prior to computing the amount that is available
for distribution to you. The general partners, in their discretion, may also
retain any portion of cash funds generated from operations for working capital
purposes of the partnership. Accordingly, there is no assurance as to when or
whether cash will be available for distributions to you.
Your Ability To Recover Your Investment On Dissolution and Termination Will
Be Limited - In the event of dissolution or termination of the partnership, the
proceeds realized from the liquidation of assets, if any, will be distributed to
the partners only after the satisfaction of claims of creditors. Accordingly,
your ability to recover all or any portion of your investment under such
circumstances will depend on the amount of funds so realized and claims to be
satisfied therefrom. Additionally, if you have elected to retain your earnings
in the partnership, you could lose such earnings in addition to the amount of
your initial investment.
Certain Kinds of Losses Cannot Be Insured Against - We will require
comprehensive insurance, including fire and extended coverage, which is
customarily obtained for or by a lender, on properties in which we acquire a
security interest. Generally, such insurance will be obtained by and at the cost
of the borrower. However, there are certain types of losses (generally of a
catastrophic nature, such as civil disturbances and acts of God such as
earthquakes, floods and slides) which are either uninsurable or not economically
insurable. Should such a disaster occur to, or cause the destruction of, any
property serving as collateral for a loan, we could lose both our invested
capital and anticipated profits from such investment. In addition, on certain
real estate owned by us as a result of foreclosure, we may require homeowner's
liability insurance. However, insurance may not be available for theft,
vandalism, land or mud slides, hazardous substances or earthquakes on all real
estate owned and losses may result from destruction or vandalism of the property
thereby adversely effecting our profitability.
Risks Related To Concentration of Mortgages in the San Francisco Bay Area -
As of December 31, 2002, 73.81% ($61,741,000) of our loans are secured by
properties located in 6 counties that comprise the San Francisco Bay Area. Like
the rest of the nation, the San Francisco Bay Area has also felt the slow down
in economic growth over the last 24 months. The technology companies of Silicon
Valley, and the airline industry, the tourism industry and other industries are
all feeling the effects of the overall U.S. economy slow down, which include
lower earnings, losses and layoffs. Our concentration of loans in the San
Francisco Bay Area exposes us to greater risk of loss if the economy in the San
Francisco Bay Area should continue to feel the effects of the slow down than
would be the case if our loans were spread throughout California or the nation.
The San Francisco Bay Area economy and/or real estate market conditions could be
weakened by:
o A continued economic recession in or slowdown the area
o Overbuilding of commercial and residential properties
o Relocation of businesses outside of the area due to economic factors such
as high cost of living and of doing business within the region
13
o Increased interest rates thereby weakening the general real estate market
If the economy were to continue to weaken it is likely that there would be
more property available for sale, values would fall, and lending opportunities
would decrease. In addition, a weak economy and increased unemployment could
adversely affect borrowers resulting in an increase in the number of loans in
default.
You Must Rely on the General Partners For Management Decisions - All
decisions with respect to the management of the partnership will be made
exclusively by the general partners. Our success will, to a large extent, depend
on the quality of the management of the partnership, particularly as it relates
to lending decisions. You have no right or power to take part in the management
of the partnership. Accordingly, you should not purchase any of the units
offered hereby unless you are willing to entrust all aspects of the management
of the partnership to the general partners. You should carefully evaluate the
general partners' capabilities to perform such functions (See "MANAGEMENT" at
page 33).
You Will Be Bound By Decision of Majority Vote - Subject to certain
limitations, limited partners holding a majority of units may vote to, among
other things:
o amend or terminate contracts for services and goods between the general
partners and the partnership,
o remove the general partners,
o dissolve the partnership,
o approve or disapprove the sale of all or substantially all of the
partnership's assets and
o amend the partnership agreement.
If you do not vote with the majority in interest of the other limited
partners, you nonetheless will be bound by the majority vote. The general
partners shall have the right to increase this offering or conduct an additional
offering of securities without obtaining your consent or the consent of any
other limited partner. (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT" at
page 73" and "TRANSFER OF UNITS" at page 75).
Net Worth of the General Partners May Affect Ability of the General
Partners To Fulfill Their Obligations To The Partnership - The general partners
have represented that they have an aggregate net worth in excess of $1,000,000,
a significant portion of which consists of assets which are illiquid. This may
be relevant in evaluating the ability of the general partners to fulfill their
obligations and responsibilities to the partnership (See "MANAGEMENT" at page
33).
Risks Regarding Formation Loan and Repayment Thereof - The partnership will
loan to Redwood Mortgage Corp., a general partner, funds in an amount equal to
the sales commissions (See "PLAN OF DISTRIBUTION - Formation Loan" at page 80).
The formation loan will be an unsecured loan that will not bear interest and
will be repaid in annual installments. Redwood Mortgage Corp. shall make annual
installments of one-tenth of the principal balance of the formation loan as of
December 31 of each year. Such payment shall be due and payable by December 31
of the following year. Prior to the termination of this offering, the principal
balance of the formation loan will increase as additional sales of units are
made each year. Upon completion of this offering, the balance of the formation
loan will be repaid in ten (10) equal annual installments of principal, without
interest, commencing on December 31 of the year following the year this offering
terminates. With respect to this offering, the formation loan could range from a
minimum of $3,750,000 assuming all investors elected to receive current cash
distributions to a maximum of $6,750,000 assuming all investors elected to
compound their earnings.
Early Withdrawal Penalties Will Reduce Amount of Formation Loan - A portion
of the amount we receive from withdrawing limited partners as early withdrawal
penalties may first be applied to reduce the principal balance of the formation
loan. This will have the effect of reducing the amount owed by Redwood Mortgage
Corp. to the partnership. If all or any one of the initial general partners are
removed as a general partner by the vote of a majority of limited partners and a
14
successor or additional general partner(s) begins using any other loan brokerage
firm for the placement of loans or loan servicing, Redwood Mortgage Corp. will
be immediately released from any further payment obligation under the formation
loan. If all of the general partners are removed, no other general partners are
elected, the partnership is liquidated and Redwood Mortgage Corp. is no longer
receiving payments for services rendered, the debt on the formation loan shall
be forgiven by the partnership. Redwood Mortgage Corp. will be immediately
released from any further obligations under the formation loan. The non-interest
bearing feature of the formation loan will have the effect of slightly diluting
your rate of return, but to a much lesser extent than if the partnership were
required to bear all of its own syndication expenses out of the offering
proceeds.
Delays In Investment Could Adversely Affect Your Return - A delay will
occur between the time you purchase your units and the time the net proceeds of
the offering are invested. This delay could adversely affect the return paid to
you. In order to mitigate this risk, pending the investment of the proceeds of
this offering, funds will be placed in such highly liquid, short-term
investments as the general partners shall designate. The interest earned on such
interim investments is expected to be less than the interest earned by the
partnership on loans. The general partners estimate, based upon their historical
experience, that it will be no longer than ninety (90) days from the time your
funds are received by us until they are invested in loans.
No Assurance of Limitation of Liability of Limited Partners - As a limited
partner, you have no right to, and you take no part in, control and management
of the partnership's business. However, the partnership agreement authorizes all
limited partners to exercise the right to vote on certain matters, including the
right to remove the general partners and elect a successor general partner(s)
(See "SUMMARY OF LIMITED PARTNERSHIP AGREEMENT - Rights and Liabilities of
Limited Partners" at page 73). The California Revised Limited Partnership Act
expressly provides that the right to vote on those matters will not cause you or
any other limited partner to have personal liability for partnership obligations
in excess of the amount of your capital contributions which have not been
previously returned to you. However, you may be required to return amounts
distributed to you as a return of your capital contribution if we are unable to
pay creditors who extended credit to us prior to the date of such return of
capital.
No Assurance That California Law Will Apply With Respect To Limitation Of
Liability Of Limited Partners - Cox Castle & Nicholson LLP, counsel for the
partnership, has advised that strong arguments may be made in support of the
conclusion that California law governs in all states as to the liability of the
limited partners and that neither the possession nor the exercise of such rights
should affect the liability of the limited partners. However, Cox Castle &
Nicholson LLP, counsel for the partnership, has also advised that since there is
no authoritative precedent on this issue, a question exists as to whether the
exercise, or perhaps even the existence, of such voting rights might provide a
basis on which a court in a state other than California could hold that you are
not entitled to the limitation on liability for which the partnership agreement
provides. This is only a concern if you are not a California resident.
We Cannot Precisely Determine Compensation To Be Paid General Partners and
Affiliates - The general partners and their affiliates are unable to predict the
amounts of compensation to be paid to them as set forth under "COMPENSATION OF
THE GENERAL PARTNERS AND AFFILIATES" at page 21. Any such prediction would
necessarily involve assumptions of future events and operating results which
cannot be made at this time. As a result, there is a risk that investors will
not have the opportunity to judge ahead of time whether the compensation
realized by the general partners is commensurate with the return generated by
the loans.
Working Capital Reserves May Not Be Adequate - We intend to maintain
working capital reserves to meet our obligations, including carrying costs and
operating expenses of the partnership (See "ESTIMATED USE OF PROCEEDS" at page
19). The general partners believe such reserves are reasonably sufficient for
our contingencies. If for any reason those reserves are insufficient, the
general partners will have to borrow the required funds or require the
partnership to liquidate some or all of our loans. In the event the general
partners deem it necessary to borrow funds, there can be no assurance that such
15
borrowing will be on acceptable terms or even available to us. Such a result
might require us to liquidate our investments and abandon our activities.
Purchase of Units is a Long Term Investment - No public trading market for
the units exists. It is highly unlikely that a public trading market will ever
develop. Article VII of the partnership agreement imposes substantial
restrictions upon your ability to transfer units (See "SUMMARY OF LIMITED
PARTNERSHIP AGREEMENT" at page 73 and "TRANSFER OF UNITS" at page 75). In
addition, the partnership agreement does not provide for the buy-back or
repurchase of units by the partnership or the general partners. It does however,
provide you with a limited right to withdraw capital from the partnership after
one year, with penalty, and after 5 years without penalty subject to certain
requirements. (See "TRANSFER OF UNITS - Withdrawal from Partnership" at page
76). There is no assurance that the value of units for purposes of this
withdrawal in any way reflects the fair market value of the units. In addition,
your units may not be readily accepted as collateral for a loan. Consequently,
you should consider the purchase of units only as a long-term investment.
We May Be Required to Forego More Favorable Investments to Avoid Regulation
Under Investment Company Act of 1940 - The general partners intend to conduct
the operations of the partnership so that we will not be subject to regulation
under the Investment Company Act of 1940. Among other things, they will monitor
the proportions of our funds which are placed in various investments and the
form of such investments so that we do not come within the definition of an
investment company under such Act. As a result, we may have to forego certain
investments which would produce a more favorable return.
Use of Forward Looking Statements - Some of the information in this
prospectus contains forward-looking statements that involve substantial risks
and uncertainties. You can identify these statements by forward-looking words
such as "may," "will," "expect," "anticipate," "believe," "estimate" and
"continue" or similar words. You should read statements that contain these words
carefully because they: (1) discuss our future expectations; (2) contain
projections of our future results of operations or of our financial condition;
or (3) state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. These events may include future operating results
and potential competition among other things. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in the partnership, you should be aware that the occurrence of
events described in these risk factors and elsewhere in this prospectus could
have a material adverse effect on our business, operating results and financial
condition.
Tax Risks
Risks Associated With Partnership Status For Federal Income Tax Purposes -
We will not seek a ruling from the Internal Revenue Service that the partnership
will be treated as a partnership for federal income tax purposes. We have
received an opinion from Cox Castle & Nicholson LLP that the partnership will be
treated as a partnership for federal income tax purposes. Counsel's opinion
represents only its best legal judgment, and has no binding effect on the IRS or
any court, and no assurance can be given that the conclusions reached in said
opinion would be sustained by a court if contested. Any such contest to a
determination by the IRS may impose an additional litigation expense on the
limited partners. If we are taxed as a corporation we would, among other things,
pay income tax on our earnings in the same manner and at the same rate as a
corporation, and losses, if any, would not be deductible by the limited
partners. Also, you would be taxed upon distributions substantially in the
manner that corporate shareholders are taxed on dividends. Thus, if we were
treated as an association taxable as a corporation, many of the "pass through"
tax benefits that would otherwise be realized by you as a limited partner would
be lost (See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES - Partnership Status" at
page 62).
16
Risks Associated With Characterization of Partnership Income as Portfolio
Income - We are engaged in mortgage lending (See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Character of Income or Loss" at page 65). We anticipate that most
of our income will be considered portfolio income and not passive income. Since
such treatment is dependent upon a number of factors not yet determined such as
whether we are engaged in a trade or business, whether we incur liabilities in
connection with our activities, and the proper matching of the allocable
expenses incurred in the production of partnership income, there can be no
assurance as to such treatment. It is possible that we might be unable to
allocate expenses to the income produced, in which case investors might find
their ability to offset income with allocable expenses limited by the two
percent (2%) floor on miscellaneous investment expenses. The determination of
whether your share of income will constitute passive, non-passive, or portfolio
income is a technical one subject to the interpretation of complex regulations
whose full impact has not yet been determined. It is possible that the treatment
of partnership income will be different than what we currently anticipate.
Risks of Partnership Characterization As a Publicly Traded Partnership -
Cox Castle & Nicholson LLP, counsel for the partnership, has given its opinion
that the partnership will not be treated as a "publicly traded partnership" for
federal income tax purposes. If the partnership were classified as a "publicly
traded partnership" it could result in:
o taxation of the partnership as a corporation; and
o application of the passive activity loss rules in a manner that could
adversely affect you and all investors.
Risks Relating to Taxation of Undistributed Revenues and Gain - We do not
anticipate that we will generate so-called "phantom income" of the type which is
commonly associated with leveraged real estate investment programs. As a limited
partner, you will be required to report your allocable share of the
partnership's taxable income on your personal tax return regardless of whether
or not you actually received any cash distributions from the partnership. If you
elect to receive current cash distributions on your Units, you will be allocated
substantially all your share of the partnership's taxable income even if such
income is in excess of any distribution of cash from our lending operations. If
on the other hand you elect to compound your earnings received on your Units,
you will be allocated your share of the partnership's taxable income even though
you will receive no cash distributions with respect to your units (rather, those
cash distributions will be reinvested). The general partners anticipate, based
upon historical experience, that the partnership's taxable income will not
differ substantially from the cash flow generated by our lending activities.
Risks Relating to Generation of Unrelated Business Taxable Income - If you
are a tax-exempt investor (such as an employee pension benefit plan or an IRA)
you may be subject to tax to the extent that income from the partnership is
treated as unrelated business taxable income ("UBTI"). We borrow funds on a
limited basis. We do not currently intend to own and lease personal property.
Where we borrow funds or lease personal property, we use reasonable efforts to
do so in a manner that does not cause any significant amount of partnership
income to be treated as UBTI. As a result of the possibility that some portion,
although likely an insignificant portion, of partnership income may be treated
as UBTI, if you are a tax-exempt investor you should consult your own tax
advisors. An investment in units may not be suitable for charitable remainder
trusts.
Risks of Audit and Adjustment - The IRS could challenge certain federal
income tax positions taken by the partnership if we are audited. Any adjustment
to the partnership's return resulting from an audit by the IRS would result in
adjustments to your tax returns and might result in an examination of items in
such returns unrelated to the partnership or an examination of tax returns for
prior or later years. Moreover, the partnership and investors could incur
substantial legal and accounting costs in contesting any IRS challenge,
regardless of the outcome. The general partners generally will have the
authority and power to act for, and bind the partnership in connection with, any
such audit or adjustment for administrative or judicial proceedings in
connection therewith.
17
Risks of Effects of State and Local Taxation - The state in which you
reside may impose an income tax upon your share of the taxable income of the
partnership. Furthermore, states in which the partnership will own property
generally impose income tax upon each partner's share of a partnership's taxable
income considered allocable to such states. Differences may exist between
federal income tax laws and state and local income tax laws. You are urged to
consult with your own tax advisers with respect to state and local taxation. The
partnership may be required to withhold state taxes from distributions to
investors in certain instances.
Erisa Risks
Risks of Investment By Tax-Exempt Investors - In considering an investment
in the partnership, if you are a pension or profit-sharing plan qualified under
Section 401(a) of the Code and exempt from tax under Section 501(a), you should
consider (i) whether the investment satisfies the diversification requirements
of Section 404(a)(3) of the Employee Retirement Income Security Act of 1974
("ERISA"); (ii) whether the investment is prudent, since units are not freely
transferable and there may not be a market created in which you can sell or
otherwise dispose of the units; (iii) whether interests in the partnership or
the underlying assets owned by the partnership constitute "Plan Assets" for
purposes of Section 4975 of the Code which would constitute a prohibited
transaction; (iv) whether the investment will impair the liquidity of your plan;
and (v) whether the investment will create unrelated business taxable income for
the plan. ERISA requires that the assets of a plan be valued at their fair
market value as of the close of the plan year, and it may not be possible to
adequately value the units from year to year, since there will not be a market
for those units and the appreciation of any property may not be shown in the
value of the units until the partnership sells or otherwise disposes of its
investments (See "ERISA CONSIDERATIONS" at page 70).
NOTICE TO CALIFORNIA RESIDENTS
All certificates of limited partnership interests resulting from any offer
and/or sale in California will bear the following legend restricting transfer:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFORE, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
18
TERMS OF THE OFFERING
We are offering a maximum of 75,000,000 units ($75,000,000) on a "best
efforts" basis. A best efforts basis means no one is guaranteeing that any
minimum number of units will be sold. The units are being sold through selected
broker dealers (the "Participating Broker Dealers") who are members of the
National Association of Securities Dealers, Inc. ("NASD"), at a price of $1 per
unit. The minimum subscription is 2,000 units ($2,000) for initial investments
and 1,000 units ($1,000) for additional investments by existing limited
partners. We may also accept orders directly from you if you utilize the
services of a registered investment advisor. The general partners have the
option to accept subscriptions for fractional units in excess of the minimum
subscription. For purposes of meeting this minimum investment requirement, you
may cumulate units you purchased individually with those units purchased by your
spouse or units purchased by your pension or profit sharing plan, IRA or Keogh
plan. You must pay $1 cash for each unit upon subscription. The offering will
terminate one year from the effective date of this prospectus, unless the
general partners, in their discretion, terminate the offering earlier, or extend
the offering for additional one-year periods.
No Escrow Established. There is no escrow. Since this is not our first
offering of units in this partnership, all proceeds from the sale of units will
be immediately available to us for investment and will not be held in an escrow
account.
Investment of Subscriptions. Your subscription proceeds will be deposited
into a subscription account at a federally insured commercial bank or other
depository selected by the general partners. They will be invested in short-term
certificates of deposit, money market or other liquid asset accounts. You will
be admitted into the partnership only when your subscription funds are required
by us to fund a loan, or the formation loan, to create appropriate reserves or
to pay organizational expenses or other proper partnership purposes. During the
period prior to your admittance as a limited partner, proceeds of the sale are
irrevocable and will be held by the general partners for your account in the
subscription account. Your funds will be transferred from the subscription
account into the partnership's operating account on a first-in, first-out basis.
Upon your admission as a limited partner to the partnership, your subscription
funds will be released to the partnership and units will be issued to you at the
rate of $1 per unit or fraction thereof. Interest earned on subscription funds
while in the subscription account will be returned to you, or if you elect to
compound earnings, the amount equal to such interest will be added to your
investment in the partnership. If you elect to have such amount added to your
investment, the number of units actually issued shall be increased accordingly.
Purchase by General Partners and Affiliates. The general partners and their
affiliates may, in their discretion, purchase units for their own account. Any
units so purchased will be counted for the purpose of obtaining the required
maximum subscriptions. The maximum amount of units that may be purchased by the
general partners or their affiliates is 1,000,000 units ($1,000,000). However,
it is not anticipated that such purchases will be regularly made by the general
partners and their affiliates. Purchases of units by the general partners or
their affiliates will be made for investment purposes only on the same terms,
conditions and prices as to unaffiliated parties.
Election to Receive Periodic Cash Distributions. To date, we have provided
you with an election to receive periodic cash distributions from the partnership
or to have earnings retained in your capital account that will increase it in
lieu of receiving periodic cash distributions. This election, once made, is
irrevocable for investors who choose to receive periodic cash distributions from
the partnership. However, you may change whether such distributions are received
on a monthly, quarterly or annual basis. If you initially elect to retain
earnings to increase your capital account in lieu of periodic cash distributions
you may, after three (3) years, elect to receive periodic cash distributions.
Once you have made the election to receive cash distributions, you may not
revoke or change your election. If you elect to retain your earnings in your
capital account, we will use those earnings for making further loans or other
proper partnership purposes. The earnings from these further loans will be
allocated among all investors; however; if you elected to retain your earnings,
you will be credited with an increasingly larger proportionate share of such
earnings than investors who receive periodic cash distributions, since your
capital account will be increasing over time. Annual cash distributions will be
made shortly after the calendar year end.
ESTIMATED USE OF PROCEEDS
The following table sets forth an estimated application of the gross
proceeds of the sale of 50% of the units and 100% of the number of units being
offered hereby. The following table also sets forth an estimated application of
the gross proceeds of the offering assuming 50% of the total gross offering
proceeds received are leveraged. Upon the repayment of the formation loan, we
estimate that approximately 96% of the proceeds of this offering will be used to
make loans or held as cash reserves. Until the formation loan is repaid, we
estimate that after deduction of the public offering expenses, that
approximately eighty-seven percent (87%) of the proceeds of this offering will
be used for making loans or be held in the reserve liquidation fund assuming all
units are sold. Many of the figures set forth are estimated, cannot be precisely
calculated at this time and consequently should not be relied upon as being
definitive.
19
Estimated 50%
Estimated 50% Maximum Offering (1)(2) Offering Sold (2)
Maximum Offering (1) Offering Sold (1) 75,000,000 Units 37,500,000 Units
75,000,000 Units 37,500,000 Units ($75,000,000) sold with ($37,500,000) sold with
($75,000,000) sold ($37,500,000) sold leveraged funds leveraged funds
===================================================================================================================================
Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Proceeds $75,000,000 100% $37,500,000 100% $75,000,000 66.67% $37,500,000 66.67%
Leveraged Funds 0 0 0 0 $37,500,000 33.33% $18,750,000 33.33%
Total Partnership Funds $75,000,000 100% $37,500,000 100% $112,500,000 100% $56,250,000 100%
Less Public Offering
Expenses: (3)
Organizational and
Offering Expenses $3,000,000 4% $3,000,000 8% $3,000,000 2.67% $3,000,000 5.33%
Total Offering Expenses $3,000,000 4% $3,000,000 8% $3,000,000 2.67% $3,000,000 5.33%
Amount Available for
Investment $72,000,000 96% $34,500,000 92% $109,500,000 97.33% $53,250,000 94.67%
Less:
Formation Loan to pay
sales commissions (4) $6,750,000 9% $3,375,000 9% $6,750,000 6% $3,375,000 6%
Reserve Liquidity Fund (5) $1,500,000 2% $750,000 2% $1,500,000 1.33% $750,000 1.33%
Cash Available for
Extension of Loans (6) $63,750,000 85% $30,375,000 81% $101,250,000 90% $49,125,000 87.34%
(1) Does not include a capital contribution of the general partners in the
amount of 1/10th of 1% of the gross proceeds (See "SUMMARY OF THE LIMITED
PARTNERSHIP AGREEMENT - Capital Contributions" at page 74).
(2) This assumes that the general partners can leverage approximately fifty
percent (50%) of the gross offering proceeds thereby increasing the funds
available to make loans. This means that the partnership may borrow funds for
the purpose of making loans for increased liquidity, reducing cash reserve needs
or for any other partnership purpose. The maximum amount the partnership may
borrow is 50% of the outstanding principal balance of the partnership's total
loan portfolio.
(3) Consists of expenses incurred in connection with offering of the units
which may be reimbursed to Redwood Mortgage Corp. These expenses include legal
and accounting fees and expenses, printing costs, filing fees and other
disbursements in connection with the sale and distribution of units. These
expenses also include reimbursements to participating broker dealers for bona
fide expenses incurred for due diligence purposes in a maximum amount of
one-half of one percent (.5%) of gross proceeds and up to an additional five
percent (5%) of gross proceeds if investors elect to receive cash distributions
or up to one percent (1%) of gross proceeds if investors elect to reinvest their
earnings for certain other expense reimbursements and sales seminar expenses
payable by the partnership. In no event will all compensation payable to
participating broker dealers, including sales commissions, (see footnote 4
below), expense reimbursements, sales seminars and or due diligence expenses
exceed the ten and one-half percent (10.5%) compensation limitation set forth in
Rule 2810 of the NASD conduct rules (See "COMPENSATION OF THE GENERAL PARTNERS
AND AFFILIATES" at page 21).
(4) The amount of the formation loan payable to Redwood Mortgage Corp. set
forth in this table is based upon the maximum sales commissions allowable of 9%.
The formation loan will not exceed nine percent (9%) of the total gross proceeds
of the offering based upon the maximum sales commissions payable, (See "PLAN OF
DISTRIBUTION - Formation Loan" at page 80). However, the general partners
anticipate, based upon historical experience and knowledge of professionals in
the industry, that the formation loan will be in the amount of (7.6%) of gross
proceeds if the maximum is raised assuming that sixty-five percent (65%) of the
investors elect to reinvest their earnings and acquire additional units and
thirty-five percent (35%) and elect to receive distributions. To the extent the
actual amount of the formation loan is less than the amount stated in the table,
20
the cash available for extension of loans will be increased proportionately. As
of December 31, 2002, the formation loans for the four prior offerings totaled
7.52% of the total gross proceeds of the offerings. The formation loan is a loan
made to Redwood Mortgage Corp. in an amount equal to the amount of the sales
commission payable to the participating broker dealers in connection with the
offering. Although the exact amount of sales commissions is not known, we have
assumed the maximum amount of sales commissions payable of 9% or $6,750,000.
From the proceeds of the formation loan, Redwood Mortgage Corp. pays the
participating broker dealers all sales commissions owed. The partnership does
not pay any sales commissions directly. Redwood Mortgage Corp. is required to
repay the formation loan to the partnership. The terms of payment are as
follows. During the offering period, Redwood Mortgage Corp. will repay annually,
one-tenth of the principal balance of the formation loan as of December 31 of
each year. Upon completion of the offering, the formation loan will be amortized
over 10 years and repaid in 10 equal annual installments. The formation loan is
unsecured, non-interest bearing and is not guaranteed. The amount of the
formation loan and thus the amount repaid to the partnership is reduced
partially by a portion of the early withdrawal penalties paid to the
partnership. With respect to this offering, the formation loan could range from
a minimum of $3,750,000 assuming all investors elected to receive current cash
distributions to a maximum of $6,750,000 assuming all investors elected to
compound their earnings . Except for the formation loan made to Redwood Mortgage
Corp., and reimbursement of organizational and offering expenses, no other
offering proceeds will be paid to the general partners or their affiliates.
(5) The partnership anticipates maintaining an average balance of a reserve
liquidity fund equal to two percent (2%) of the gross proceeds of the offering.
(6) These proceeds will be used to make loans (See "INVESTMENT OBJECTIVES
AND CRITERIA" at page 38). The exact amount of the cash available for extension
of loans will depend upon the amount of the formation loan, organization and
operating expenses, use of leveraged funds and cash reserves. (See Footnote (1)
above.)
CAPITALIZATION OF THE PARTNERSHIP
The capitalization of the partnership as of December 31, 2002, and as
adjusted to give effect to the sale of the maximum number of units offered
hereby, excluding any contributions of the general partners is as follows:
Actual As Adjusted (1)
Units ($1.00 per unit) $95,690,000 $160,940,000
----------- ------------
- -----------------------
(1) Amount determined after deduction of certain offering expenses
aggregating $3,000,000 and maximum formation loan of $6,750,000. (See "ESTIMATED
USE OF PROCEEDS" at page 19).
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES
Set forth below in tabular form is a description of compensation that we
may pay the general partners and their affiliates. No other compensation will be
paid to the general partners or any affiliates from the partnership. These
compensation arrangements have been established by the general partners and are
set forth in the partnership agreement and are not the result of arms-length
negotiations. The general partners have compared their compensation arrangements
to those of unrelated parties providing the same services. The general partners
have set, in some instances, maximum levels of compensation to be received by
them; however, they have the discretion to set the actual fee received by them
at an amount lower than the maximum amount allowable. The ability to set a fee
at below the maximum amount permitted to be received under the partnership
agreement is solely within the discretion of the general partners and does not
require approval of the limited partners. In order for the general partners to
receive any fees in excess of the maximum amounts allowable, the general
partners, under the terms of the partnership agreement, would be required to
obtain a vote of at least the limited partners holding 51% or more of the
limited partnership assets. The general partners have determined the following
compensation levels are fair and reasonable. In their review, the general
partners have:
o analyzed the compensation arrangements in other offerings,
o spoken to other professionals in the industry including issuers,
promoters and broker dealers,
o examined "rate sheets" from banks and savings & loans which set forth the
rates being charged by those institutions for the same or similar services
21
o collected data regarding compensation from trade association meetings
and/or other relevant periodicals. Thus, the amounts are approximately
equivalent to those which would customarily be paid to unrelated parties for the
same services.
The exact amount of future compensation payable to the general partners
cannot be precisely determined. The compensation to be received by the general
partners is based primarily upon the net asset value of the partnership and the
loan balances. The net asset value of the partnership is the partnership's total
assets less its total liabilities. The net asset value will fluctuate due to the
reinvestment of income, earnings distributions and the level of liquidations.
Loan balances outstanding will fluctuate during the term of the partnership
because loans will be continually maturing and "turning over". Accordingly, the
exact amount of fees to be paid to the general partners and their affiliates
cannot be determined. However, based upon the general partners' prior experience
with this partnership and in similar programs and upon certain assumptions made
as a result of that experience as set forth below, the general partners can
estimate on an annual average basis, assuming a minimum partnership life of
twelve (12) years, the amount of fees they and their affiliates will receive.
Except as noted below, there is no limit on the dollar amount of compensation
and fees paid to the general partners and their affiliates.
The amount of fees to be paid will vary from those estimated below due to
varying economic factors, over which the general partners have no control,
including, but not limited to, the state of the economy, lending competition in
the area where partnership loans are made, interest rates and partnership
earnings. We are subject to public reporting requirements and the partnership
will file quarterly and annual reports with the Securities and Exchange
Commission. These reports will be available to you and will set forth, among
other things, the exact amount of compensation and/or fees being paid to the
general partners and their affiliates.
The general partners' or their affiliates' ability to effect the nature of
the compensation by undertaking different actions is extremely limited. Because
we are only one of many lenders in the industry, the general partners' ability
to affect fees charged is virtually non-existent. Additionally, to a large
extent, the amount of fees paid to the general partners and their affiliates is
based upon decisions made by the borrower regarding, among other things, type
and amount of loan, prepayment on the loan and possible default on the loan. The
relationships with the general partners of the various entities referred to
herein are described under the caption "MANAGEMENT" at page 33.
OFFERING STAGE
Entity Receiving
Compensation Form and Method of Compensation Estimated Amount
Redwood Mortgage Corp. Reimbursement of offering expenses including, but not limited Maximum of $3,000,000
to, attorneys' fees, accounting fees, printing costs and other
selling expenses (other than underwriting commissions) equal
to the lesser of ten percent (10%) of the gross proceeds of
the offering or $3,000,000. The general partners will pay any
offering expenses in excess of this amount.(1)
OPERATING STAGE
Entity Receiving Estimated Amount
Compensation Form and Method of Compensation Payable
Redwood Mortgage Corp. Loan brokerage commissions average approximately three to six $3,200,000 per year (9)
percent (3-6%) of the principal amount of each loan, but may
be higher or lower depending upon market conditions. Loan
brokerage commissions are limited to an amount not to exceed
four percent (4%) of the total partnership assets per year.
Such commissions are payable solely by the borrower and not by
us. (See "TERMS OF THE OFFERING" at page 19).
Redwood Mortgage Corp. Processing and escrow fees for services in connection with $48,000 per year(7)
notary, document preparation, credit investigation, and escrow
fees in an amount equal to the fees customarily charged by
Redwood Mortgage Corp. for comparable services in the
geographical area where the property securing the loan is
located, payable solely by the borrower and not by the
partnership.
22
Redwood Mortgage Corp. Loan servicing fee payable monthly in an amount up to 1/8 of $1,125,000 per year
1% of the outstanding principal amount of each loan. (2)(3)
Redwood Mortgage Corp. (50%) Asset management fee payable monthly in an amount up to 1/32 $297,000 per year(7)
Gymno Corporation ( 25%) of 1% of the "net asset value."(4)
Michael R Burwell (25%)
Redwood Mortgage Corp. Reimbursement of expenses relating to administration of the $229,500 per year(7)
partnership, subject to certain limitations, see Article 10 of
the partnership agreement. (1)(5)
Gymno Corporation Reconveyance fee for reconveyance of property upon full Approximately $45 per
payment of loan, payable by borrower. deed of trust or market
rate.
Redwood Mortgage Corp. Assumption fee for assumption of loans payable by borrower of $12,000 per year(6)
between 1/2 and 1 1/2 percent of the loan.
Redwood Mortgage Corp. Extension fee for extending the loan period payable by $6,000 per year(7)
borrower as a percentage of the loan.
Redwood Mortgage Corp. Interest earned, if any, between the date of deposit of $0 per year
borrower's funds into Redwood Mortgage Corp.'s trust account
and date of payment of such funds by Redwood Mortgage Corp.
Redwood Mortgage Corp. (33.33%) One percent (1%) interest in profits, losses and distributions $70,500 per year(7)
Gymno Corporation (33.33%) of earnings and cash available for distribution.
Michael R Burwell (33.33%)
LIQUIDATING STAGE
Entity Receiving
Compensation Form and Method of Compensation Estimated Amount
Redwood Mortgage Corp. Redwood Mortgage Corp.'s obligation to repay the principal $91,290 per year(7)(8)
amount of the formation loan owed to the partnership will be
reduced by a portion of the early withdrawal penalties
received by the partnership. Initially, a portion of the
early withdrawal penalties will be used to reduce the
formation loan obligation and a portion will be used to pay
reimbursable offering expenses. This portion shall be
determined by the ratio between the initial amount of the
formation loan and the total amount of the organizational and
syndication costs incurred by the partnership. Assuming that
the maximum formation loan is $6,750,000 and the maximum
organizational costs are $3,000,000, the ratio would be
69:31. This amount could be higher or lower, depending upon
total sales commissions and organizational expenses. That
ratio will be determined by the actual formation loan and
organizational and syndication costs incurred. The ratio will
change as organizational and syndication costs are amortized.
Historically, 70% of the total early withdrawal penalty
payments were used to reduce Redwood Mortgage Corp.'s
obligation under the formation loan (See "TRANSFER OF UNITS -
Withdrawal from Partnership" at page 76).
23
(1) The general partners will endeavor to minimize such expenses to the
extent possible and to the extent consistent with the terms of the offering.
(See "TERMS OF THE OFFERING" at page 19).
(2) The general partners are entitled to receive a maximum loan servicing
fee of up to one and one-half percent (1 1/2%) per year which is paid monthly in
an amount up to 1/8 of 1% of the outstanding principal amount of each loan. We
estimate the loan portfolio to average $80,000,000. The general partners, in
their sole discretion, may elect to lower the loan servicing fee for any period
of time and thereafter raise the fees up to the stated limits. Historically, the
general partners have charged a loan servicing fee of one percent (1%) of the
outstanding principal amount of the loans per year.
(3) On any property foreclosed upon, the loan servicing fee is payable by
the borrower up until the time of foreclosure. If, at the time of foreclosure,
the loan servicing fee has not been paid out of the cash proceeds from a
trustee's sale of the foreclosed property, the loan servicing fee will be
payable by the partnership.
(4) The general partners shall receive a monthly asset management fee in a
maximum amount of 1/32 of 1% of the net asset value of the partnership for
services rendered in connection with the on going management of the
partnership's portfolio of loans. The general partners, in their sole
discretion, may elect to lower the amount of the asset management fee they
receive. The general partners may not increase the asset management fee above
the maximum amount. Currently, the asset management fee is paid 50% to Redwood
Mortgage Corp., 25% to Gymno Corporation and 25% to Michael R. Burwell. The
general partners may, in their discretion, change the relative amount received
by each of them.
(5) We shall reimburse the general partners or their affiliates for the
actual cost of goods and materials used for or by the partnership and obtained
from unaffiliated parties. In addition, we shall reimburse the general partners
or their affiliates for the cost of administrative services necessary to the
prudent operation of the partnership provided that such reimbursement will be
the lesser of (a) the actual cost of such services or (b) ninety percent (90%)
of the amount which the partnership would be required to pay independent parties
for comparable services.
(6) Redwood Mortgage Corp. may receive an assumption fee of between .5% and
1.5% of the outstanding balance of a loan when a new borrower assumes the loan
obligations of the original borrower under a loan. The actual amount of the
assumption fee (between .5% and 1.5% of the principal balance of the loan) is
determined by the general partners at the time of the assumption based on such
factors as current interest rates, the amount of the outstanding loan and the
credit worthiness of the new borrower.
(7) The amount of fees to be paid to the general partners and their
affiliates are based on certain assumptions made in light of the general
partners' past experience with similar programs. In determining the average
annual fees to be paid to the general partners and their affiliates the general
partners have assumed, based upon their historical experience the following: (i)
a minimum partnership life of twelve (12) years assuming $37,500,000 is raised
in year one (1) and $37,500,000 is raised in year two (2); (ii) sixty percent
(60%) of the investors elect to retain or reinvest earnings and forty percent
(40%) elect to receive periodic cash distributions; (iii) a nine percent (9%)
yield in the first three (3) years of operation, an eight percent (8%) yield in
years four (4), five (5) and six (6) and a nine percent (9%) yield thereafter;
(iv) withdrawal rates similar to those experienced by past partnerships; (v) a
turnover rate on loans of ten percent (10%) in year three (3), fifteen percent
(15%) in year four (4) and twenty percent (20%) thereafter; and (vi) no
leveraging of the portfolio has been considered. However, because the estimated
amount of fees to be paid to the general partners and their affiliates are based
on certain assumptions and conditions, including, historical experience, which
may not provide an exact measurement of the fees to be paid, the general state
of the economy, interest rates, the turnover rate of loans, partnership
earnings, the duration and type of loans the partnership will make, and the
election of investors to receive periodic cash distributions or additional
units, the actual amount of fees paid will vary from those set forth above.
(8) Early withdrawal penalties applied to the formation loan reduces the
amount of the formation loan balance owed by Redwood Mortgage Corp. to the
partnership. Early withdrawal penalties are applied based on the original cost
percentage of 70% and 30%, respectively, between the formation loan and
syndication costs. After the syndication costs are reimbursed or amortized,
early withdrawal penalties are applied 70% to the formation loan and 30% to
other income. After the formation loan is repaid, all early withdrawal penalty
amounts are credited to the partnership for use in making loans and for
reserves.
(9) To estimate the maximum loan brokerage commissions, we have assumed
that average partnership assets will be $80,000,000.
24
The following table summarizes the forms and amounts of compensation and
reimbursed expenses paid to the general partners or their affiliates for the
years ended December 31, 2001and December 31, 2002 showing actual amounts and
the maximum allowable. No other compensation was paid to the general partners
during such periods. Amounts of compensation payable to the general partners in
connection with this offering may vary from those set forth below. Such fees
were established by the general partners and were not determined by arms-length
negotiation.
Year Ended Year Ended
December 31, 2002 December 31, 2001
Maximum Maximum
Actual Actual Maximum Fee Actual Actual Amount Maximum
Amount Fee Amount Paid Amount Fee Allowable Fee
Form Received % Allowable % Received % For Period %
- ---- -------- - --------- - -------- - ---------- -
PAID BY PARTNERSHIP
Loan Servicing Fee (2) $1,098,000 1.32% $1,306,000 1.5% $552,000 1% $828,000 1.5%
Asset Management Fee (3) $325,000 .375% $325,000 .375% $158,000 .25% $255,000 .375%
Reimbursement of Operating
Expenses $266,000 N/A $266,000 N/A $241,000 N/A $241,000 N/A
1% of Profits, Losses and
Disbursements $75,000 1% $75,000 1% $61,000 1% $61,000 1%
Organization and Offering
Expenses $0 0% $1,800,000 2.4% $0 0% $1,200,000 2.4%
PAID BY BORROWERS
Loan Brokerage Fees (1) $996,000 1.4% $2,846,000 4% $1,156,000 1.4% $3,436,000 4%
Processing and Servicing
Fees $23,000 N/A $23,000 N/A $22,000 N/A $22,000 N/A
(ranges from approximately
$500 to $1,000 per loan based
upon loan size)
Reconveyance Fees $4,000 N/A $4,000 N/A $3,000 N/A $3,000 N/A
(maximum of $45 per deed of
trust or equal to fractionlized
interest of the partnership in
the deed of trust)
Assumption Fee $0 N/A $0 N/A $0 N/A $0 N/A
Extension Fee $500 N/A $500 N/A $500 N/A $500 N/A
(ranges from approximately
$250 to $1,000 per loan based
upon loan size)
PAID BY OTHERS
Interest earned on deposit $0 N/A $0 N/A $0 N/A $0 N/A
Early withdrawal penalty (4) $16,000 N/A $16,000 N/A $46,000 N/A $46,000 N/A
- ------------------------
(footnotes to table)
(1) Although Redwood Mortgage Corp. can receive loan brokerage fees of up
to six percent (6%) or higher if such fees could have been negotiated with
borrowers, the figures reflect actual loan brokerage fees charged on the loans.
For the years 2002 and 2001, the loan brokerage fees were 3.06% and 2.43% of the
principal amount of the loans extended and 0.97% and 1.34% of total partnership
assets as of December 31, 2002 and 2001 respectively.
25
(2) Servicing fees for `actual' were generally 1% of the outstanding
principal balances.. Maximum amount allowable assumes the principal balances
with the maximum allowable 1.5% loan servicing fee. An increase or decrease in
this fee within the limits set by the partnership agreement directly impacts the
yield to the limited partners.
(3) The actual asset management fees for the year ended 2001 varied between
..125% and .25% of the monthly net asset value. The actual asset management fee
for the year ended 2002 was .375% of the monthly net asset value. The maximum
amount allowable for both years 2001 and 2002 were calculated based on the
maximum .375% asset management fee allowable. An increase or decrease in the
asset management fee within the limits set by the partnership agreement directly
impacts the yield to the limited partners.
(4) Amount of early withdrawal penalties collected from early withdrawing
limited partners and applied against the formation loan.
CONFLICTS OF INTEREST
The partnership is subject to various conflicts of interest arising out of
its relationship with the general partners and their affiliates. These conflicts
include conflicts related to the arrangements pursuant to which the general
partners will be compensated by the partnership. Because the partnership was
organized and is operated by the general partners, these conflicts will not be
resolved through arms length negotiations but through the exercise of the
general partners' judgment consistent with their fiduciary responsibility to you
and the other limited partners and the partnership's investment objectives and
policies.
The general partners are, and will be subject to, public reporting
requirements for prior public programs and for this program. They will continue
to have an obligation to keep you appraised of material developments with
respect to all partnerships in which they are the general partners, including
material developments or events which give rise to a conflict of interest. (See
"PRIOR PERFORMANCE SUMMARY" at page 30).
Additionally, the partnership agreement imposes upon the general partners,
an obligation to disclose and keep you apprised of any developments that would
otherwise be disclosed in accordance with public reporting requirements,
including those developments which would give rise to a conflict of interest.
Your power as a limited partner with respect to any such developments including
the power, subject to a majority vote to amend the partnership agreement, to
remove the general partners and/or amend or terminate contracts for services or
goods between the general partners and the partnership, act as a check to the
actions of general partners. (See "FIDUCIARY RESPONSIBILITY OF THE GENERAL
PARTNERS" at page 29 and "INVESTMENT OBJECTIVES AND CRITERIA" at page 38). These
conflicts include, but are not limited to, the following:
1. Conflicts Arising As A Result Of The General Partners' Legal And
Financial Obligations To Other Partnerships. The general partners and their
affiliates serve as the general partners of other limited partnerships. These
partnerships include real estate mortgage limited partnerships with investment
objectives similar to those of the partnership. They may also organize other
real estate mortgage limited partnerships in the future, including partnerships
which may have investment objectives similar to those of the partnership. The
general partners and such affiliates have legal and financial obligations with
respect to these partnerships which are similar to their obligations with
respect to the partnership. As general partners, they may have contingent
liability for the obligations of such partnerships as well as those of the
partnership.
The level of compensation payable to the general partners or their
affiliates in connection with the organization and operation of other
partnerships may exceed that payable in connection with the organization and
operation of this partnership. However, the general partners and their
affiliates do not intend to offer for sale, interests in any other public
programs (but not necessarily private programs) with investment objectives
similar to the partnership, before substantially all initial proceeds of this
offering are invested or committed.
The general partners believe that they have sufficient financial and legal
resources to meet and discharge their obligations to the partnership and to the
other partnerships. In the event that a conflict were to arise, however, the
general partners will undertake the following steps: (i) they will seek the
advice of counsel with respect to the conflict; (ii) in the event of a short
fall of resources, they will seek to allot the partnerships' financial and legal
resources on a pro rata basis among the partnerships; (iii) in the event a pro
rata allotment would materially adversely affect the operations of any
partnership, the general partners will use their best efforts to apply available
resources to that partnership so as to attempt to prevent a material adverse
effect, and the remainder of the resources, if any, would be applied on a pro
rata basis.
26
2. Conflicts Arising From The General Partners' Allocation Of Time Between
The Partnership And Other Activities. The general partners and their affiliates
have conflicts of interest in allocating their time between the partnership and
other activities in which they are involved. However, the general partners
believe that they, and their affiliates, have sufficient personnel to discharge
fully their responsibilities to the partnership and to other affiliated
partnerships and ventures in which they are involved. Redwood Mortgage Corp.
also provides loan brokerage services to investors other than the partnership.
As a result, there will exist conflicts of interest on the part of the general
partners between the partnership and the other partnerships or investors with
which they are affiliated at such time. The general partners will decide which
loans are appropriate for funding by the partnership or by such other
partnerships and investors after consideration of all relevant factors,
including:
o the size of the loan,
o portfolio diversification,
o quality and credit worthiness of borrower,
o amount of uninvested funds,
o the length of time that excess funds have remained uninvested.
To date, the individual general partners have each allocated approximately
20-25 hours per week, exclusively on partnership activities and estimate that
they will continue to allocate approximately the same amount of time in the
future. This amount may be higher during the offering and marketing stages and
may be lower thereafter. The general partners believe that they will have
sufficient time, based upon the organization and personnel that they have built
and retained over the last twenty-five (25) years, to fully discharge their
obligations to the partnership. In the event that a conflict were to arise,
however, the general partners will take the following action: (i) they will seek
the advice of counsel with respect to the conflict; (ii) in the event of a short
fall of resources, they would seek to allot the partnership's financial and
legal resources on a pro rata basis among the partnerships; (iii) in the event a
pro rata allotment would materially adversely affect the operations of any
partnership, the general partners will use their best efforts to apply resources
to that partnership to attempt to prevent a material adverse effect, and the
remainder of the resources, if any, would be applied on a pro rata basis.
3. Amount Of Loan Brokerage Commissions Affects Rate Of Return To You. None
of the compensation payable to the general partners was determined by arms
length negotiations. We anticipate that the loan brokerage commissions charged
to borrowers by Redwood Mortgage Corp., a general partner, will average
approximately three to six percent (3-6%) of the principal amount of each loan,
but may be higher or lower depending upon market conditions. The loan brokerage
commission shall be capped at four percent (4%) per annum of the partnership's
assets. Any increase in the loan brokerage commission charged on loans may have
a direct, adverse effect upon the interest rates charged by the partnership on
loans and thus the overall rate of return to you. Conversely, if the general
partners reduced the loan brokerage commissions charged by Redwood Mortgage
Corp. a higher rate of return might be obtained for the partnership and the
limited partners. This conflict of interest will exist in connection with every
loan transaction, and you must rely upon the fiduciary duties of the general
partners to protect their interests. In an effort to partially resolve this
conflict, Redwood Mortgage Corp. has agreed that loan brokerage commissions
shall be limited to four percent (4%) per annum of the partnership's assets. In
the event of a conflict with respect to the payment of the loan brokerage
commissions or the quality or type of loan, the general partners will resolve
the conflict in favor of the partnership.
The general partners have reserved the right to retain the services of
other firms, in addition to or in lieu of Redwood Mortgage Corp., to perform the
brokerage services, loan servicing and other activities in connection with the
partnership's loan portfolio that are described in this prospectus. Any such
other firms may also be affiliated with the general partners.
4. Arrangement Of Loans By Redwood Mortgage Corp. Redwood Mortgage Corp.
arranges all loans made by the partnership. Redwood Mortgage Corp. also arranges
and makes mortgage loans for its own account and for other investors, including
affiliates of the general partners. There may be a conflict of interest between
the partnership and Redwood Mortgage Corp. or other investors for whom it
selects mortgage loans for investment. This could arise from the fact that
Redwood Mortgage Corp. may be choosing among various loans that it may have
originated with different interest rates and other terms and features, for
placement either in the partnership's mortgage loan portfolio or with other
investors. You must rely on Redwood Mortgage Corp. and the other general
partners to honor their fiduciary duty to protect the partnership's interests in
making and choosing mortgage loans.
5. Terms Of Formation Loan Are Not A Result Of Arms Length Negotiations.
Redwood Mortgage Corp. will borrow from the partnership an amount equal to not
more than nine percent (9%) of the gross proceeds of this offering. This loan
(the "formation loan") will not bear interest. With respect to this offering,
the formation loan could range from a minimum of $3,750,000 assuming all
investors elected to receive current cash distributions to a maximum of
$6,750,000 assuming all investors elected to compound their earnings.
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Accordingly, the partnership's rate of return on the formation loan will be
below the rate obtainable by the partnership on its loans. The terms of the
formation loan were not the result of arms length negotiations. This loan will
be an unsecured obligation of Redwood Mortgage Corp. (See "PLAN OF DISTRIBUTION
- - Formation Loan" at page 80). The amount of any early withdrawal penalties
received by the partnership from investors will reduce the principal balance of
the formation loan, thus reducing the amount owed from Redwood Mortgage Corp. to
the partnership. In the event of default in the payment of such loan a conflict
of interest would arise on our part in connection with the enforcement of the
loan and the continued payment of other fees and compensation, including the
loan brokerage fee and loan servicing fee, to Redwood Mortgage Corp. If the
general partners are removed, no other general partners are elected, the
partnership is liquidated and Redwood Mortgage Corp. is no longer receiving
payments for services rendered, the debt on the formation loan shall be forgiven
by the partnership and Redwood Mortgage Corp. shall be immediately released from
any further obligation under the formation loan. In the event of a conflict with
respect to the repayment of the formation loan, or a default thereof or the
continued payment of other fees and compensation to Redwood Mortgage Corp., the
partnership, at the partnership's expense, will retain independent counsel, who
has not previously represented the general partners to represent the partnership
in connection with such conflict.
6. Potential Conflicts If We Invest in Loans With General Partners Or
Affiliates. We may invest in loans acquired by the general partners or
affiliates. The partnership's portion of the total loan may be smaller or
greater than the portion of the loan made by the general partners or affiliates.
Such an investment would be made after a determination by the general partners
that the entire loan is in an amount greater than would be suitable for the
partnership to make on its own or that the partnership will benefit through
broader diversification of its loan portfolio. However, you should be aware that
investing with the general partners or affiliates could result in a conflict of
interest between the partnership and the general partners or affiliates in the
event that the borrower defaults on the loan. Both the partnership and the
general partners or affiliates will protect their own interest in the loan and
in the underlying security. In order to minimize the conflicts of interest which
may arise if the partnership invests in loans with the general partners or
affiliates, the partnership will acquire its interest in the loan on the same
terms and conditions as does the general partners or affiliates and the terms of
the loan will conform to the investment criteria established by the partnership
for the origination of loans. By investing in a loan on the same terms and
conditions as does the general partners or an affiliate, the partnership will be
entitled to enforce the same rights as the general partners or affiliate in such
loan and the general partners and affiliate will not have greater rights in the
loan than does the partnership.
7. General Partners Will Represent Both Parties In Sales Of Real Estate
Owned To Affiliates. In the event the partnership becomes the owner of any real
property by reason of foreclosure on a loan, the general partners' first
priority will be to arrange the sale of the property. The general partners will
attempt to obtain a price that will permit the partnership to recover the full
amount of its invested capital plus accrued but unpaid interest and other
charges, or so much thereof as can reasonably be obtained in light of current
market conditions. In order to facilitate such a sale, the general partners may,
but are not required to, arrange a sale to persons or entities controlled by
them, e.g., to another partnership or entity formed by one of the general
partners for the express purpose of acquiring foreclosure properties from
lenders such as the partnership. The general partners will be subject to
conflicts of interest in arranging such sales since they will represent both
parties to the transaction. For example, the partnership and the potential buyer
will have conflicting interests in determining the purchase price and other
terms and conditions of sale. The general partners decision will not be subject
to review by any outside parties.
The general partners have undertaken to resolve these conflicts as follows:
(a) No foreclosed property will be sold to the general partners or an
affiliate unless the general partners have first used their best efforts to sell
the property at a fair price on the open market for at least 60 days.
(b) In the event the property will be sold to an affiliate, the net
purchase price must be more favorable to the partnership than any third party
offer received. The purchase price will also be (1) no lower than the
independently appraised value of such property at the time of sale, and (2) no
lower than the total amount of the partnership's "investment" in the property.
The partnership's investment includes without limitation the following:
o the unpaid principal amount of the partnership's loan,
o unpaid interest accrued to the date of foreclosure,
o expenditures made to protect the partnership's interest in the property
such as payments to senior lienholders and for insurance and taxes,
o costs of foreclosure (including attorneys' fees actually incurred to
prosecute the foreclosure or to obtain relief from a stay in bankruptcy), and
o any advances made by the general partners on behalf of the partnership
for any of the foregoing less any income or rents received, condemnation
proceeds or other awards received or similar monies received.
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A portion of the purchase price may be paid by the affiliate executing a
promissory note in favor of the partnership. Any such note will be secured by a
deed of trust on the subject property. The principal amount of such a note, plus
any obligations secured by senior liens, will not exceed ninety percent (90%) of
the purchase price of the property. The terms and conditions of such a note will
be comparable to those the partnership requires when selling foreclosed
properties to third parties.
(c) Neither the general partners nor any of their affiliates would receive
a real estate commission in connection with such a sale.
It is the general partners' belief that these undertakings will yield a
price which is fair and reasonable for all parties. However, no assurance can be
given that the partnership could not obtain a better price from an unaffiliated
third party purchaser.
8. Professionals Hired By General Partners Do Not Represent You Or Any
Other Limited Partners. The attorneys, accountants and other experts who perform
services for the partnership also perform services for the general partners and
their affiliates. It is anticipated that such representation will continue in
the future. Such professionals, including, Cox Castle & Nicholson LLP, counsel
for the partnership and the general partners, do not represent you or any other
limited partner. Under the partnership agreement, you must acknowledge and agree
that such professionals, including, Cox Castle & Nicholson LLP, counsel for the
partnership and the general partners, representing the partnership and the
general partners and their affiliates do not represent, and shall not be deemed
under applicable codes of professional conduct and responsibility to have
represented or be representing, any or all of the limited partners in any
respect. Such professionals, however, are obligated under those codes not to
engage in unethical or improper professional conduct. In the event of a conflict
regarding services performed by attorneys, accountants and other experts, with
respect to the general partners and/or the partnership and limited partners,
then the partnership, at partnership expense, will retain independent counsel,
who has not previously represented the partnership or the general partners to
represent the interests of the limited partners solely with respect to the issue
of a conflict regarding the services performed by professionals.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS
The general partners are accountable to the partnership as fiduciaries. As
such, they are under a fiduciary duty to exercise good faith and integrity in
conducting the partnership's affairs. They must conduct such affairs in the best
interest of the partnership. The California Revised Limited Partnership Act
provides that you as a limited partner may institute legal action on behalf of
yourself and all other similarly situated limited partners (a class action) to
recover damages for a breach by a general partner of its fiduciary duty. You may
also institute an action, or on behalf of the partnership (a partnership
derivative action) to recover damages from a general partner or third parties
where the general partner has failed or refused to enforce the obligation.
Present State of the Law. Based upon the present state of the law and
federal statutes, regulations, rules and relevant judicial and administrative
decisions, it appears that
(1) as a limited partner of the partnership you have the right, subject to
the provisions of applicable procedural rules and statutes to:
o bring partnership class actions,
o enforce rights of all limited partners similarly situated, and
o bring partnership derivative actions to enforce rights of the partnership
including, in each case, rights under certain rules and regulations of the
Securities and Exchange Commission; and
(2) if you are a limited partner who has suffered losses in connection with
the purchase or sale of your units due to a breach of fiduciary duty by the
general partners in connection with such purchase or sale, including
misapplication by the general partners of the proceeds from the sale of units,
you may have a right to recover such losses from the general partners in an
action based on Rule 10b-5 under the Securities and Exchange Act of 1934. In
addition, if you are an employee benefit plan who has acquired units, case law
applying the fiduciary duty concepts of ERISA could be viewed to apply to the
general partners. The general partners will provide quarterly and annual reports
of operations and must, on demand, give you or any limited partner or his/her
legal representative a copy of the Form 10-K and true and full information
concerning the partnership's affairs. Further, the partnership's books and
records may be inspected or copied by you or your legal representatives at any
time during normal business hours.
Exculpation. The general partners may not be liable to the partnership or
to you for errors in judgment or other omission not amounting to willful
misconduct or gross negligence since the partnership agreement and California
partnership law exculpate the general partners, except for willful misconduct
and gross negligence. Therefore, you have a more limited right of action than
you would have had absent the exculpation in the partnership agreement or in
states other than California.
29
Indemnification. The partnership agreement provides that the partnership,
but not the limited partners, indemnify the general partners and their
affiliates, for liabilities the general partners and their affiliates may incur
in dealing with third parties on behalf of the partnership. To the extent that
the indemnification provisions purport to include indemnification for
liabilities arising under the Securities Act of 1933, in the opinion of the
Securities and Exchange Commission, such indemnification is contrary to public
policy and unenforceable.
This is a rapidly developing and changing area of the law and this summary,
describing in general terms the remedies available to limited partners for
breaches of fiduciary duty by the general partners, is based on statutes and
judicial and administrative decisions as of the date of this prospectus. If you
have questions concerning the duties of the general partners or believe that a
breach of fiduciary duty by a general partner has occurred, you should consult
your own counsel.
Terms of the Partnership Agreement. Provision has been made in the
partnership agreement that the general partners shall have no liability to the
partnership for a loss arising out of any act or omission by the general
partners, provided that the general partners determine in good faith that their
conduct was in the best interest of the partnership and, provided further, that
their conduct did not constitute gross negligence or gross misconduct. As a
result, you may have a more limited right of action in certain circumstances
than you would in the absence of such a provision in the partnership agreement.
The partnership agreement also provides that, to the extent permitted by
law, the partnership will indemnify the general partners against liability and
related expenses (including attorneys' fees) incurred in dealings with third
parties. Such indemnification will apply, provided that the conduct of the
general partners is consistent with the standards described in the preceding
paragraph. Notwithstanding the foregoing, neither the general partners nor their
affiliates shall be indemnified for any liability imposed by judgment (including
costs and attorneys' fees) arising from or out of a violation of state or
federal securities laws associated with the offer and sale of units offered
hereby. However, indemnification will be allowed for settlements and related
expenses of lawsuits alleging securities law violations and for expenses
incurred in successfully defending such lawsuits provided that (a) a court
either approves indemnification of litigation costs if the general partners are
successful in defending the action; or (b) the settlement and indemnification is
specifically approved by the court of law which shall have been advised as to
the current position of the Securities and Exchange Commission (as to any claim
involving allegations that the Securities Act of 1933 was violated) and
California Commissioner of Corporations or the applicable state authority (as to
any claim involving allegations that the applicable state's securities laws were
violated). Any such indemnification shall be recoverable out of the assets of
the partnership and not from limited partners. A successful claim for such
indemnification would deplete partnership assets by the amount paid.
PRIOR PERFORMANCE SUMMARY
The information presented in this section represents the historical
experience of real estate mortgage programs sponsored and managed by the general
partners and their affiliates. You should not assume that you will experience
returns, if any, comparable to those experienced by other investors' programs.
Experience and Background of General Partners and Affiliates. Since 1978,
the general partners and their affiliates have sponsored and managed nine (9)
real estate mortgage limited partnerships including this partnership. All
partnerships have investment objectives similar to this partnership. Six of
these partnerships were offered without registration under the Securities Act of
1933 in reliance upon the intrastate offering exemption from the registration
requirements thereunder and/or the exemption for transactions not involving a
public offering. Three of these partnerships including this partnership were
registered under Securities Act of 1933. The effect of not registering six of
the prior partnerships is that the partners in the respective partnerships have
differing rights with respect to the transfer of their interests in the
partnerships. When securities are issued without registration under the
Securities Act of 1933, either in reliance upon the intrastate exemption or the
exemption for transactions not involving a public offering, those securities may
not be transferred without registration under, or an exemption from, the
Securities Act of 1933. On the other hand, securities issued pursuant to a
registration statement under the Securities Act of 1933 generally may be sold
without such registration. In general, securities issued pursuant to
registration under the Securities Act of 1933 are more freely transferable than
those which are issued without registration under the Securities Act of 1933.
However, even securities issued pursuant to a registration statement are subject
to restrictions on transfer under the securities laws of the states in which
they are issued and under the terms of their respective partnership agreements.
Publicly Offered Programs. Not including the prior offerings in this
partnership, the 2 previous publicly offered partnerships (Redwood Mortgage
Investors VI and Redwood Mortgage Investors VII) have raised aggregate capital
contributions of approximately $21,770,953 from approximately 1033 investors and
has total net assets under management as of December 31, 2002, of $15,825,234.
As of December 31, 2002, the number of loans made by these partnerships was
approximately 684 and the number of currently outstanding loans by these earlier
publicly offered programs was approximately 47, ($11,607,084) which are secured
by properties principally located in Northern California. Of these loans,
30
o approximately 13, which represents twenty one percent (21%) of the other
partnerships' portfolios ($2,436,906) are secured by single family residences,
o 12, which represents eleven percent (11%) of the other partnerships'
portfolios ($1,275,248) are secured by multifamily units,
o 17 which represents forty nine percent (49%) of the other partnerships'
portfolios ($5,737,872) are secured by commercial properties and
o 5 which represents nineteen percent (19%) of the other partnerships'
portfolios ($2,157,058) are secured by unimproved property.
Privately Offered Programs. The six privately offered partnerships
sponsored by the general partners and their affiliates (Redwood Mortgage
Investors V, Redwood Mortgage Investors IV, Redwood Mortgage Investors III,
Redwood Mortgage Investors II, Redwood Mortgage Investors and Corporate Mortgage
Investors), described below under the heading "Privately Offered Mortgage
Programs," raised aggregate capital contributions of approximately $25,866,047
from approximately 2,065 investors and have total current net assets under
management of $11,935,515 as of December 31, 2002. The number of loans made by
these privately offered partnerships was approximately 1,404 and the number of
outstanding loans made by these privately offered partnerships, as of December
31, 2002, was approximately 81, ($10,202,623) which are secured by properties
principally located in Northern California. Of these loans,
o approximately 30, which represents nineteen percent (19%) of the other
partnerships' portfolios ($1,955,009) are secured by single family residences,
o 18, which represents twenty six percent (26%) of the other partnerships'
portfolios ($2,663,564) are secured by multifamily units,
o 30 which represents forty nine percent (49%) of the other partnerships'
portfolios ($4,956,002) are secured by commercial properties and
o 3 which represents six percent (6%) of the other partnerships' portfolios
($628,048) are secured by unimproved property.
Redwood Mortgage Investors VIII. As of December 31, 2002, this partnership
had offered $125,000,000 of units in four public prior offerings, with aggregate
capital contributions of approximately $91,238,920 from approximately 2,606
investors and had total net assets under management of $95,777,000. The first
offering closed in November, 1996. The second offering closed in August, 2000.
The third offering closed in April, 2002. The fourth offering will close when
this offering becomes effective. As of December 31, 2002, the partnership had 70
outstanding loans, ($83,650,000) which are secured by properties located
principally in Northern California. Of these 70 loans:
o 35, which represents forty three percent (43%) of the partnership's
portfolio ($36,178,000) are secured by single family residences.
o 6, which represents eight percent (8%) of the partnership's portfolio
($6,572,000) are secured by multifamily units.
o 22, which represents thirty nine percent (39%) of the partnership's
portfolio ($32,485,000) are secured by commercial properties.
o 7, which represents ten percent (10%) of the partnership's portfolio
($8,415,000) are secured by unimproved properties.
PUBLICLY OFFERED MORTGAGE PROGRAMS
Redwood Mortgage Investors VII ("RMI VII"). RMI VII is a California limited
partnership of which Michael R. Burwell and Gymno Corporation are the general
partners. RMI VII was registered under the Securities Act of 1933. As of
December 31, 2002, RMI VII had a total capitalization of $9,052,268 and
571nvestors.
Redwood Mortgage Investors VI ("RMI VI"). RMI VI is a California limited
partnership of which Michael R. Burwell and Gymno Corporation are the general
partners. RMI VI was registered under the Securities Act of 1933. As of December
31, 2002, RMI VI had a total capitalization of $6,772,966 and 467 investors.
31
PRIVATELY OFFERED MORTGAGE PROGRAMS
Redwood Mortgage Investors V ("RMI V"). RMI V is a California limited
partnership of which Michael R. Burwell and Gymno Corporation are the general
partners. RMI V was qualified under California securities laws and a permit
allowing RMI V to offer and sell units was issued by the Commissioner of
Corporations on September 15, 1986. As of December 31, 2002, RMI V had a total
capitalization of $2,212,948and 224 investors.
Redwood Mortgage Investors IV ("RMI IV"). RMI IV is a California limited
partnership of which Michael R. Burwell and Gymno Corporation are general
partners. RMI IV was qualified under California securities laws and a permit
allowing RMI IV to offer and sell units was issued by the Commissioner of
Corporations on October 2, 1984. The Commissioner of Corporations subsequently
extended the effectiveness of the RMI IV offering permit until September 18,
1986. As of December 31, 2002, RMI IV had a total capitalization of $5,979,155
and 401 investors.
Redwood Mortgage Investors III ("RMI III"). RMI III is a California limited
partnership of which Michael R. Burwell and Gymno Corporation are general
partners. This partnership was sold only to a limited number of select
California residents in compliance with applicable federal and state securities
laws. As of December 31, 2002, RMI III had 47 investors. The RMI III offering
terminated on June 30, 1984 at which time it had a total capitalization of
approximately $1,429,624. The partnership was re-offered in July, 1992, and as
of December 31, 1996, additional contributions of $858,800 were received and the
offering was subsequently closed.
Redwood Mortgage Investors II ("RMI II"). RMI II is a California limited
partnership of which Michael R. Burwell and Gymno Corporation are general
partners. This partnership was sold only to a limited number of select
California residents in compliance with applicable federal and state securities
laws. As of December 31, 2002, RMI II had 16 investors. The RMI II offering
terminated on June 30, 1983 at which time it had a total capitalization of
approximately $1,282,802.
Redwood Mortgage Investors ("RMI"). RMI is a California limited partnership
of which Michael R. Burwell and Gymno Corporation are general partners. This
partnership was sold only to a limited number of selected California residents
in compliance with applicable federal and state securities laws. As of December
31, 2002, RMI had 16 investors. The RMI offering terminated on July 31, 1982, at
which time it had a total capitalization of approximately $1,090,916.
Corporate Mortgage Investors ("CMI"). CMI is a California limited
partnership of which A & B Financial Services, Inc. is the general partner. The
offering period for CMI commenced August 1, 1978, and interests in CMI have been
closed. The interest in CMI was offered and sold exclusively to qualified
pension and profit sharing plans and other institutional investors. Commencing
January 1, 1984, a segregated portfolio was created within CMI, into which all
new subscriptions received by CMI were placed. The two (2) portfolios within CMI
were designated Portfolio I and Portfolio II, respectively. As of December 31,
2002, the two portfolios had been merged and had total capital of $1,136,460 and
24 investors.
The funds raised by these partnerships have been used to make loans secured
by deeds of trust. All loans are arranged and serviced by Redwood Mortgage
Corp., a general partner of this partnership, for which it receives substantial
compensation. All of these partnerships will have funds to invest in loans at
the same time as this partnership (See "CONFLICTS OF INTEREST" at page 26).
Copies of audited financial statements for all prior partnerships are
available from the general partners upon request and may be obtained upon
payment of a fee sufficient to cover copying costs. If you would like to receive
such information, you should contact the general partners at 900 Veterans Blvd.,
Suite 500, Redwood City, California 94063; (650) 365-5341. All of the foregoing
partnerships have achieved their stated goals to date.
Additional Information. Certain additional information regarding some of
the partnerships' discussed objectives are similar to the partnership's and are
set forth in Appendix I in the Prior Performance Tables:
TABLE I Experience in Raising and Investing Funds.
TABLE II Compensation to General Partners and Affiliates.
TABLE III Operating Results of Prior Limited Partnerships.
TABLE IV is not included herein because none of the partnerships has
completed its operations or disposed of all of its loans.
TABLE V Payment of Loans.
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TABLE VI Descriptions of Open Loans of Prior Limited Partnerships is
contained in Part II of the Registration Statement.
Upon request, the general partners shall provide to you without charge, a
copy of the most recent Form 10-K Annual Report filed with the Securities and
Exchange Commission by any prior public program that has reported to the
Securities and Exchange Commission within the last twenty-four months. Exhibits
to any annual report on Form 10-K may be obtained upon payment of a fee
sufficient to cover the copying costs. You may review, read and copy all of our
filings at the SEC's Public Reference Room located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. You can call the SEC at 1 800 SEC-0330 for
further information on the public reference room. Our SEC filings are also
available on the SEC's website at "http://www.sec.gov."
No Major Adverse Developments. There have been no major adverse business
developments or conditions experienced by any of the prior limited partnerships
that would be material to prospective investors in the partnership. While the
Tax Reform Act of 1986 made a number of changes to the tax laws, some dealing
with limitations on interest deductions, it has not had a material adverse
effect upon the performance of the prior limited partnerships. Since the
deductibility of residential mortgage interest remained deductible, the Tax
Reform Act of 1986 may in fact have enhanced the utility of residential mortgage
loans of the type offered by these limited partnerships. All prior programs of
the general partners have been treated by the Internal Revenue Service as
partnerships for federal income tax purposes.
Prior Public Partnerships. In addition to the four prior public offerings
in this partnership, the general partners have previously sponsored two public
partnerships registered under the Securities Act of 1933. These partnerships are
RMI VI and RMI VII.
MANAGEMENT
General. The general partners will be responsible for the management of the
proceeds of the offering and the investments of the partnership. Services
performed by the general partners include, but are not limited to:
o implementation of partnership investment policies
o identification, selection and extension of loans
o preparation and review of budgets
o cash flow and taxable income or loss projections and working capital
requirements
o periodic physical inspections and market surveys
o supervision of any necessary litigation
o preparation and review of partnership reports, communications with
limited partners
o supervision and review of partnership bookkeeping, accounting and audits
o supervision and review of partnership state and federal tax returns
o supervision of professionals employed by the partnership in connection
with any of the foregoing, including attorneys and accountants.
The general partners may be removed by a majority of the limited partners
(See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT - Rights and Liabilities of
the Limited Partners" at page 73).
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 46, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the estate of D. Russell Burwell. Upon the completion of the
administration of D. Russell Burwell's estate, Michael R. Burwell will have a
controlling interest in Gymno Corporation. Michael R. Burwell is a director of
Gymno and the director position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
Redwood Mortgage Corp. Redwood Mortgage Corp. is a licensed real estate
broker incorporated in 1978 under the laws of the State of California, and is
engaged primarily in the business of arranging and servicing mortgage loans.
Redwood Mortgage Corp. will act as the loan broker and servicing agent in
connection with loans, as it has done on behalf of several other limited
partnerships formed by the general partners (See "PRIOR PERFORMANCE SUMMARY" at
page 30). Redwood Mortgage Corp. is a subsidiary of The Redwood Group, Ltd.
33
The general partners have represented that they have a combined net worth
of in excess of $1,000,000. Audited and unaudited balance sheets for Gymno
Corporation and Redwood Mortgage Corp. are set forth hereafter.
Affiliates of the General Partners.
The Redwood Group, Ltd. The Redwood Group, Ltd., a California corporation,
is a diversified financial services company specializing in various aspects of
the mortgage lending and investment business. Its various subsidiaries have
arranged over 1 billion dollars in loans secured in whole or in part by first,
second and third deeds of trust. Its subsidiaries include Redwood Mortgage Corp.
and A & B Financial Services, Inc. The estate of D. Russell Burwell is currently
the majority shareholder of The Redwood Group, Ltd. Upon completion of the
administration of the estate of D. Russell Burwell, Michael R Burwell will have
a controlling interest through trusts in The Redwood Group, Ltd.
Theodore J. Fischer. Theodore J. Fischer, age 53, Director and Vice
President of Redwood Mortgage Corp. (1980-present); licensed real estate broker
(1979-present); Assistant Vice President, Western Title Insurance Co.
(1977-1980); Business Development representative, Transamerica Title Insurance
Co. (1976-1977).
Diana B. Mandarino. Diana B. Mandarino, age 58, Vice President of Redwood
Mortgage Corp. (2001-present), Director of Sales and Marketing, Redwood Mortgage
Investors (1995-present), Sr. Vice President, Rancon Securities Corp.
(1982-1995), Marketing and Sales Assistant, Belmont Reid & Co. Investment Group,
(1977-1982); Member and Past President of Financial Planning Association,
Silicon Valley Chapter.
SELECTED OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or entity owns beneficially more than five percent (5%) of the
partnership units. The general partners do not own any limited partnership
units. The general partners receive collectively 1% of the net income, losses
and cash distributions from the partnership and the limited partners receive the
remaining 99% of such items. The general partners' ownership is reflected as
general partnership interests while the limited partners' ownership is reflected
in "units" of limited partnership interest. The following table sets forth the
beneficial ownership interests in the partnership as of December 31, 2002, by
(i) each general partner of the partnership and (ii) all general partners as a
group.
General Partners' Interest
Amount of
Beneficial
Ownership Percent
In Partnership's Of General
Net Income, Partners'
Title Losses, Interest
of And Cash Owned
Class Name and Address Distributions (3) (4)
----- ---------------- ----------------- ---
General Partner's Gymno Corporation, 900 Veterans Blvd., Suite 500, Redwood .33% 33%
Interest City, California 94063(1)
General Partner's Michael R. Burwell, 900 Veterans Blvd., Suite 500, Redwood .33% 33%
Interest City, California 94063
General Partner's Redwood Mortgage Corp, 900 Veterans Blvd., Suite 500, Redwood .33% 33%
Interest City, California 94063 (2)
General Partners' All general partners as a group 1.00% 100%
Interest
(1) Gymno Corporation is currently owned fifty percent (50%) by the estate
of D. Russell Burwell, and fifty percent (50%) by Michael R. Burwell. Upon the
completion of the administration of the estate of D. Russell Burwell, Michael R.
Burwell will have a controlling interest in Gymno Corporation.
(2) Redwood Mortgage Corp. is owned 100% by The Redwood Group Ltd, an
affiliate of the general partners.
(3) The general partners own in the aggregate an interest in the
partnership equal to 1% of the partnership's net income, losses and cash
distributions, in consideration of which the general partners contribute
collectively to the partnership, cash in the amount of 1/10th of 1% of the
capital contributed by limited partners. The general partners share such
interest equally.
(4) Each general partner owns 33 1/3% of the general partners' interests.
The general partners' interests represent an interest in 1% of the partnership's
net income, losses and cash distributions.
34
SELECTED FINANCIAL DATA
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
For the Six Months ended June 30,
---------------------------------------------------------
2003 2002
Loans secured by trust deeds $109,927,000 $86,038,000
Less: Allowance for loan losses ($2,606,000) ($2,652,000)
Real estate held for sale $9,748,000 $0
Cash, cash equivalents and other assets $10,494,000 $7,101,000
Total assets $127,563,000 $90,487,000
Liabilities $9,589,000 $9,200,000
Partners' capital
General partners $109,000 $71,000
Limited partners $117,865,000 $81,216,000
Total partners' capital $117,974,000 $81,287,000
Total liabilities/partners' capital $127,563,000 $90,487,000
Revenues $5,861,000 $5,117,000
Operating expenses
Management fee $209,000 $156,000
Provisions for losses on loans $245,000 $405,000
Provisions for losses on real estate held for sale $0 $0
Other $916,000 $904,000
Net income $4,491,000 $3,652,000
Net income allocated to general partners $45,000 $37,000
Net income allocated to limited partners $4,446,000 $3,615,000
Net income per $1,000 invested by limited
partners for entire period:
- where income is reinvested and
compounded $39.48 $42.84
- where partner receives income in monthly
distributions $38.05 $42.10
35
SELECTED FINANCIAL DATA
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
For the Years ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
Loans secured by trust deeds $83,650,000 $82,790,000 $68,571,000 $35,693,000 $31,906,000
Less: Allowance for loan losses ($3,021,000) ($2,247,000) ($1,345,000) ($834,000) ($414,000)
Real estate held for sale $9,286,000 $0 $0 $0 $66,000
Cash, cash equivalents and other assets $12,290,000 $5,467,000 $2,738,000 $2,776,000 $1,564,000
Total assets $102,205,000 $86,010,000 $69,964,000 $37,635,000 $33,122,000
Liabilities $6,428,000 $12,256,000 $16,737,000 $573,000 $6,074,000
Partners' capital
General partners $87,000 $67,000 $47,000 $32,000 $22,000
Limited partners $95,690,000 $73,687,000 $53,180,000 $37,030,000 $27,025,000
Total partners' capital $95,777,000 $73,754,000 $53,227,000 $37,062,000 $27,048,000
Total liabilities/partners' capital $102,205,000 $86,010,000 $69,964,000 $37,635,000 $33,122,000
Revenues $11,537,000 $9,035,000 $6,349,000 $4,426,000 $3,406,000
Operating expenses
Management fee $325,000 $158,000 $61,000 $42,000 $32,000
Provisions for losses on loans $780,000 $957,000 $376,000 $409,000 $163,000
Provisions for losses on real estate
Held for sale $500,000 $0 $0 $0 $0
Other $2,446,000 $1,827,000 $1,625,000 $1,033,000 $937,000
Net income $7,486,000 $6,093,000 $4,287,000 $2,942,000 $2,274,000
Net income allocated to general partners $75,000 $61,000 $43,000 $29,000 $23,000
Net income allocated to Limited Partners $7,411,000 $6,032,000 $4,244,000 $2,913,000 $2,251,000
Net income per $1,000 invested by Limited
Partners for entire period:
- where income is reinvested and
compounded $87 $90 $86 $84 $84
- where partner receives income in monthly
distributions $84 $86 $83 $81 $81
36
ORGANIZATIONAL CHART
REDWOOD MORTGAGE INVESTORS VIII
OTHER PARTNERSHIPS: (3)
REDWOOD MORTGAGE INVESTORS (4)
REDWOOD MORTGAGE INVESTORS II (4)
REDWOOD MORTGAGE INVESTORS III (4) LIMITED PARTNERS
REDWOOD MORTGAGE INVESTORS IV (5) 99% beneficial ownership in partnership's
REDWOOD MORTGAGE INVESTORS V (5) net income, losses and cash distributions
REDWOOD MORTGAGE INVESTORS VI (5) 99.91% economic interest REDWOOD MORTGAGE
INVESTORS VII (5)
MICHAEL BURWELL GYMNO CORPORATION REDWOOD MORTGAGE CORP.
Individual General Corporate General Partner Corporate General
Partner (.33% beneficial Partner
(.33% beneficial ownership (1) (.33% beneficial
ownership (1)) .09% economic ownership (1))
ownership (2))
MICHAEL BURWELL The Burwell Trusts
50% owner Gymno 50% owner Gymno
Corporation Corporation (6)
THE REDWOOD GROUP, LTD
100% owner Redwood Mortgage Corp.
The Burwell Trusts
100% owner of
The Redwood Group, LTD
(1) Beneficial ownership in a partner's net income, losses and
distributions (2) Economic interest is an equity interest
(3) Limited partners hold a 99% beneficial ownership and General Partners
Michael Burwell and Gymno Corporation each hold 1/2 of 1% (.5%) beneficial
ownership
(4) Limited Partners hold a 100% economic interest
(5) Limited partners hold economic interests of 99.87%, 99.77%, 99.86% and
99.87% and Gymno Corporation holds economic interests of .13%, .23%, .14% and
..13% in Redwood Mortgage Investors IV, Redwood Mortgage Investors V, Redwood
Mortgage Investors VI and Redwood Mortgage Investors VII respectively
(6) Upon completion of the administration of the estate of D. Russell
Burwell, Michael R. Burwell will have a controlling interest through trusts in
The Redwood Group, Ltd.
37
INVESTMENT OBJECTIVES AND CRITERIA
Principal Objectives. We are engaged in business as a mortgage lender. We
make loans to individuals and business entities secured primarily by first and
second deeds of trust on California real estate. We have been operating for 10
years and have made loans in the aggregate in excess of $233,000,000. The
aggregate principal balance of loans outstanding as of December 31, 2002 totaled
$83,650,455. As of December 31, 2002, we have raised $74,923,213 in aggregate
capital contributions in three (3) prior offerings. As of December 31, 2002 and
June 30, 2003, we have raised $16,315,707 and $41,009,129 in aggregate capital
contributions in our current fourth offering, respectively. Through June 30,
2003, in the three prior offerings and in the ongoing fourth offering, we have
raised $115,932,342 in aggregate capital contributions. We have not yet
identified nor committed to make any loans from any additional proceeds of this
offering and, as of the date of the prospectus, have not entered into any
negotiations with respect to extending any loans.
Our partnership's primary objectives are to:
o Yield a high rate of return from mortgage lending; and
o Preserve and protect the partnership's capital.
You should not expect the partnership to provide tax benefits of the type
commonly associated with limited partnership tax shelter investments. The
partnership is intended to serve as an investment alternative for investors
seeking current income. However, unlike other investments which are intended to
provide current income, your investment in the partnership will be:
o less liquid,
o not readily transferable, and
o not provide a guaranteed return over its investment life.
The foregoing objectives of the partnership will not change. However, the
limited partnership agreement does provide that the general partners shall have
sole and complete charge of the affairs of the partnership and shall operate the
business for the benefit of all partners.
General Standards for Loans. The partnership is engaged in the business of
making loans to members of the general public. These loans will generally be
secured by deeds of trust on the following types of real property, including:
o single-family residences (including homes, condominiums and townhouses,
including 1-4 unit residential buildings),
o multifamily residential property (such as apartment buildings),
o commercial property (such as stores, shops, offices, warehouses and
retail strip centers), and
o land.
Based on prior experience, we anticipate that of the number of loans made,
approximately 30% to 60% of the total dollar amount of loans will be secured by
single family residences, 20% to 50% by commercial properties, 1% to 20% by
apartments, and 1% to 10% by undeveloped land.
As of December 31, 2002, of the partnership's outstanding loan portfolio,
43% is secured by single family residences, 39% by commercial properties, 8% by
multifamily properties and 10% by land. We will also make loans secured by
promissory notes which will be secured by deeds of trust and shall be assigned
to the partnership. The partnership's loans will not be insured by the Federal
Housing Administration or guaranteed by the Veterans Administration or otherwise
guaranteed or insured. With the exception of the formation loan to be made to
Redwood Mortgage Corp., loans will be made pursuant to a set of guidelines
designed to set standards for the quality of the security given for the loans,
as follows:
o Priority of Mortgages. The lien securing each loan will not be junior to
more than two other encumbrances (a first and, in some cases a second deed of
trust) on the real property which is to be used as security for the loan.
Although we may also make wrap-around or "all-inclusive" loans, those
wrap-around loans will include no more than two (2) underlying obligations (See
"CERTAIN LEGAL ASPECTS OF LOANS - Special Considerations in Connection with
Junior Encumbrances" at page 43). We anticipate that the partnership's loans
will eventually be diversified as to priority approximately as follows:
o first mortgages - 40-60%;
o second mortgages - 40-60%;
o third mortgages - 0-10%.
38
As of December 31, 2002, of the partnership's outstanding loan portfolio:
o fifty five percent (55%) were secured by first mortgages,
o thirty seven percent (37%) by second mortgages and
o eight percent (8%) by third mortgages.
o Geographic Area of Lending Activity. We will continue to generally limit
lending to properties located in California. To date, we have made no loans
outside of California. Approximately 73.81% of our loans are secured by deeds of
trust on properties in the six San Francisco Bay Area counties. We anticipate
that this will continue in the future. These counties, which have an aggregate
population of over 5.8 million, are Santa Clara, San Mateo, San Francisco,
Alameda, Contra Costa and Marin. The economy of the area where the security is
located is important in protecting market values. Therefore, the general
partners will limit the largest percentage of our lending activity principally
to the San Francisco Bay Area since it has a broad diversified economic base, an
expanding working population and a minimum of buildable sites. The general
partners believe these factors contribute to a stable market for residential
property. Although we anticipate that the partnership's primary area of lending
will continue to be Northern California, we may elect to make loans secured by
real property located throughout California.
o Construction Loans. We may make construction loans up to a maximum of 10%
of our loan portfolio. With respect to residential property, a construction loan
is a loan in which the proceeds are used to construct a new dwelling (up to four
units) on a parcel of property on which no dwelling previously existed or on
which the existing dwelling was entirely demolished. With respect to commercial
property, a construction loan is a loan in which the proceeds are used to
construct an entirely new building on a parcel of property on which no building
existed or on which an existing building was entirely demolished. As of December
31, 2002, 5.77% of our loans consisted of construction loans. In no event will
the loan-to-value ratio on construction loans exceed 80% of the independently
appraised completed value of the property. Once a property receives a
certificate of occupancy from the local jurisdiction in which it is located, our
loan will be reclassified as a permanent loan. We will not make loans secured by
properties determined by the general partners to be special-use properties.
Special use properties are bowling alleys, churches and gas stations.
o Loan-to-Value Ratios. The amount of the partnership's loan combined with
the outstanding debt secured by a senior deed of trust on the security property
generally will not exceed a specified percentage of the appraised value of the
security property as determined by an independent written appraisal at the time
the loan is made. These loan-to-value ratios are as follows:
Type of Security Property Loan to-Value Ratio
- --------------------------------------------------------------------------------
Residential (including apartments) 80%
Commercial Property (including retail stores,
office buildings, warehouses facilities,
mixed use properties) 70%
Land 50%
Any of the above loan-to-value ratios may be increased if, in the sole
discretion of the general partners, a given loan is supported by credit adequate
to justify a higher loan-to-value ratio. In addition, such loan-to-value ratios
may be increased by 10% (e.g., to 90% for residential property), to the extent
mortgage insurance is obtained; however, the general partners do not anticipate
obtaining mortgage insurance. Finally, the foregoing loan-to-value ratios will
not apply to purchase-money financing offered by us to sell any real estate
owned (acquired through foreclosure) or to refinance an existing loan that is in
default at the time of maturity. In such cases, the general partners shall be
free to accept any reasonable financing terms that they deem to be in the best
interests of the partnership, in their sole discretion. Notwithstanding the
foregoing, in no event will the loan-to-value ratio on construction loans exceed
eighty percent (80%) of the independently appraised completed value of the
property. The target loan-to-value ratio for partnership loans as a whole is
approximately 70%. As of December 31, 2002, the loan to value ratio for the
partnership as a whole was 60.61%.
We receive an independent appraisal for the property that will secure our
mortgage loan. Appraisers retained by us shall be licensed or qualified as
independent appraisers by state certification or national organization or other
qualifications acceptable to the general partners. The general partners will
review each appraisal report and will conduct a "drive-by" for each property on
which an appraisal is made. A "drive by" means the general partners or their
affiliates will drive to the property and assess the front exterior of the
subject property, the adjacent properties and the neighborhood. A "drive by"
does not include entering any structures on the property. In many cases the
general partners do enter the structures on the property.
39
o Terms of Loans. Most of our loans are for a period of 1 to 10 years, but
in no event more than 15 years. Most loans provide for monthly payments of
principal and/or interest. Many loans provide for payments of interest only or
are only partially amortizing with a "balloon" payment of principal payable in
full at the end of the term. Some loans provide for the deferral and compounding
of all or a portion of accrued interest for various periods of time.
o Equity Interests in Real Property. Most of our loans provide for interest
rates comparable to second mortgage rates prevailing in the geographical area
where the security property is located. However, we reserve the right to make
loans (up to a maximum of 25% of the partnership's loan portfolio) bearing a
reduced stated interest rate in return for an interest in the appreciation in
value of the security property during the term of the loan (See "CONFLICTS OF
INTEREST - Amount of Loan Brokerage Commissions Affects Rate of Return to You"
at page 27).
o Escrow Conditions. Loans are funded through an escrow account handled by
a title insurance company or by Redwood Mortgage Corp., subject to the following
conditions:
o Satisfactory title insurance coverage is obtained for all loans. The
title insurance policy names the partnership as the insured and provides title
insurance in an amount at least equal to the principal amount of the loan. Title
insurance insures only the validity and priority of the partnership's deed of
trust, and does not insure the partnership against loss by reason of other
causes, such as diminution in the value of the security property, over
appraisals, etc.
o Satisfactory fire and casualty insurance is obtained for all loans,
naming the partnership as loss payee in an amount equal to cover the replacement
cost of improvements.
o The general partners do not intend to and to date have not arranged for
mortgage insurance, which would afford some protection against loss if the
partnership foreclosed on a loan and there was insufficient equity in the
security property to repay all sums owed. If the general partners determine in
their sole discretion to obtain such insurance, the minimum loan-to-value ratio
for residential property loans will be increased.
o All loan documents (notes, deeds of trust, escrow agreements, and any
other documents needed to document a particular transaction or to secure the
loan) and insurance policies name the partnership as payee and beneficiary.
Loans are not written in the name of the general partners or any other nominee.
o Loans to General Partners and Affiliates. Although we may loan funds to
the general partners or their affiliates, no such loans have been made to date.
However, the partnership has made and will make formation loans to Redwood
Mortgage Corp. and may, in certain limited circumstances, loan funds to
affiliates, to among other things, purchase real estate owned by us as a result
of foreclosure.
o Purchase of Loans from Affiliates and Other Third Parties. Existing loans
may be purchased, from the general partners, their affiliates or other third
parties, only so long as any such loan is not in default and otherwise satisfies
all of the foregoing requirements; provided, the general partners and their
affiliates will sell no more than a 90% interest and retain a 10% interest in
any loan sold to the partnership which they have held for more than 180 days. In
such case, the general partners and affiliates will hold their 10% interest and
the partnership will hold its 90% interest in the loan as tenants in common. The
purchase price to the partnership for any such loan will not exceed the par
value of the note or its fair market value, whichever is lower.
o Note Hypothecation. We also may make loans which will be secured by
assignments of secured promissory notes. The amount of a loan secured by an
assigned note will satisfy the loan-to-value ratios set forth above (which are
determined as a specified percentage of the appraised value of the underlying
property) and also will not exceed 80% of the principal amount of the assigned
note. For example, if the property securing a note is commercial property, the
total amount of outstanding debt secured by such property, including the debt
represented by the assigned note and any senior mortgages, must not exceed 70%
of the appraised value of such property, and the loan will not exceed 80% of the
principal amount of the assigned note. For purposes of making loans secured by
promissory notes, we shall rely on the appraised value of the underlying
property, as determined by an independent written appraisal which was conducted
within the last twelve (12) months. If such appraisal was not conducted within
the last twelve months, then we will arrange for a new appraisal to be prepared
for the property. All such appraisals will satisfy our loan-to-value ratios set
forth above. Any loan evidenced by a note assigned to the partnership will also
satisfy all other lending standards and policies described herein. Concurrently
with our making of the loan, the borrower of partnership funds, i.e., the holder
of the promissory note, shall execute a written assignment which shall assign to
the partnership his/its interest in the promissory note. No more than 20% of our
portfolio at any time will be secured by promissory notes. As of the date
hereof, none of our portfolio is secured by promissory notes.
40
o Loan Participation. We have participated in loans with other limited
partnerships organized by the general partners, where we have purchased a
fractional undivided interest in a loan, meeting the requirements set forth
above. Because we will not participate in a loan which would not otherwise meet
our requirements, the risk of such participation is minimized. Although we may
participate in loans with nonaffiliated lenders, individuals or pension funds,
we have not to date. Any such participation would only be on the terms and
conditions set above.
o Diversification. The maximum investment by the partnership in a loan will
not exceed the greater of (1) $75,000, or (2) 10% of the then total partnership
assets (See Loan Participation, above). However, over time, as the partnership
begins to wind down its operations and the total partnership assets decrease, a
single loan could in fact exceed 10% of the total partnership's assets.
o Reserve Liquidity Fund. A contingency reserve liquidity fund equal to two
percent (2%) of the net capital of the offering will be established for the
purpose of covering unexpected cash needs of the partnership.
Credit Evaluations. We may consider the income level and general
creditworthiness of a borrower to determine his or her ability to repay the loan
according to its terms, but such considerations are subordinate to a
determination that a borrower has sufficient equity in the security property to
satisfy the loan-to-value ratios described above. Therefore, loans may be made
to borrowers who are in default under other of their obligations (e.g., to
consolidate their debts) or who do not have sources of income that would be
sufficient to qualify for loans from other lenders such as banks or savings and
loan associations. The partnership may make multiple loans to a single borrower
or affiliated borrowers who have been determined to have sufficient equity in
the properties securing each of the loans.
Loan Brokerage Commissions. Redwood Mortgage Corp. will receive loan
brokerage commissions for services rendered in connection with the review,
selection, evaluation, negotiation and extension of the loans from borrowers.
Redwood Mortgage Corp. anticipates that loan brokerage commissions will average
approximately three to six percent (3-6%) of the principal amount of each loan,
but may be higher or lower depending upon market conditions. The loan brokerage
commission will be limited to four percent (4%) per annum of the partnership's
total assets.
Loan Servicing. It is anticipated that all loans will be "serviced" (i.e.,
loan payments will be collected) by Redwood Mortgage Corp. Redwood Mortgage
Corp. will be compensated for such loan servicing activities (See "COMPENSATION
TO GENERAL PARTNERS AND AFFILIATES" at page 21). Both Redwood Mortgage Corp. and
the partnership have the right to cancel this servicing agreement and any other
continuing business relationships that may exist between them upon 30 days
notice.
Borrowers will make interest payments in arrears, i.e., with respect to the
preceding 30-day period, and will make their checks payable to Redwood Mortgage
Corp. Checks will be deposited in Redwood Mortgage Corp.'s trust account, and,
after checks have cleared, funds will be transferred to the partnership's bank
or money market account.
Sale of Loans. Although we have not done so in the past, the general
partners or their affiliates may sell loans to third parties including
affiliated parties (or fractional interests therein) if and when the general
partners determine that it appears to be advantageous to do so.
Borrowing. We will borrow funds for partnership activities including: (1)
making loans; (2) increasing the liquidity of the partnership; and (3) reducing
cash reserve needs. We may assign all or a portion of our loan portfolio as
security for such loan(s). As of December 31, 2002, the outstanding balance of
the $20,000,000 line of credit was zero. We anticipate engaging in this type of
transaction when the interest rate at which the partnership can borrow funds is
somewhat less than the rate that can be earned by us on our loans, giving us the
opportunity to earn a profit on this "spread." Such a transaction involves
certain elements of risk and also entails possible adverse tax consequences (See
"RISK FACTORS - Use of Borrowed Money May Reduce Our Profitability Or Cause
Losses Through Liquidation" at page 11 and "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Investment by Tax-Exempt Investors" at page 68). It is our
intention to finance no more than fifty percent (50%) of the partnership's
investments with borrowed funds. (See "TAX RISKS - Risks Relating to Generation
of Unrelated Business Taxable Income" at page 17).
Other Policies. We shall not:
o issue senior securities
o invest in the securities of other issuers for the purpose of exercising
control
o underwrite securities of other issuers, or
o offer securities in exchange for property.
41
If we anticipate that we will become, through foreclosure or otherwise, the
owner of property that is subject to a high degree of risk, including without
limitation, property subject to hazardous or toxic cleanup, prolonged
construction or other risk, the general partners may, in their discretion, seek
to transfer or sell the loan to an affiliated or unaffiliated entity with the
expertise to manage the attendant risk.
CERTAIN LEGAL ASPECTS OF LOANS
Each of our loans (except the formation loan to Redwood Mortgage Corp.)
will be secured by a deed of trust, the most commonly used real property
security device in California. The following discusses certain legal aspects of
the loans with respect to Federal and California law only. The deed of trust
(also commonly referred to as a mortgage) creates a lien on the real property.
The parties to a deed of trust are: the debtor called the "trustor", a
third-party grantee called the "trustee", and the lender-creditor called the
"beneficiary." The trustor grants the property, irrevocably until the debt is
paid, "in trust, with power of sale" to the trustee to secure payment of the
obligation. The trustee has the authority to exercise the powers provided in the
deed of trust including non-judicial foreclosure of the property, and acts upon
the directions of the beneficiary. We will be a beneficiary under all deeds of
trust securing loans.
Foreclosure. Foreclosure of a deed of trust is accomplished in most cases
by a trustee's sale through a non-judicial foreclosure under the power-of-sale
provision in the deed of trust. Prior to such sale, the trustee must record a
notice of default and send a copy to the trustor, to any person who has recorded
a request for a copy of a notice of default and notice of sale, to any successor
in interest to the trustor and to the beneficiary of any junior deed of trust.
The trustor or any person having a junior lien or encumbrance of record may,
until five business days before the date a foreclosure sale is held, cure the
default by paying the entire amount of the debt then due. Such amount does not
include principal due only because of acceleration upon default, plus costs and
expenses actually incurred in enforcing the obligation and statutory limited
attorney's and trustee's fees. After the notice of default is recorded and
following a three (3) month notice period and at least 20 days before the
trustee's sale, a notice of sale must be posted in a public place and published
once a week over the 20 day period. A copy of the notice of sale must be posted
on the property, and sent to the trustor and to each person who has requested a
copy, to any successor in interest to the trustor and to the beneficiary of any
junior deed of trust, at least 20 days before the sale. Following the sale,
neither the trustor nor a junior lienholder has any further interest in the
property. A judgment may not be sought against the trustor for the difference
between the amount owed on the debt and the amount the beneficiary received upon
sale of the property.
A judicial foreclosure (in which the beneficiary's purpose is usually to
obtain a deficiency judgment), is subject to many of the delays and expenses of
other types of lawsuits, sometimes requiring up to several years to complete.
Following a judicial foreclosure sale, the trustor or his successors in interest
will have certain rights to redeem the property. However, such redemption rights
will not be available if the creditor waives the right to any deficiency.
Foreclosed junior lienholders do not have a right to redeem the property after a
judicial foreclosure sale. We generally will not pursue a judicial foreclosure
to obtain a deficiency judgment, except where, in the sole discretion of the
general partners, such a remedy is warranted in light of the time and expense
involved.
Tax Liens. Any liens for federal or state taxes filed after a loan is made
which is secured by a recorded deed of trust will be junior in priority to the
loan. Accordingly, the filing of federal or state tax liens after our loan is
made will not affect the priority of the partnership's deed of trust, regardless
of whether it is a senior or junior deed of trust. Real property tax liens will
be in all instances a lien senior to any deed of trust given by borrowers.
Accordingly, even if the partnership is the senior lienholder, if a real
property tax lien is filed, the partnership's deed of trust will be junior to
the real property tax lien. For a discussion of the effect of a junior lien see
"Special Considerations In Connection With Junior Encumbrances" at page 43.
Anti-Deficiency Legislation. California has four principal statutory
prohibitions which limit the remedies of a beneficiary under a deed of trust.
Two statutes limit the beneficiary's right to obtain a deficiency judgment
against the trustor following foreclosure of a deed of trust, one based on the
method of foreclosure and the other on the type of debt secured. Under one
statute, a deficiency judgment is barred where the foreclosure was accomplished
by means of a trustee's sale. Most of our loans will be enforced by means of a
trustee's sale, if foreclosure becomes necessary, and, therefore, a deficiency
judgment may not be obtained. However, it is possible that some of our loans
will be enforced by means of judicial foreclosure sales. Under the other
statute, a deficiency judgment is barred in any event where the foreclosed deed
of trust secured a "purchase money" obligation. With respect to loans, a
promissory note evidencing a loan used to pay all or a part of the purchase
price of a residential property occupied, at least in part, by the purchaser,
will be a purchase money obligation. Thus, under either statute, we will not be
able to seek a deficiency judgment.
Another statute, commonly know as the "one form of action" rule, provides
that the beneficiary commence an action to exhaust the security under the deed
of trust by foreclosure before a personal action may be brought against the
borrower. The fourth statutory provision limits any deficiency judgment obtained
by the beneficiary following a judicial foreclosure sale to the excess of the
42
outstanding debt over the fair market value of the property at the time of sale,
thereby preventing a beneficiary from obtaining a large deficiency judgment
against the debtor as a result of low bids at the judicial foreclosure sale.
Other matters, such as litigation instituted by a defaulting borrower or
the operation of the federal bankruptcy laws, may have the effect of delaying
enforcement of the lien of a defaulted loan and may in certain circumstances
reduce the amount realizable from sale of a foreclosed property.
Special Considerations in Connection with Junior Encumbrances. In addition
to the general considerations concerning trust deeds discussed above, there are
certain additional considerations applicable to second and third deeds of trust
("junior encumbrances"). By its very nature, a junior encumbrance is less secure
than more senior ones. Only the holder of a first trust deed is permitted to bid
in the amount of his credit at his foreclosure sale; junior lienholders must bid
cash. If a senior lienholder forecloses on its loan, unless the amount of the
bid exceeds the senior encumbrances, the junior lienholders will receive
nothing. However, in that event the junior lienholder may have a personal action
against the borrower to enforce the promissory note.
Accordingly, a junior lienholder (such as the partnership) will in most
instances be required to protect its security interest in the property by taking
over all obligations of the trustor with respect to senior encumbrances while
the junior lien holder commences his foreclosure, making adequate arrangements
either to (i) find a purchaser of the property at a price which will recoup the
junior lienholder's interest or (ii) to pay off the senior encumbrances so that
his encumbrance achieves first priority. Either alternative will require us to
make substantial cash expenditures to protect our interest (See "RISK FACTORS -
Loan Defaults and Foreclosures By Borrowers May Adversely Affect Partnership" at
page 8).
We may also make wrap-around mortgage loans (sometimes called
"all-inclusive loans"), which are junior encumbrances to which all the
considerations discussed above will apply. A wrap-around loan is made when the
borrower desires to refinance his property but does not wish to retire the
existing indebtedness for any reason, e.g., a favorable interest rate or a large
prepayment penalty. A wrap-around loan will have a principal amount equal to the
outstanding principal balance of the existing debts plus the amount actually to
be advanced by us. The borrower will then make all payments directly to the
partnership, and the partnership in turn will pay the holder of the senior
encumbrance(s). The actual yield to the partnership under a wrap-around mortgage
loan will exceed the stated interest rate to the extent that such rate exceeds
the interest rate on the underlying senior loan, since the full principal amount
of the wrap-around loan will not actually be advanced by the partnership.
We will record a request for notice of default at the time the trust deed
is recorded. This procedure entitles the partnership to notice when any senior
lienholder files a Notice of Default and will provide more time to make
alternate arrangements for the partnership to protect its security interest.
In the event the borrower defaults solely upon his debt to the partnership
while continuing to perform with regard to the senior lienholder, the
partnership (as junior lienholder) will foreclose upon its security interest in
the manner discussed above in connection with deeds of trust generally. Upon
foreclosure by a junior lienholder, the property remains subject to all liens
senior to the foreclosed lien. Thus, were the partnership to purchase the
security property at its own foreclosure sale, it would acquire the property
subject to all senior encumbrances.
The standard form of deed of trust used by most institutional lenders, like
the one that will be used by the partnership, confers on the beneficiary the
right both to receive all proceeds collected under any hazard insurance policy
and all awards made in connection with any condemnation proceedings. The
standard form also confers upon us the power to apply such proceeds and awards
to any indebtedness secured by the deed of trust, in such order as the
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the beneficiary under the underlying first deed of trust
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation, and to apply the same to the indebtedness secured by the first
deed of trust before any such proceeds are applied to repay the loan. Applicable
case law, however, has imposed upon the lender the good faith obligation to
apply those proceeds towards the repair of the property in those situations.
"Due-on-Sale" Clauses. Our forms of promissory notes and deeds of trust,
like those of many lenders generally, contain "due-on-sale" clauses permitting
the partnership to accelerate the maturity of a loan if the borrower sells the
property. Some forms of the partnership's promissory notes and deeds of trust
will permit assumption by a subsequent buyer, but do not usually contain
"due-on-encumbrance" clauses which would permit the same action if the borrower
further encumbers the property (i.e., executes further deeds of trust). The
enforceability of these types of clauses has been the subject of several major
court decisions and Congressional legislation in recent years.
o Due-on-Sale. Federal law now provides that, notwithstanding any contrary
preexisting state law, due-on-sale clauses contained in mortgage loan documents
are enforceable in accordance with their terms by any lender after October 15,
1985. Cox Castle & Nicholson LLP, counsel for the partnership, has advised that
43
under the Garn-St. Germain Act we will probably be entitled to enforce the
"due-on-sale" clause anticipated to be used in the deeds of trust given to
secure the loans. On the other hand, acquisition of a property by us by
foreclosure on one of our loans, may also constitute a "sale" of the property,
and would entitle a senior lienholder to accelerate its loan against us. This
would be likely to occur if then prevailing interest rates were substantially
higher than the rate provided for under the accelerated loan. In that event, we
may be compelled to sell or refinance the property within a short period of
time, notwithstanding that it may not be an opportune time to do so.
o Due-on-Encumbrance. With respect to mortgage loans on residential
property containing four or less units, federal and California law prohibits
acceleration of the loan merely by reason of the further encumbering of the
property (e.g., execution of a junior deed of trust). This prohibition does not
apply to mortgage loans on other types of property. Although most of our second
mortgages will be on properties that qualify for the protection afforded by
federal law, some loans will be secured by apartment buildings or other
commercial properties which may contain due on encumbrance provisions. Second
mortgage loans made by us may trigger acceleration of senior loans on such
properties if the senior loans contain due-on-encumbrance clauses, although both
the number of such instances and the actual likelihood of acceleration is
anticipated to be minor. Failure of a borrower to pay off the accelerated senior
loan would be an event of default and subject us (as junior lienholder) to the
attendant risks (See "CERTAIN LEGAL ASPECTS OF LOANS - Special Considerations in
Connection with Junior Encumbrances" at page 43).
o Prepayment Charges. Some loans originated by the partnership provide for
certain prepayment charges to be imposed on the borrowers in the event of
certain early payments on the loans. Any prepayment charges collected on loans
will be retained by the partnership. Loans secured by deeds of trust encumbering
single-family owner-occupied dwellings may be prepaid at any time, regardless of
whether the note and deed of trust so provides, but prepayments made in any
12-month period during the first five years of the term of the loan which exceed
20% of the original balance of the loan may be subject to a prepayment charge
provided the note and deed of trust so provided. The law limits the prepayment
charge in such loans to an amount equal to six months advance interest on the
amount prepaid in excess of the permitted 20%, or interest to maturity,
whichever is less. If a loan that is secured by residential property is being
repaid because the lender has accelerated the loan upon the sale of the
property, California law does not allow a prepayment penalty to be charged.
o Real Property Loans. California statutory law imposes certain disclosure
requirements with respect to loans arranged by a California real estate broker
and secured by residential property. However, those requirements are applicable
to loans that are in a lesser amount than the anticipated loans. Notwithstanding
the preceding, the partnership intends to make disclosures to borrowers that
would satisfy these statutes to the extent reasonably practicable, regardless of
whether the statutes are applicable to the relevant loans. While it is unlikely
that the partnership would make any loans subject to these additional disclosure
requests, the failure to comply with the law could have significant adverse
effects on the partnership (See "RISK FACTORS - Risks Associated with High Cost
Mortgages" at page 10).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet date. 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, 2002, there were two
real estate properties acquired.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, 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.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
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
44
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 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.
Related Parties.
The general partners of the partnership are Redwood Mortgage Corp., Gymno
Corporation and Michael R. Burwell. Most partnership business is conducted
through Redwood Mortgage Corp., which arranges, services and maintains the loan
portfolio for the benefit of the partnership. The fees received by the general
partners are paid pursuant to the partnership agreement and are determined at
the sole discretion of the general partner. In the past the general partner has
elected not to take the maximum compensation. The following is a list of various
partnership activities for which related parties are compensated.
o Mortgage Brokerage Commissions - For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the partnership 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. In 2000, 2001 and 2002, loan
brokerage commissions paid by the borrowers were $1,873,000, $1,155,000 and
$996,000, 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
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $506,000, $552,000 and $1,098,000 were
incurred for the years ended December 31, 2000, 2001 and 2002, respectively.
o Asset Management Fees - The general partners receive monthly fees for
managing the partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $61,000, $158,000 and $325,000 were incurred by the partnership for
years 2000, 2001 and 2002, respectively.
o Other Fees - The partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses - All income and losses are credited or charged to
partners in relation to their respective partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses - The general partners may be 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 or severally are
required to contribute 1/10 of 1% in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2001 and
2002, a general partner, Gymno Corporation, had contributed $70,000 and $91,000,
respectively, as capital in accordance with Section 4.02(a) of the partnership
agreement.
o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the partnership out of the offering proceeds. Instead, the
partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited sales. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners
capital in the consolidated balance sheets. The sales commissions range between
0 (for Units sold by the general partners) and 9%. It is estimated that the
total amount of the Formation Loan will approximate 7.6% based on the assumption
that 65% of the investors will reinvest earnings, which qualify for the higher
commission percentage. Formation Loans made to Redwood Mortgage Corp. were on a
per offering basis.
45
The following table summarizes Formation Loan transactions through December
31, 2002 (in thousands):
1st Offering 2nd Offering 3rd Offering 4th Offering Total
------------- -------------- ------------- -------------- -------------
Limited partner contributions $ 14,932 $ 29,993 $ 29,999 $ 16,316 $ 91,239
============= ============== ============= ============== =============
Formation Loans made 1,075 2,272 2,218 1,300 6,865
Payments to date (595) (661) (211) - (1,467)
Early withdrawal penalties
applied (50) (63) (28) - (141)
------------- -------------- ------------- -------------- -------------
Balance December 31, 2002 $ 430 $ 1,548 $ 1,979 $ 1,300 $ 5,257
============= ============== ============= ============== =============
The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installment of one-tenth of the principal balance of the
Formation Loan at December 31 of each year until the offering period is closed.
Thereafter, the remaining Formation Loan is paid in ten equal amortizing
payments over a period of ten years.
On December 31, 2002, the partnership was in the offering stage of its
fourth offering, ($50,000,000). Contributed capital equaled $14,932,000 for the
first offering, $29,993,000 for the second offering, $29,999,000 for the third
offering, and $16,316,000 for the fourth offering, totaling an aggregate of
$91,239,000 as of December 31, 2002. Of this amount, $2,578,000 remained in
applicant status.
Results of Operations - For the years ended December 31, 2000, 2001, and
2002.
The net income increase of $1,345,000 (46%) for the year ended December 31,
2000, was primarily attributable to an increase in interest earned on loans of
$1,924,000, an increase in late fees of $38,000, a decrease in provision for
loan losses and real estate acquired through foreclosure of $33,000; offset by
expense increases due primarily to the increased size of the partnership of
$147,000 for mortgage servicing fees, $361,000 for interest on line of credit,
$29,000 for clerical costs through Redwood Mortgage Corp., $19,000 for asset
management fees, and $32,000 for professional fees for 2000. The net income
increase of $1,806,000 (42%) for the year ended December 31, 2001 was due
primarily to an increase in interest earned on loans of $2,659,000, an increase
in late fees of $33,000, and a decrease in professional fees of $51,000; offset
by expense increases due primarily to the increased size of the partnership loan
of $46,000 for mortgage servicing fees, $85,000 for interest expense, $596,000
for provisions for losses on loans, $97,000 for asset management fees, and
$127,000 for clerical cost from Redwood Mortgage Corp. The net income increase
of $1,393,354 (23%) for the year ended December 31, 2002 was due primarily to an
increase in interest earned on loans of $2,496,000, an increase in late fees of
$15,000, a decrease in interest expense of $456,000; offset by expense increases
due primarily to the increased size of the partnership of $546,000 for mortgage
servicing fees, $323,000 for provisions for losses on loans and provisions for
losses on real estate, $167,000 for asset management fees, $25,000 for clerical
costs from Redwood Mortgage Corp., $53,000 for professional fees and $444,000
for broker expense.
The increase in interest on loans of $1,924,000 (44%), $2,659,000 (42%) and
$2,496,000 (28%) for the years ended December 31, 2000, 2001 and 2002,
respectively, was due primarily to the increased size of the partnership loan
portfolio, which increased from $35,693,000 at December 31, 1999, to $68,571,000
at December 31, 2000, to $82,790,000 at December 31, 2001 and $83,650,000 at
December 31, 2002. The average outstanding loan balance for 2002 was
approximately $87,000,000 but was significantly reduced by loan payoffs in
December, 2002. The lower percentage rate of interest increase (28%) on loans in
2002 is reflective of the lower interest rate environment in 2002 as compared to
2000 and 2001 and a smaller increase in outstanding loans than previous years.
This was also offset in 2002 by "additional interest" received on one loan of
$888,000 during 2002.
The late charge income increases of $38,000 (136%), $33,000 (50%), $15,000
(15%) for the years ended 2000, 2001 and 2002, respectively, is largely
attributed to the growth in the loan portfolio.
The increase in interest on the line of credit of $361,000 (69%), and
$85,000 (10%) during the years ended 2000 and 2001 is reflective of higher
credit line usage in 2000 and 2001 offset by significantly lower borrowing rates
in the latter part of 2001. Our credit line is tied to prime and the prime rate
declined from 9.5% to 4.75% during 2001. The decrease of $456,000 (48%) in
interest expense in 2002 is primarily due to the lower prime interest rates
existing throughout 2002 and approximately 20% average lower credit line usage
during the year. The partnership utilized its bank line of credit less during
2002 than 2001.
The increase in mortgage servicing fees for 2000, 2001 and 2002 of $147,000
(41%), $46,000 (9%) and $546,000 (99%). Mortgage servicing fees increased
primarily due to increases in the outstanding loan portfolio. During 2002,
46
additional servicing fees were earned related to impaired loans. The partnership
does not accrue servicing fees to Redwood Mortgage Corp. on impaired loans.
Rather, servicing fees on impaired loans are incurred as borrower payments are
received.
The decrease of $33,000 (8%) in 2000 in provisions for losses on loans and
real estate was due to low expectation of loan losses in 2000. The increase in
provisions for losses on loans in 2001 of $596,000 (159%) is primarily due to
the loan portfolio increasing in amount and due to recognition that we were in
more difficult economic times. The increase in provisions for losses on loans
and real estate of $323,000 (34%) in 2002 reflects the general partners'
estimate of appropriate allowances for anticipated losses. As the partnership's
loan portfolio has increased and since the partnership acquired two properties
in 2002, the provisions for loss have also been increased.
The increase in management fees of $19,000 (45%), $97,000 (150%) and
$167,000 (106%) for 2000, 2001 and 2002, respectively, is due to the increase in
capital under management in 2000, 2001 and 2002. In addition, the general
partners began collecting the full asset management fees of .375% during 2002 as
compared to .25% in 2001 and .125% in 2000.
The increase in clerical costs of $29,000 (34%), $127,000 (112%) and
$25,000 (10%) for 2000, 2001 and 2002, respectively, is due primarily to an
increase in the partnership size and in 2001 to an upgrade of computer hardware
and software.
The increase in brokerage fees of $444,000 in 2002 from $0 in 2000 and 2001
is due to the partnership having an obligation to pay one-half of "additional
interest" collected on one of its loans to a non-affiliated real estate broker.
This expense ends with the full collection of the "additional interest"
anticipated to be in 2003.
Partnership capital continued to increase as the partnership received new
limited partner capital contributions of $14,887,000, $19,712,000 and
$21,563,000 and retained the earnings of limited partners that have chosen to do
so of $2,751,000, $3,892,000 and $4,716,000 for the years 2000, 2001 and 2002,
respectively. The partnership ceased raising funds during the period of May 2002
through October 2002 while it was in application status for a fourth offering of
Units. The fourth offering commenced October 30, 2002 and funds raised will be
used to increase the partnership's capital base and provide funds for additional
mortgage loans.
The partnership began funding loans on April 14, 1993 and as of December
31, 2002, had credited earnings to limited partners who elected to retain
earnings at an average annualized yield of 8.44%. Limited partners who elected
to have their earnings distributed monthly had an average annualized yield of
8.17% since inception through December 31, 2002.
In 1995, the partnership established a line of credit with a commercial
bank secured by its loan portfolio. Since its inception, the credit limit has
increased from $3,000,000 to $20,000,000. The size of the credit line facility
could again increase as the partnership's capital increases. This added source
of funds may help in maximizing the partnership's yield by permitting the
partnership to minimize the amount of funds in lower yield investment accounts
when appropriate loans are not available. Additionally, the loans made by the
partnership bear interest at a rate in excess of the rate payable to the bank
which extended the line of credit. The amount to be retained by the partnership,
after payment of the line of credit cost, will be greater than without the use
of the line of credit. As of December 31, 2000, 2001 and 2002, the outstanding
balance on the line of credit was $16,400,000, $11,400,000 and $0, respectively.
Cash generated from interest earnings, late charges, amortization on principal,
loan payoffs and capital contributed by limited partners was utilized to pay
down the credit line in full at year ended December 31, 2002.
During 2001, and through December 31, 2002, the Federal Reserve reduced
interest rates by cutting the Federal Funds Rate twelve times to 1.25%. The
effect of the previous cuts has greatly reduced short-term interest rates and to
a lesser extent reduced long-term interest rates. The general partners
anticipate that new loans will be placed at rates approximately 1% to 1.50%
lower than similar loans during 2002. The lowering of interest rates has
encouraged those borrowers that have mortgages with higher interest rates than
those currently available to seek refinancing of their obligations. The
partnership may face prepayments in the existing portfolio from borrowers taking
advantage of these lower rates. However, demand for loans from qualified
borrowers continues to be strong and as prepayments occur, the general partners
expect to replace paid off loans with loans at somewhat lower interest rates.
The general partners believe that the average loan portfolio interest rate will
decline approximately .50% to .75% over the year 2003. Nevertheless, based upon
the rates payable in connection with the existing loans, and anticipated
interest rates to be charged by the partnership and the general partners'
experience, the general partners anticipate that the annualized yield will range
between 7.5% and 8.25% in 2003.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of partnership operations. The partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, and continuing in 2002, the Northern California real estate market slowed
47
and the national and local economies have slipped into recession. As of December
31, 2002, six notices of default are currently filed beginning the process of
foreclosing six of our loans. The principal amounts of the six foreclosed loans
total $4,029,000 or 4.82% of the loan portfolio. Four of these borrowers have
entered into workout agreements, with the borrowers making regular monthly
payments.
The partnership has also entered into workout agreements with borrowers who
are past maturity or delinquent in their regular payments. The partnership had
workout agreements on approximately 6 loans totaling $5,209,000 as of December
31, 2002. Typically, a workout agreement allows the borrower to extend the
maturity date of the balloon payment and/or allows the borrower to make current
monthly payments while deferring for periods of time, past due payments, and
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 economic times and conversely fall
during good economic times. The number and amount of foreclosures existing at
December 31, 2002, in management's opinion, does not have a material effect on
our results of operations or liquidity. These workouts and foreclosures have
been considered when management arrived at appropriate loan loss reserves and
based on our experience, are reflective of our loan marketplace segment.
In 2002, the partnership filed some foreclosure proceedings to enforce the
terms of our loans. In some of these instances the borrowers have been able to
remedy the foreclosures we have filed. As of December 31, 2002, we have existing
foreclosure proceedings against six loans totaling $4,029,000. Of the
foreclosures, four have entered into workout agreements, which call for regular
monthly payments. The partnership did not acquire any properties through
foreclosure in 2000 and 2001. During 2002, we completed foreclosure of two loans
resulting in the acquisition of two real estate properties. The partnership's
principal balances were $6,565,000 after excluding an affiliated partnership's
interest in one of the properties. In 2003, we may acquire additional real
estate through the foreclosure process. Borrower foreclosures are a normal
aspect of partnership operations and the general partners anticipate that they
will not have a material effect on liquidity. As a prudent guard against
potential losses, the general partners have made provisions for losses on loans
and real estate acquired through foreclosure of $3,521,000 through December 31,
2002. These provisions for losses were made to guard against collection losses.
The total cumulative provision for losses as of December 31, 2002, is considered
by the general partners to be adequate. Because of the number of variables
involved, the magnitude of the swings possible and the general partners
inability to control many of these factors, actual results may and do sometimes
differ significantly from estimates made by the general partners.
Borrower Liquidity and Capital Resources.
The partnership relies upon purchases of units, loan payoffs, borrowers'
mortgage payments, and, to a lesser degree, its line of credit for the source of
funds for loans. Recently, 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. As such, additional
limited partner Unit purchases could decline, which would reduce the overall
liquidity of the partnership. 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 both or either of a
surge of Unit purchases by prospective limited partners, and 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 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 must elect
either to receive monthly, quarterly or annual cash distributions from the
partnership, or to compound earnings in their capital account. If you initially
elect to receive monthly, quarterly or annual distributions, such election, once
made, is irrevocable. However an investor may elect to receive such
distributions on a monthly, quarterly or annual basis. If the investor initially
elects to compound earnings in his/her capital account, in lieu of cash
distributions, the investor may, after three (3) years, change the election and
receive monthly, quarterly or annual cash distributions. Earnings allocable to
limited partners who elect to compound earnings in their capital account, will
be retained by the partnership for making further loans or for other proper
partnership purposes, and such amounts will be added to such limited partners'
capital accounts.
48
During the periods stated below, the partnership, after allocation of
syndication costs, made the following allocation of earnings both to the limited
partners who elected to compound their earnings, and those that chose to
distribute:
2000 2001 2002
------------- ------------- -------------
Compounding $2,751,000 $3,892,000 $4,716,000
Distributing $1,245,000 $1,962,000 $2,517,000
As of December 31, 2000, December 31, 2001, December 31, 2002, limited
partners electing to receive cash distributions of earnings represented 31%, 34%
and 35%, respectively of the limited partners' outstanding capital accounts.
These percentages have remained relatively stable. The general partners
anticipate that after all capital has been raised, the percentage of limited
partners electing to withdraw earnings will decrease due to the dilution effect
which occurs when compounding limited partners' capital accounts grow through
earnings reinvestment.
The partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties (see "Withdrawal From
Partnership" in the Limited Partnership Agreement). Once a limited partner's
initial five-year hold period has passed, the general partners expect to see an
increase in liquidations due to the ability of limited partners to withdraw
without penalty. This ability to withdraw five years after a limited partner's
investment has the effect of providing limited partner liquidity and the general
partners expect a portion of the limited partners to avail themselves of this
liquidity. This has the anticipated effect of increasing the net capital of the
partnership, primarily through retained earnings during the offering period. The
general partners expect to see increasing numbers of limited partner withdrawals
during a limited partner's 5th through 10th anniversary, at which time the bulk
of those limited partners who have sought withdrawal have been liquidated. Since
the five-year hold period for most limited partners has yet to expire, as of
December 31, 2002, many limited partners may not as yet avail themselves of this
provision for liquidation. Earnings and capital liquidations including early
withdrawals during the three years ended December 31, 2002 were:
2000 2001 2002
------------- -------------- ---------------
Cash distributions $1,245,000 $1,962,000 $2,517,000
Capital liquidation* $ 762,000 $1,425,000 $1,049,000
------------- -------------- ---------------
Total $2,007,000 $3,387,000 $3,566,000
============= ============== ===============
* These amounts represent gross of early withdrawal penalties.
Additionally, limited partners may liquidate their investment over a
one-year period subject to certain limitations and penalties. During the past
three years ended December 31, 2002, capital liquidated subject to the 10%
penalty for early withdrawal was:
2000 2001 2002
-------------- -------------- --------------
$310,000 $730,000 $244,000
This represents 0.58%, 0.99%, and 0.26% of the limited partners' ending
capital for the years ended December 31, 2000, 2001, and 2002, respectively.
These withdrawals are within the normally anticipated range and represent a
small percentage of limited partner capital.
Results of Operations - For the six and three months ended June 30, 2003
and 2002
The net income increase of $839,000 (23%) for the six months and $511,000
for the three months ended June 30, 2003 versus June 30, 2002 was due primarily
to an increase in interest earned on loans of $613,000 for the six months, and
$437,000 for the three months, and reduced interest costs of $223,000 for the
six months, and $89,000 for the three months, on the partnership's debt. In
addition, significant expense increases or (decreases) for the six and three
months ended June 30, 2003 versus June 30, 2002 included a decrease in mortgage
servicing fees of ($17,000) for the six months, and an increase of $20,000 for
the three months, a decrease in the provision for losses on loans and real
estate acquired through foreclosure of ($160,000) for the six months, and
$46,000 for the three months, increase in asset management fees of $53,000 for
the six months, and $31,000 for the three months, and an increase in brokerage
fees of $181,000 for the six months and $100,000 for the three months.
The increase in interest on loans of $613,000 (12%) for the six months, and
$437,000 (17%) for the three months ended June 30, 2003 versus June 30, 2002 was
due primarily to the increased size of the partnership secured loan portfolio at
49
June 30, 2003 as compared to June 30, 2002 of $109,927,000 and $86,038,000, and
due to collection of "additional interest" of $362,000 derived from one of the
partnership's loans.
The decrease in interest expense of $223,000 for the six months, and
$89,000 for the three months ended June 30, 2003 versus June 30, 2002 is due to
almost no usage of the line of credit during the first half of 2003. This low
credit line usage was due primarily to loan payoffs and high number of
partnership unit sales in the fourth offering, offset by good loan production
volume but insufficient to absorb the total cash inflows. In addition, interest
on the note payable relating to real estate held for sale is being capitalized.
The decrease in mortgage servicing fees of $17,000 (4%) for the six months,
and an increase of $20,000 (9%) for the three months ended June 30, 2003 versus
June 30, 2002 is primarily due to additional mortgage servicing fees earned on
impaired loans during the first quarter of 2002, offset slightly by the larger
loan portfolio, which existed during the first half of 2003.
The decrease of $160,000 and $46,000 in provision for losses on loans and
real estate acquired through foreclosure for the six and three months ended June
30, 2003 versus the respective six and three months ended June 30, 2002
indicates the general partners' expectation on loan losses. Despite the fact
that the partnership's loan portfolio has increased, and the partnership
acquired two properties through borrower defaults in the third quarter of 2002,
the general partners considered that the amount of provision was reasonable. At
June 30, 2003, total allowance for losses on loans and real estate acquired
through foreclosure equaled $3,106,000, which the general partners consider to
be adequate. See additional discussions below.
The increase in the asset management fees of $53,000 and $31,000 for the
six and three months ended June 30, 2003 versus the respective period ended June
30, 2002 is due to an increase in the partners' capital under management at June
30, 2003 and 2002 of $125,443,000 and $85,892,000, respectively.
The increase in professional fees of $15,000 and $7,000 for the six and
three months ended June 30, 2003 versus June 30, 2002 is due to the increased
expense due to the larger partnership size.
The increase in brokerage fees of $181,000 and $100,000 for the six and
three months ended June 30, 2003 versus June 30, 2002 is due to the partnership
incurring an obligation to pay one-half of the "additional interest" collected
on one of its loans to a non-affiliated real estate broker. No "additional
interest" was collected during the first half of 2002, therefore there was no
expense during the first half of 2002.
Partnership capital continued to increase as the partnership received new
limited partner capital contributions of $24,694,000 and retained the earnings
of limited partners that have chosen to do so of $2,848,000 for the six months
ended June 30, 2003, as compared to $5,247,000 and $2,292,000 for the six months
ended June 30, 2002. The increased partnership capital helped increase loans
outstanding to $109,927,000 at June 30, 2003, as compared to $86,038,000 at June
30, 2002. The limited partner contributions of $24,694,000 versus $5,247,000, is
due to the completion of the third offering in April 2002, and the beginning of
the fourth offering, effective October 30, 2002, of $50,000,000, which brought
about exceptional sales of units.
The partnership did not utilize its bank line of credit during the first
half of 2003 compared to 2002. Cash generated from interest earnings, late
charges, amortization of principal, loan payoffs and capital contributions by
limited partners was utilized to fund new loans and meet distributions and
capital liquidations to limited partners.
At June 30, 2003, outstanding foreclosures were five ($3,740,000) compared
to the six ($5,695,000) that existed at June 30, 2002. Since June 30, 2002, the
outstanding principal subject to foreclosure decreased $1,955,000 from
$5,695,000. This was a decrease in foreclosure amount of 34%. Of the
foreclosures at June 30, 2003, all 5 have entered into workout agreements, which
require regular monthly payments. These foreclosures are a reflection of the
difficult economic times that existed at June 30, 2003 and June 30, 2002, yet
are not unusual in the general partners' experience.
The general partners received mortgage brokerage commissions from the loan
borrowers of $1,252,000 and $679,000 for the six and three months ended June 30,
2003 as compared to $516,000 and $263,000for the six and three months ended June
30, 2002. The increase is due to more loans written in the six and three months
ended June 30, 2003 than the six and three months during the corresponding
period of 2002.
Allowance for Losses.
As of June 30, 2003, five notices of default are currently filed beginning
the process of foreclosing five of our loans. The principal amounts of the five
foreclosed loans total $3,740,000 or 3.40% of the loan portfolio. All of these
borrowers have entered into workout agreements, with the borrowers making
regular monthly payments.
50
The partnership has also entered into workout agreements with borrowers who
are past maturity or delinquent in their regular payments. The partnership had
workout agreements on approximately 7 loans totaling $5,630,000 as of June 30,
2003. The number and amount of foreclosures existing at June 30, 2003, in
management's opinion, does not have a material effect on our results of
operations or liquidity. These workouts and foreclosures have been considered
when management arrived at appropriate loan loss reserves and based on our
experience, are reflective of our loan marketplace segment. The partnership did
not acquire any properties through foreclosure during the first half of 2003. As
a prudent guard against potential losses, the general partners have made
provisions for losses on loans and real estate acquired through foreclosure of
$3,106,000 at June 30, 2003. These provisions for losses were made to guard
against collection losses. The total provision for losses as of June 30, 2003,
is considered by the general partners to be adequate. During the second quarter
of 2003, the partnership sold two of its delinquent loans totaling $3,240,000 at
a discount sustaining an overall loss of $661,000. This loss had been previously
provided for in the allowance for loan losses. 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.
Current Economic Conditions.
The partnership makes loans primarily in Northern California. As of June
30, 2003, approximately 72.55% of the loans held were in the six San Francisco
Bay Area Counties. The remainder of the loans held were secured primarily by
Northern California real estate outside the San Francisco Bay Area. Like the
rest of the nation, the San Francisco Bay Area has also felt the recession and
accompanying slow down in economic growth and increasing unemployment. The
technology companies of Silicon Valley, the airline industry, the tourism
industry and other industries are feeling the effects of the overall United
States recession, which includes lower earnings, losses and layoffs.
During 2003, the 30 year fixed rate mortgage interest rates have continued
to steadily decline to their lowest levels in almost 40 years. During the week
ending June 13, 2003, in Freddie Mac's Primary Mortgage Market Survey, the 30
year rate mortgage (FRM) averaged 5.21% with an average 1/2 point fee. Since
June, 2003, the FRM has increased to 6.44% for the week ending September 5,
2003. This is an increase of 1.23% and while it may signal a reversal or a
cessation of the declining mortgage interest rate environment, nonetheless,
mortgage interest rates remain at very low historic levels.
According to the San Francisco Chronicle of the week of June 21, 2003, the
mortgage defaults dropped across the U.S. The article states, "Fewer California
and U.S. homeowners defaulted on their mortgages in the first quarter, as
plunging interest rates helped trim monthly house payments, a mortgage banking
group reported Friday. At the same time, however, soaring personal bankruptcies
and persistent job losses - largely in the Midwest - helped push the U.S.
foreclosure rate to a record 1.20%, the Mortgage Bankers Association said. "We
saw very modest improvement (in mortgage delinquencies) this quarter, because we
didn't see the improvement in the economy we would have expected," said Doug
Duncan, chief economist at the Washington D.C., trade group. "If economy
continues to muddle along ... we won't see rapid improvement in delinquencies."
In California, 2.66% of homeowners were late on their mortgage payments by at
least 30 days in the first three months of the year on a non-seasonally adjusted
basis, compared with 3.10% a year ago. Nationwide, 4.52% of homeowners were
delinquent on home payments, versus 4.65% in the first quarter of 2002. U.S.
data are compiled on a seasonally adjusted basis to account for differences in
state laws regarding foreclosure. Much of the decrease in defaults can be
attributed to historically low interest rates, which have allowed consumers to
refinance and slash their monthly house payments."
On the commercial scene, the San Francisco Business Times for the week of
June 27, 2003 stated, "Preliminary second quarter numbers from two brokerage
houses concurred that commercial vacancy was basically as flat as the Indian
bread over the last quarter, ticking up a mere 0.1% from March. Newmark & Co.
Real Estate said that total vacancy was 17.1%, versus 17% last quarter, while
Grubb & Ellis saw vacancy at 24.1%, up slightly from 24%. "I think what it's
saying is we really have not had significant job growth to take down some of the
vacant space, " said Monica Finnegan, managing principal with Newmark, "Even if
we have some slight absorption, we have another level of lay-offs at another
organization." Colin Yasukochi, regional manager of research and client services
for California at Grubb & Ellis, saw the numbers as potentially more sweet bread
than sourdough, noting that they might indicate the market is finally
stabilizing. The article further states "The direction of rents themselves is
also a source of discrepancy in the reports, though ironically so. The seemingly
less optimistic Newmark said direct rent was $21.88 in second quarter, actually
up slightly from $21.74 last quarter. "Some of the high rise, premier buildings
are still trying to capture higher rents," Finnegan said. "So you're looking at
average rents that reflect Class A across the board." Meanwhile, Grubb reported
that Class A rents citywide, declined from $28.40 to $28.10, and Yasukochi said
they could continue to erode slightly over the next few quarters."
To the partnership, lower interest rates may mean more borrowers coming
forward for equity loans or for refinancing. Declines in defaults will stabilize
delinquencies and foreclosures. Stabilizing commercial vacancies and little
appreciation in rental rates may mean that we are at the vacancy rate bottom.
For partnership loans outstanding, as of June 30, 2003, the partnership had
an average loan to value ratio computed as of the date the loan was made of
51
60.08%. This percentage does not account for any increases or decreases in
property values since the date the loan was made, nor does it include any
reductions in principal through amortization of payments after the loan was
made. This low loan to value ratio will assist the partnership in weathering
loan delinquencies and foreclosures should they eventuate.
Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and a note payable on
our line of credit as of December 31, 2002. The presentation, for each category
of information, aggregates the assets and liabilities by their maturity dates
for maturities occurring in each of the years 2003 through 2007 and separately
aggregates the information for all maturities arising after 2007. The carrying
values of these assets and liabilities approximate their fair market values as
of December 31, 2002 (in thousands).
2003 2004 2005 2006 2007 Thereafter Total
-----------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 5,971 $ 5,971
Average interest rate 1.05% 1.05%
Loans secured by deeds of trust $44,101 $12,912 $11,879 $ 1,723 $ 8,198 $ 4,837 $ 83,650
Average interest rate 12.14% 10.73% 11.60% 11.64% 10.46% 11.51% 11.64%
Interest bearing liabilities
Note payable to bank - - - - - - -
Average interest rate 4.00% - - - - - 4.00%
Market Risk.
The partnership's note payable to the bank for its 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 note payable. 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, (100% as of
June 30, 2003) 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, 2000, 2001 and 2002.
Loan Portfolio.
The partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of December 31, 2000,
2001 and 2002 the partnership's loans secured by real property collateral in the
six San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara,
Alameda, Contra Costa, and Marin) represented $55,555,000 (81.0%), $68,291,000
(82.5%), and $61,741,000 (73.81%) of the outstanding loan portfolio. The
remainder of the portfolio represented loans secured by real estate located
primarily in Northern California. No partnership loan equals or exceeds 10% of
the partnership's assets.
As of December 31, 2000, approximately 38.25% ($26,225,000), was invested
in loans secured by single family homes (1-4 units), approximately 12.34%
($8,459,000), was invested in loans secured by multifamily dwellings (apartments
over 4 units), approximately 40.95% ($28,082,000), was invested in loans secured
by commercial properties, and approximately 8.47% ($5,806,000) was invested in
loans secured by land. As of December 31, 2001, approximately, 45.35%
52
($37,542,000), was invested in loans secured by single family homes (1-4 units),
approximately 8.86% ($7,337,000) was invested in loans secured by multifamily
dwellings (apartments over 4 units), approximately 38.78% ($32,105,000) was
invested in loans secured by commercial properties, and approximately 7.01%
($5,806,000) was invested in loans secured by land. As of December 31, 2002,
approximately, 43.72% ($36,574,000), was invested in loans secured by single
family homes (1-4 units), approximately 7.86% ($6,572,000) was invested in loans
secured by multi-family dwellings (apartments over 4 units), approximately,
38.36% ($32,089,000) was invested in loans secured by commercial properties, and
approximately 10.06% ($8,415,000) was invested in loans secured by land.
As of December 31, 2002, the partnership held 70 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the partnership as of December 31, 2002.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of December 31, 2002 (in thousands)
# of Loans Amount Percent
------------- -------------- ---------------
1st Mortgages 31 $ 46,117 55%
2nd Mortgages 32 30,930 37%
3rd Mortgages 7 6,603 8%
============= ============== ===============
Total 70 $ 83,650 100.00%
Maturing 12/31/03 and prior 28 $ 44,101 52.72%
Maturing prior to 12/31/04 13 12,912 15.44%
Maturing prior to 12/31/05 8 11,879 14.20%
Maturing after 12/31/05 21 14,758 17.64%
============= ============== ===============
Total 70 $ 83,650 100.00%
Average Loan $ 1,195 1.43%
Largest Loan 4,943 5.91%
Smallest Loan 27 0.03%
Average Loan-to-Value 60.61%
PORTFOLIO REVIEW - For the six months ended June 30, 2003 and 2002.
Loan Portfolio.
The partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of June 30, 2003 and
2002 the partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $79,757,000 (72.55%) and $68,962,000
(80.15%) of the outstanding loan portfolio. The remainder of the portfolio
represented loans secured by real estate located primarily in Northern
California. No partnership loan equals or exceeds 10% of the partnership's
assets.
As of June 30, 2003, approximately 32.74% ($35,988,000), was invested in
loans secured by single family homes (1-4 units), approximately 20.85%
($22,919,000), was invested in loans secured by multifamily dwellings
(apartments over 4 units), approximately 41.28% ($45,375,000), was invested in
loans secured by commercial properties, and approximately 5.13% ($5,645,000) was
invested in loans secured by land. As of June 30, 2002, approximately, 46.79%
($40,255,000), was invested in loans secured by single family homes (1-4 units),
approximately 9.82% ($8,446,000) was invested in loans secured by multifamily
dwellings (apartments over 4 units), approximately 36.11% ($31,072,000) was
invested in loans secured by commercial properties, and approximately 7.28%
($6,265,000) was invested in loans secured by land.
As of June 30, 2003, the partnership held 69 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the partnership as of June 30, 2003.
53
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of June 30, 2003 (in thousands)
# of Loans Amount Percent
------------ ------------ ------------
1st Mortgages 34 $65,248 59.36%
2nd Mortgages 30 42,050 38.25%
3rd Mortgages 5 2,629 2.39%
============ ============ ============
Total 69 $109,927 100.00%
Maturing 12/31/03 and prior 16 $19,742 17.96%
Maturing prior to 12/31/04 13 29,029 26.41%
Maturing prior to 12/31/05 12 31,990 29.10%
Maturing after 12/31/05 28 29,166 26.53%
============ ============ ============
Total 69 $109,927 100.00%
Average Loan $1,593 1.45%
Largest Loan 10,440 9.50% (1)
Smallest Loan 46 0.04%
Average Loan-to-Value 60.08%
(1) The largest loan outstanding is 9.50% of the outstanding loan portfolio
and 8.85% of net assets
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 these practices. Rather, the general partners, in connection with
the periodic closing of the accounting records of the Partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the Partnership. As of
December 31, 2002 and June 30, 2003, the general partners have determined that
the allowance for loan losses of $3,521,000 (3.68% of net assets) and $3,106,000
(2.63% 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, 2002 and June 30, 2003, 20 and 13 loans were delinquent over 90 days
amounting to $28,650,000 and $14,057,000. Additionally, at December 31, 2002 and
June 30, 2003, $2,957,000 and $4,329,000 of these delinquent loans were subject
to workout agreements, which require the borrower to make regular monthly loan
payments and/or payments plus additional catch up amounts.
CONTROLS AND PROCEDURES
As of June 30, 2003, the general partner of the partnership carried out an
evaluation, under the supervision and with the participation of the general
partner's management, including the general partner's President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the President and Chief Financial Officer of
the general partner concluded that the partnership's disclosure controls and
procedures are effective. There were no significant changes in the partnership's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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
54
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 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 (See "INVESTMENT RISKS
- - Purchase of Units is a Long Term Investment" at page 16).
COMPETITION
The partnership's major competitors in providing mortgage loans are banks,
savings and loan associations, 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.
In general, mortgage interest rates have fallen during the last 18 to 24
months. This has been partially due to actions by the Federal Reserve Bank to
reduce the discount rate on borrowings charged to member banks, a slowing
economy and low threat of inflation. Although the general trend for interest
rates has been down, many lenders have tightened their credit and reduced their
lending exposure in various markets and property types. This credit tightening
from competing lenders would generally provide the partnership with additional
lending opportunities at above-market rates. However, as a result of the slowing
economy, there are now fewer transactions in the marketplace, which could
potentially reduce the number of lending opportunities to the partnership.
Continued rate reductions by the Federal Reserve Bank, a continued slowing
economy, and a continued low threat of inflation could have the effect of
reducing mortgage yields in the future. Current loans with relatively high
yields could be replaced with loans with lower yields, which in turn could
reduce the net yield paid to the limited partners. In addition, if there is less
demand by borrowers for loans and, thus, fewer loans for the partnership to
invest in, it will invest its excess cash, including proceeds from the offering
of the units, in shorter-term alternative investments yielding considerably less
than the current investment portfolio.
BUSINESS
We are engaged in business as a mortgage lender for the primary purpose of
making loans secured primarily by first and second deeds of trust on California
real estate. As of December 31, 2002, ninety two percent (92%) of the
partnership's loans were secured by first and second deeds of trust. We are a
California limited partnership that commenced operations in April, 1993. The
Fifth Amended and Restated Limited Partnership Agreement and the California
Revised Limited Partnership Act, (Corporations Code Sections 15611 to 15723)
govern our existence and the rights and obligations of the general and limited
partners. We are located at 900 Veterans Blvd., Suite 500, Redwood City,
California 94063 and our telephone number is (650) 365-5341.
Loans are arranged and serviced by Redwood Mortgage Corp., a general
partner of the partnership. As of December 31, 2002, approximately 55% of the
partnership's loans are secured by first deeds of trust and 37% are secured by
second deeds of trust and 8% by third deeds of trust. The aggregate principal
balance of these loans total $83,650,000.
The following table shows the growth in total partnership capital, loans
and net income as of December 31, 2002, and for the years ended December 31,
2001, 2000, and 1999:
Capital Loans Net Income
---------------- ----------------- -----------------
2002 $95,777,000 $83,650,000 $7,486,000
2001 73,754,000 82,790,000 6,093,000
2000 53,227,000 68,571,000 4,287,000
1999 37,062,000 35,693,000 2,942,000
55
As of December 31, 2002, the partnership had made two hundred sixty eight
(268) loans, including one hundred twenty five (125) first deeds of trust, one
hundred twenty four (124) second deeds of trust and nineteen (19) third deeds of
trust. The following table sets forth the types and maturities of these loans.
Many of these loans have been repaid in full by the borrowers.
TYPES AND MATURITIES OF LOANS (As of December 31, 2002) (in thousands)
Number of
Mortgage
Investments Amount Percent
------------ ------------ ----------
First Mortgage 125 $129,854 55.77%
Second Mortgage 124 $90,761 38.98%
Third Mortgage 19 $12,229 5.25%
------- ------------ ----------
268 $232,844 100.0%
======= ============ ==========
Maturing before 1/1/2003 183 $148,446 63.75%
Maturing after 1/1/2003 and before 1/1/2005 38 $50,864 21.85%
Maturing after 1/1/2005 47 $33,534 14.40%
------- ------------ ----------
268 $232,844 100.0%
======= ============ ==========
Single Family Residences 149 $117,896 50.63%
Commercial Properties 85 $86,804 37.28%
Multi-Unit Properties 19 $14,269 6.13%
Land 15 $13,875 5.96%
------- ------------ ----------
268 $232,844 100.0%
======= ============ ==========
DELINQUENCIES
As of December 31, 2002, we had 20 loans ($28,650,000) which were
delinquent over 90 days. As of June 30, 2003 delinquencies had declined to 13
loans ($14,057,000) which were delinquent over 90 days. Of the 20 loans that
were 90 days delinquent on December 31, 2002, six loans had notices of default
filed. Of the 13 loans that wete 90 days delinquent on June 30, 2003, three
loans had notices of default filed. Additionally, at June 30, 2003, two loans
had notices of default filed which were not 90 days delinquent for a total of
five notices of default at June 30, 2003.
ALLOWANCE FOR LOSSES
Loans and the related accrued interest, fees and advances are analyzed on a
continuous 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
to provide for unrecoverable accounts receivable. At December 31, 2002,
$3,021,000 was provided as an allowance for possible loan losses.
1. Table of open loans for the partnership as of December 31, 2002. As of
December 31, 2002, the partnership had seventy (70) open loans with a principal
outstanding balance totaling $83,650,455. Open loans are those loans in which
the principal amount of the loan is outstanding. That is, the loan has not been
paid back to the partnership.
The following table sets forth with respect to each open loan, the
following information:
o the date the loan was funded;
o the amount of the existing first or second mortgage on the property, if
any;
o the amount of the loan, the term of the loan;
o the appraised value of the property at the time the loan was made;
o the loan to value ratio at the time the loan was made; and
o the current status of the loan
Please be aware that the key to the footnotes indicated in the following
table appear at the bottom of the page.
56
a. Loans Secured By Single Family Residences (1-4 Units)
S
Existing Existing % t
1st 2nd Amount of Loan Appraised Loan to a
Mortgage Mortgage Partnership Term Value of Value t
Date at at Loans at In Property at Ratio at u
County Funded Funding Funding Funding Months Funding Funding s
- -----------------------------------------------------------------------------------------------------------------------------------
Single Family Residences (county)
San Francisco 1 6/24/97 $0.00 $0.00 $579,300.00 36 $800,000.00 72.41% B
San Francisco 2 8/7/98 $579,300.00 $0.00 $950,700.00 18 $2,000,000.00 76.50% B
San Francisco 1 11/3/98 $0.00 $0.00 $910,000.00 18 $1,300,000.00 70.00% B
San Francisco 2 11/3/98 $910,000.00 $0.00 $953,000.00 18 $2,800,000.00 66.54% B
Marin 1 2/4/99 $0.00 $0.00 $1,210,000.00 24 $1,860,000.00 65.05% C
Santa Clara 2 8/17/99 $668,433.00 $0.00 $850,000.00 120 $2,800,000.00 54.23% A
San Francisco 2 1/25/00 $492,978.13 $0.00 $400,000.00 60 $1,430,000.00 62.45% C
Stanislaus 1 8/13/02 $0.00 $0.00 $746,818.18 24 $1,900,773.00 39.29% A
Santa Clara 3 9/19/02 $852,428.00 $250,000.00 $1,250,000.00 24 $3,362,000.00 69.97% A
San Mateo 1 9/05/02 $0.00 $0.00 $1,781,000.00 36 $2,550,000.00 69.84% A
San Mateo 2 9/13/02 $318,908.00 $0.00 $206,661.92 60 $736,964.00 71.32% A
San Mateo 2 10/09/02 $2,450,000.00 $0.00 $368,000.00 8 $3,890,000.00 72.44% A
Napa 2 12/30/02 $500,000.00 $0.00 $1,320,000.00 42 $2,600,000.00 70.00% A
Santa Clara 2 12/11/02 $748,762.00 $0.00 $650,000.00 18 $2,200,000.00 63.58% A
Marin 1 8/29/00 $0.00 $0.00 $1,325,000.00 6 $1,916,000.00 69.15% C
Napa 1 4/5/01 $0.00 $0.00 $1,675,000.00 18 $3,150,000.00 53.17% A
Santa Clara 3 4/10/01 $5,910,000.00 $1,830,500.00 $4,116,500.00 24 $18,130,000.00 65.40% A
Marin 1 4/18/01 $0.00 $0.00 $605,500.00 12 $865,000.00 70.00% C
Santa Clara 2 5/30/01 $581,870.00 $0.00 $2,100,000.00 18 $4,500,000.00 59.60% B
Napa 1 7/5/01 $0.00 $0.00 $3,515,500.00 18 $7,550,000.00 46.56% A
Santa Clara 2 7/26/01 $664,591.00 $0.00 $800,000.00 24 $2,450,000.00 59.78% A
San Mateo 1 9/29/01 $0.00 $0.00 $3,426,500.00 18 $5,000,000.00 68.53% A
San Mateo 2 10/31/01 $2,484,370.00 $0.00 $1,500,000.00 36 $6,800,000.00 58.59% A
Stanislaus 2 11/8/01 $166,540.00 $0.00 $70,000.00 60 $397,000.00 59.58% A
San Francisco 2 11/21/01 $978,927.00 $0.00 $300,000.00 36 $1,900,000.00 67.31% A
San Mateo 3 12/31/01 $682,398.00 $449,583.00 $422,750.00 36 $2,282,850.00 68.10% A
Lake 2 1/22/02 $64,939.00 $0.00 $708,000.00 24 $1,110,000.00 69.63% A
San Mateo 2 5/01/02 $139,911.00 $0.00 $318,228.50 18 $661,000.00 69.31% B
Napa 1 3/22/02 $0.00 $0.00 $1,650,000.00 36 $5,500,000.00 30.00% A
Santa Clara 2 7/09/02 $1,647,000.00 $0.00 $262,500.00 24 $2,550,000.00 74.88% A
San Francisco 2 7/15/02 $3,500,000.00 $0.00 $2,000,000.00 60 $8,500,000.00 64.71% A
Santa Clara 2 7/15/02 $637,762.00 $0.00 $431,250.00 18 $1,540,000.00 69.42% A
Santa Clara 3 8/08/02 $632,118.00 $836,009.00 $805,000.00 60 $3,600,000.00 63.14% A
Alameda 1 8/16/02 $0.00 $0.00 $1,300,000.00 24 $8,130,000.00 15.99% A
Alameda 2 8/13/02 $494,135.00 $0.00 $346,000.00 36 $1,300,000.00 64.63% A
San Mateo 2 8/22/02 $709,865.00 $0.00 $269,000.00 36 $1,400,000.00 69.92% A
1 Indicates a first deed of trust on property
2 Indicates a second deed of trust on property
3 Indicates a third deed of trust on the property
4 The term loan to value ratio means the total amount of debt
secured by the property expressed as a percentage of the total
value of the property. Generally, the loan to value ratio will
not exceed 80% of the appraised value for residential
properties, 70% of the appraised value for commercial
properties and 50% of appraised value for land.
a) Loan current or less than 90 days delinquent
b) Loan 90 days or more delinquent
c) Loan in foreclosure
d) Loan in bankruptcy
57
b. Loans Secured By Multifamily Residences (5+ Units)
S
Existing Existing % t
1st 2nd Amount of Loan Appraised Loan to a
Mortgage Mortgage Partnership Term Value of Value t
Date at At Loans at in Property at Ratio at u
County Funded Funding Funding Funding Months Funding Funding s
- -----------------------------------------------------------------------------------------------------------------------------------
Multiple Units (county)
San Francisco 1 7/7/00 $0.00 $0.00 $4,000,000.00 36 $5,956,522.00 67.15% B
San Francisco 2 10/20/00 $4,000,000.00 $0.00 $289,855.07 18 $5,956,522.00 72.02% C
Merced 1 5/8/01 $0.00 $0.00 $182,000.00 60 $280,000.00 65.00% A
Alameda 2 2/13/02 $178,945.00 $0.00 $100,000.00 60 $500,000.00 55.79% A
San Mateo 2 5/03/03 $15,440,000.00 $0.00 $1,700,000.00 7 $22,500,000.00 76.18% A
Contra Costa 2 3/31/99 $43,548.00 $0.00 $310,246.79 60 $440,877.00 80.25% A
1 Indicates a first deed of trust on property
2 Indicates a second deed of trust on property
3 Indicates a third deed of trust on the property
4 The term loan to value ratio means the total amount of debt
secured by the property expressed as a percentage of the total
value of the property. Generally, the loan to value ratio will not
exceed 80% of the appraised value for residential properties, 70%
of the appraised value for commercial properties and 50% of
appraised value for land.
a) Loan current or less than 90 days delinquent
b) Loan 90 days or more delinquent
c) Loan in foreclosure
d) Loan in bankruptcy
58
c. Loans Secured By Commercial Property
S
Existing Existing % t
1st 2nd Amount of Loan Appraised Loan to a
Mortgage Mortgage Partnership Term Value of Value t
Date At At Loans at in Property at Ratio at u
County Funded Funding Funding Funding Months Funding Funding s
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial Properties (county)
Santa Clara 2 11/15/96 $468,000.00 $0.00 $18,000.00 15 $585,000.00 83.08% A
San Francisco 1 3/28/97 $0.00 $0.00 $700,000.00 108 $2,100,000.00 33.33% A
San Francisco 1 9/10/97 $0.00 $0.00 $150,000.00 60 $1,440,000.00 10.42% A
San Francisco 1 9/19/97 $0.00 $0.00 $650,000.00 120 $1,190,000.00 54.62% A
Los Angeles 1 5/10/00 $0.00 $0.00 $4,970,000.00 18 $8,800,000.00 56.48% A
San Mateo 1 5/23/00 $0.00 $0.00 $775,000.00 72 $1,200,000.00 64.58% A
Alameda 2 11/7/00 $310,381.00 $0.00 $205,000.00 24 $915,000.00 56.33% C
San Francisco 2 12/20/00 $845,350.00 $0.00 $692,000.00 36 $2,100,000.00 73.21% A
San Francisco 1 3/23/01 $0.00 $0.00 $4,750,000.00 12 $9,130,000.00 52.03% B
San Francisco 2 3/23/01 $4,750,000.00 $0.00 $2,250,000.00 12 $9,130,000.00 76.67% B
San Mateo 1 7/27/01 $0.00 $0.00 $350,000.00 60 $495,000.00 70.71% A
San Francisco 3 12/12/01 $4,750,000.00 $2,250,000.00 $2,404,500.00 12 $12,000,000.00 78.37% B
Santa Clara 2 7/15/02 $2,876,088.00 $0.00 $798,913.35 36 $5,728,209.00 64.16% A
Alameda 1 2/22/02 $0.00 $0.00 $1,600,000.00 60 $3,050,000.00 52.46% A
Santa Clara 1 3/14/02 $0.00 $0.00 $769,500.00 60 $750,000.00 102.60% A
Alameda 1 3/14/02 $0.00 $0.00 $320,320.01 60 $248,111.00 129.10% A
Santa Clara 2 3/14/02 $10,000,000.00 $0.00 $4,550,500.00 36 $28,528,000.00 51.00% A
Santa Clara 1 7/19/02 $0.00 $0.00 $3,600,000.00 24 $4,810,000.00 74.84% A
San Mateo 1 9/13/02 $0.00 $0.00 $441,000.00 60 $840,000.00 52.50% A
El Dorado 3 11/26/02 $378,450.00 $340,000.00 $900,000.00 60 $2,450,000.00 66.06% A
Sonoma 2 11/20/02 $1,802,479.00 $0.00 $250,000.00 60 $2,800,000.00 73.30% A
Riverside 1 12/20/02 $0.00 $0.00 $1,500,000.00 60 $2,500,000.00 60.00% A
1 Indicates a first deed of trust on property
2 Indicates a second deed of trust on property
3 Indicates a third deed of trust on the property
4 The term loan to value ratio means the total amount of debt
secured by the property expressed as a percentage of the total
value of the property. Generally, the loan to value ratio will
not exceed 80% of the appraised value for residential
properties, 70% of the appraised value for commercial
properties and 50% of appraised value for land.
a) Loan current or less than 90 days delinquent
b) Loan 90 days or more delinquent
c) Loan in foreclosure
d) Loan in bankruptcy
59
d. Loans Secured By Land
S
Existing Existing % t
1st 2nd Amount of Loan Appraised Loan to a
Mortgage Mortgage Partnership Term Value of Value t
Date At at Loans at in Property at Ratio at u
County Funded Funding Funding Funding Months Funding Funding s
- -----------------------------------------------------------------------------------------------------------------------------------
Land (county)
Stanislaus 2 6/23/99 $363,035.00 $0.00 $1,800,000.00 24 $3,008,571.00 71.90% B
Stanislaus 2 6/23/99 $358,116.00 $0.00 $2,600,000.00 24 $5,997,000.00 49.32% B
Stanislaus 3 10/14/99 $368,393.00 $2,600,000.00 $221,951.22 24 $3,582,927.00 89.04% B
Stanislaus 2 2/15/00 $2,600,000.00 $0.00 $475,609.76 24 $6,037,073.00 50.95% B
Santa Clara 1 1/17/02 $0.00 $0.00 $987,000.00 24 $1,500,000.00 65.80% A
San Diego 1 2/13/02 $0.00 $0.00 $270,000.00 36 $650,000.00 41.54% A
San Mateo 1 10/23/02 $0.00 $0.00 $2,500,000.00 19 $4,950,000.00 50.51% A
1 Indicates a first deed of trust on property
2 Indicates a second deed of trust on property
3 Indicates a third deed of trust on the property
4 The term loan to value ratio means the total amount of debt
secured by the property expressed as a percentage of the total
value of the property. Generally, the loan to value ratio will
not exceed 80% of the appraised value for residential
properties, 70% of the appraised value for commercial
properties and 50% of appraised value for land.
a) Loan current or less than 90 days delinquent
b) Loan 90 days or more delinquent
c) Loan in foreclosure
d) Loan in bankruptcy
60
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
CAUTION: WE DO NOT INTEND TO PROVIDE TAX BENEFITS OF THE TYPE COMMONLY
ASSOCIATED WITH LIMITED PARTNERSHIP TAX SHELTERS. NONETHELESS, THE INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE COMPLEX.
The following is a summary of federal income tax considerations material to
your investment in the partnership. This summary is based upon the Code,
effective and proposed administrative regulations (the "Regulations"), judicial
decisions, published and private rulings and procedural announcements issued by
the Treasury Department as in effect as of the date of this prospectus, any of
which may be subject to change, possibly with adverse retroactive effect. Many
provisions of the Code that significantly affect the tax consequences of
investments in real estate limited partnerships have not yet been the subject of
court decisions or authoritative interpretation by the IRS. It is impossible to
predict what tax legislation, if any, will be enacted, and there can be no
assurance that proposals that would adversely affect an investment in the units
will not be enacted into law.
In considering the tax aspects of the offering, you should note that the
partnership is not intended to be a so-called "tax shelter" and that,
accordingly, many of the tax aspects commonly associated with a "tax shelter"
are inapplicable to the partnership or are of minor importance. The partnership
does not expect to generate tax losses that can be used to offset your income
from sources other than the partnership and, if the partnership's investment
objectives are met, we will generate taxable income, as opposed to taxable loss,
for investors.
The availability and amount of tax benefits that will be claimed by the
partnership will depend not only upon the general legal principles described
below, but also upon certain decisions and factual determinations which will be
made in the future by the general partners as to which no legal opinion is
expressed and which are subject to potential controversy on factual or other
grounds. Such determinations include the proper characterization and purpose of
various fees, commissions and other expenses of the partnership, the
reasonableness and timing of fees, whether loans made by the partnership are for
investment purposes, the terms of the loans, whether the loans will have equity
participation or original issue discount features, whether the partnership is
engaged in a trade or business and other matters of a factual nature which will
only be determined based upon the future operations of the partnership.
No rulings have been or will be requested from the IRS concerning any of
the tax matters described herein. Accordingly, there can be no assurance that
the IRS or a court will not disagree with the following discussion or with any
of the positions taken by the partnership for federal income tax purposes.
This summary provides a discussion of tax consequences deemed material by
counsel but is not a complete or exhaustive analysis of all possible applicable
provisions of the Code, the regulations, and judicial and administrative
interpretations thereof. The income tax considerations discussed below are
necessarily general and will vary with the individual circumstances. In
particular, this summary assumes that the limited partners will be U.S.
taxpayers who are individuals or tax-exempt pension or profit-sharing trusts or
IRAs and who intend to hold Units for investment. It does not generally discuss
the federal income tax consequences of an investment in the partnership peculiar
to corporate taxpayers, taxpayers receiving interests in the partnership
pursuant to the exercise of an option or otherwise as compensation for services,
taxpayers who are subject to the alternative minimum tax, foreign taxpayers,
estates, taxable trusts, dealers, financial institutions, taxpayers subject to
specialized rules such as insurance or bank holding companies or to a transferee
of a limited partner. If you are such a prospective investor, you should
carefully consult your own advisors on this issue. Other tax issues of relevance
to other taxpayers should be reviewed carefully by such investors to determine
special tax consequence of an investment prior to their subscription.
Summary of Material Tax Aspects. The following summarizes the primary
material tax aspects for an investment in the partnership. The very nature of an
investment in the partnership involves complex issues of taxation, and
accordingly, investors are urged to review the entire discussion of tax matters
in "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" above and "TAX RISKS" at page 16
in the prospectus. With respect to these issues, the partnership has received an
opinion of counsel as to the material tax aspect, namely that the partnership
will be taxed as a partnership for federal income tax purposes ("MATERIAL
FEDERAL INCOME TAX CONSEQUENCES - Opinion of Counsel" at page 62).
The principal tax aspect likely to be material to an investor is the "flow
through" of net income and net loss for tax purposes to limited partners. Unlike
a corporation, the partnership will not be liable for income taxes on net income
generated by the partnership. Rather, such income and loss will be allocated
among the limited partners and reported individually by the limited partners on
their income tax returns. If for any reason the partnership was not treated as a
partnership for tax purposes, it could result in the partnership being taxed on
its net income as well as limited partners being taxed on any distributions made
to them.
61
Other aspects of an investment in the partnership may be considered
material to limited partners based upon unique circumstances applicable to
individual partners. Accordingly, investors are urged to review the balance of
the discussion of tax consequences in this section.
Opinion of Counsel. The partnership has obtained an opinion from the Cox
Castle & Nicholson LLP ("Counsel") which states that the sections of the
prospectus which discuss the material tax risks and the section of the
prospectus entitled "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" at page 61
address fully and fairly all material tax issues of an investment in the Units
and accurately describe each of the material federal income tax issues and
reflect Counsel's opinion regarding such matters referred to therein. Tax
benefits should not be considered a primary investment feature of the
partnership. The partnership is intended to serve as an investment vehicle for
investors seeking current income, and possibly, appreciation through earnings
compounding. Counsel has opined, subject to certain conditions and based upon
certain representations, that:
1. Partnership Tax Status. The partnership will be treated as a partnership
as defined in Sections 7701(a)(2) and 761(a) of the Code and not as an
association taxable as a corporation, and the limited partners will be subject
to tax as partners pursuant to Subchapter K of the Code.
2. Publicly Traded Partnerships. The partnership will not constitute a
publicly traded partnership for purposes of Sections 7704 and 469(k) of the
Code.
Counsel's opinion is based upon the facts described in this prospectus and
upon facts and assumptions as they have been represented by the general partners
to Counsel or determined by them as of the date of the opinion. Counsel has not
independently audited or verified the facts represented to it by the general
partners. Any alteration of the facts may adversely affect the opinion rendered.
Furthermore, the opinion of counsel is based upon existing law and applicable
regulations and proposed regulations, current published administrative positions
of the Service contained in revenue rulings and revenue procedures, and judicial
decisions, which are subject to change either prospectively or retroactively.
Counsel does not prepare or review the partnership's income tax information
return, which is prepared by the general partners and independent accountants
for the partnership. The general partners will make a number of decisions on tax
matters in preparing the partnership tax return and such matters and such
partnership tax return will be handled by the general partners, often with the
advice of independent accountants retained by the partnership, and usually is
not reviewed with Counsel.
You should note that the opinion described herein represents only Counsel's
best legal judgment and has no binding effect or official status of any kind.
Thus, in the absence of a ruling from the Service, there can be no assurance
that the Service will not challenge the conclusion or propriety of any of
Counsel's opinions and that such challenge would not be upheld by the courts.
Partnership Status. The partnership has not requested and does not intend
to request a ruling from the Service that the partnership will be treated for
federal income tax purposes as a partnership and not as an association taxable
as a corporation. In counsel's opinion, the partnership will be treated for
federal income tax purposes as a partnership and not as an association taxable
as a corporation.
The ability to obtain income tax attributes anticipated from an investment
in units depends upon the classification of the partnership as a partnership for
federal income tax purposes and not as an association taxable as a corporation.
Regulations regarding entity classification have been issued under Section 7701
of the Internal Revenue Code which, in effect, operate to allow a business
entity that is not otherwise required to be classified as a corporation, an
"eligible entity," to elect its classification for federal income tax purposes.
Under Section 301.7701-3(b) of the Regulations, an "eligible entity" that has at
least two members will be treated as a partnership in the absence of an
election. Accordingly, while we do not intend to request a ruling from the IRS
as to the classification of the partnership for income tax purposes, we
anticipate that under the Regulations the partnership will be such an eligible
entity. Unless the partnership is deemed to be taxable as a corporation pursuant
to the application of the publicly traded partnership rules discussed below, the
partnership will qualify as a "eligible entity" and need not make an election to
be treated as a partnership for income tax purposes.
In the event that the partnership, for any reason, were to be treated for
federal income tax purposes as an association taxable as a corporation, the
partners of the partnership would be treated as stockholders with the following
results, among others: (1) the partnership would become a taxable entity subject
to the federal income tax imposed on corporations; (2) items of income, gain,
loss, deduction and credit would be accounted for by the partnership on its
federal income tax return and would not flow through to the partners; and (3)
distributions of cash would generally be treated as dividends taxable to the
partners at ordinary income rates, to the extent of current or accumulated
earnings and profits, and would not be deductible by the partnership in
computing its income tax.
62
Based on the entity classification regulations, and IRS rulings and
judicial decisions under Section 7701(a) of the Internal Revenue Code, all of
which are subject to change, and based upon certain representations of the
general partners and other assumptions, counsel has concluded that the
partnership will be treated as a partnership for federal income tax purposes and
not as an association taxable as a corporation. In rendering such opinion,
Counsel has also relied upon the fact that the partnership is duly organized as
a limited partnership under the laws of the State of California and upon
representations by the general partners. The remaining summary of the federal
tax consequences in the section assumes that the partnership will be classified
as a partnership for federal income tax purposes.
Publicly Traded Partnerships. Classification of the partnership as a
"publicly traded partnership" could result in (1) the partnership being taxable
as a corporation (See "Partnership Status" at page 62), and (2) the treatment of
net income of the partnership as portfolio income rather than passive income
(See "Character of Income or Loss" at page 65). A publicly traded partnership is
generally defined under Section 7704 of the Internal Revenue Code as any
partnership whose interests are traded on an established securities market or
are readily tradable on a secondary market or the substantial equivalent
thereof. In addition, regulations have been issued (the Section 7704
regulations) which provide guidance with respect to such classification
standards, including certain safe harbor standards which, if satisfied, preclude
classification as a publicly traded partnership.
The Section 7704 regulations contain definitions of what constitutes an
established securities market and a secondary market or the substantial
equivalent thereof. They also set forth what transfers may be disregarded in
determining whether such definitions are satisfied with respect to the
activities of a partnership. The general partners do not believe that units in
the partnership are traded on an established securities market or a secondary
market or a substantial equivalent thereof as defined in Section 7704
regulations. The general partners have also represented that they will use their
best efforts to ensure that the units will not be deemed to be traded on an
established securities market or a secondary market in the future.
As noted above, the Section 7704 regulations provide certain safe harbors,
the "secondary market safe harbors" which, after taking into consideration all
transfers other than those deemed disregarded, may be satisfied in order to
avoid classification of such transfers as being made on a secondary market or
the substantial equivalent thereof. One of the secondary market safe harbors
provides that interests in a partnership will not be considered tradable on a
secondary market or the substantial equivalent thereof if the sum of the
partnership interests transferred during any taxable year, other than certain
disregarded transfers, does not exceed 2% of the total interest in the
partnership's capital or profits. Disregarded transfers include, among other
things, transfers by gift, transfers at death, transfers between family members,
distributions from a qualified plan and block transfers, which are defined as
transfers by a partner during any 30 calendar day period units representing more
than 2% of the total interest in a partnership's capital or profits.
The Section 7704 regulations also provide a second safe harbor from
classification as a publicly traded partnership, dealing with redemption and
repurchase agreements. The Section 7704 regulations also make it clear that the
failure to satisfy a safe harbor provision under the regulations will not cause
a partnership to be treated as a publicly traded partnership if, after taking
into account all facts and circumstances, partners are not readily able to buy,
sell or exchange their partnership interests in a manner that is comparable,
economically, to trading on an established securities market.
The general partners have represented that the partnership will be operated
strictly in accordance with the partnership agreement, and they have also
represented that they will void any transfers or assignments of units if they
believe that such transfers or assignments will cause the partnership to be
treated as a publicly traded partnership under the Section 7704 regulations or
any other guidelines adopted by the IRS in the future. Based upon the
representations of the general partners, and assuming the partnership will be
operated strictly in accordance with the terms of the partnership agreement,
Counsel has concluded that the partnership will not be classified as a publicly
traded partnership under Section 7704 of the Internal Revenue Code. Due to the
complex nature of the safe harbor provisions contained in Section 7704
regulations, and because any determination in this regard will necessarily be
based upon future facts not yet in existence, no assurance can be given that the
IRS will not challenge this conclusion or that the partnership will not, at some
time in the future, be deemed a publicly traded partnership.
Even if the partnership were deemed a publicly traded partnership, Section
7704(c) of the Internal Revenue Code provides an exception to taxation of such
an entity as a corporation if 90% or more of the gross income of such an entity
for each taxable year consists of "qualifying income." Qualifying income
includes interest, real property rents and gain from the sale of other
disposition of real property, but qualifying income does not include real
property rents that are contingent on the profits of the lessees or income from
the rental or lease of personal property. The general partners intend to operate
the partnership in such a manner as to qualify for the 90% qualifying income
exception (see "INVESTMENT OBJECTIVES AND CRITERIA" at page 38).
The general partners have represented that they will use their best efforts
to assure that the partnership is not treated as a "publicly traded
partnership." The general partners have also represented that they will not take
any affirmative action on behalf of the partnership to intentionally establish a
market for the partnership interests. Although the general partners will use
their best efforts to make sure that a secondary market or substantial
equivalent thereof does not develop for interests in the partnership, there can
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be no assurance that a secondary market for the units will not develop, or that
the IRS may take the position that the partnership should be classified as a
"publicly traded partnership" for this purpose. In addition, regulations may be
adopted that would cause the partnership to be treated as a publicly traded
partnership.
Results if Partnership is Taxable as an Association. If the partnership
were classified as an association taxable as a corporation, the partnership
itself would be subject to a federal income tax on any taxable income at regular
corporate tax rates. The partners would not be entitled to take into account
their distributive share of the partnership's deductions or credits, and would
not be subject to tax on their distributive share of the partnership's income.
Distributions to the partners would be treated as dividends to the extent of
accumulated and current earnings and profits; as a return of capital to the
extent of basis; and thereafter, as taxable income, perhaps as ordinary income,
to the extent distributions were in excess of the tax basis. In addition, if the
loss of partnership status occurred at a time when the partnership's
indebtedness exceeded the tax basis of its assets and such corporate status was
prospective only, it could be argued that a constructive incorporation occurred,
and that the partners realized gain under Section 357(c) of the Code, measured
by the difference between such indebtedness and the partnership's tax basis of
its assets. If for any reason the partnership becomes taxable as a corporation
prospectively, a constructive incorporation may be deemed to have occurred and
partners may be required to recognize income as described in this section.
Anti-Abuse Rules. The regulations set forth broad "anti-abuse" rules
applicable to partnerships, which rules authorize the IRS to recast transactions
involving the use of partnerships either to reflect the underlying economic
arrangement or to prevent the use of a partnership to circumvent the intended
purpose of any provision of the Internal Revenue Code. The general partners are
not aware of any fact or circumstance which could cause these rules to be
applied to the partnership; however, if any of the transactions entered into by
the partnership were to be recharacterized under these rules, or the partnership
itself were to be recast as a taxable entity under these rules, material adverse
tax consequences to all of the partners might occur.
Taxation of Partners - General. If the partnership is treated for federal
income tax purposes as a partnership and not as an association taxable as a
corporation, it will file an annual informational income tax return, but will
not be subject as an entity to the payments of federal income tax. On his
personal income tax return, each limited partner will be required to report his
share of partnership income or loss without regard to the amount, if any, of
cash or other distributions made to him. Thus, each limited partner will be
taxed on his share of income even though the amount of cash distributed to him
may be more or less than the resulting tax liability.
Subject to various limitations referred to herein, each limited partner may
deduct his share of the partnership losses if any, to the extent of his tax
basis in his partnership interest. Any losses in excess of basis may be carried
forward indefinitely to offset future taxable income of the partnership. In
computing income or losses, the partnership will include appropriate deductions
for non-capital costs and the depreciation portion of capital costs. If cash
distributions in any one year exceed the partnership's taxable income (whether
in liquidation or otherwise), the amount of such excess will be treated as a
return of capital reducing the tax basis of the limited partner in his interest.
Any cash distributions in excess of the recipient's basis are treated as a sale
or exchange of the limited partnership interest resulting in taxable income to
the recipient.
A limited partner's basis will be decreased (but not below zero) by actual
distributions to him from the partnership, by his distributive share of
partnership losses, by an actual or deemed decrease in his share of partnership
nonrecourse borrowings, and by his share of nondeductible expenses of the
partnership which are not properly chargeable to his capital account. In the
event that cash distributions to a limited partner exceed the adjusted basis of
his units, a limited partner must recognize gain equal to such excess.
Allocation of Profits and Losses. The net profits and net losses of the
partnership will be allocated as specified in Article 5 of the limited
partnership agreement (See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT" at
page 73).
For federal income tax purposes, each partner's distributive share of
specific items of income, gain, loss, deduction and credit is determined by
reference to the general ratio for sharing profits and losses as provided in the
partnership agreement. In general, the allocation provided in a partnership
agreement will control unless such allocation does not have "substantial
economic effect." If an allocation provision of a partnership agreement is found
to lack "substantial economic effect" partnership items will be allocated in
accordance with a partner's interest in the partnership based on all the facts
and circumstances.
Under the regulations, one of three alternative tests must be met in order
for an allocation to be valid under Section 704(b). Allocations are valid if:
(i) the allocation has substantial economic effect; or (ii) the partners can
show that, taking into account all facts and circumstances, the allocation is in
accordance with the partner's interests in the partnership; or (iii) the
allocation can be deemed to be in accordance with the partner's interests in the
partnership in accordance with special rules set forth in the regulations.
The allocations of the income and loss of the partnership should have
"substantial economic effect" based upon the fact that the allocations affect
the dollar amount of each partner's share of total partnership income or loss
independent of tax consequences; the capital accounts of the partners will
reflect the allocation; and the economic risk of loss will be borne by the
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limited partners, or that in the alternative, the allocations, if held to lack
substantial economic effect, should nonetheless be deemed to be in accordance
with the partner's interests in the partnership. This would result in the same
treatment as if the allocations were held to have substantial economic effect.
Sale of Partnership Units. You may be unable to sell your units as there
may be no public market for them. In the event that units are sold, however, the
selling party will realize gain or loss equal to the difference between the
gross sale price or proceeds received from sale and the investor's adjusted tax
basis in his units. Assuming the investor is not a "dealer" with respect to such
units and has held the units for more than 12 months, his gain or loss will be
long-term capital gain or loss, except for that portion of any gain attributable
to such investor's share of the partnership's "unrealized receivables" and
"inventory items" as defined in Section 751 of the Internal Revenue Code, which
portion would be taxable as ordinary income.
Ordinary income for individual taxpayers is currently taxed at a maximum
marginal rate of 35%. For individual taxpayers after May 5, 2003, however,
capital gains are taxed at a maximum marginal rate of 15% i.e., for gains
realized with respect to capital assets held for more than 12 months. Capital
losses may generally be used to offset capital gains or may, in the absence of
capital gains, be deductible against ordinary income on a dollar-for-dollar
basis up to a maximum annual deduction of $3,000 ($1,500 in the case of a
married individual filing a separate return.)
Any recapture cost recovery allowances taken previously by the partnership
with respect to personal property associated with partnership real properties
will be treated as "unrealized receivables" for this purpose. Investors should
note that in this regard that Section 6050K of the Internal Revenue Code
requires the partnership to report any sale of units to the IRS if any portion
of the gain realized upon such sale is attributable to the transferor's share of
the partnership's "Section 751 property."
The partnership's taxable year will close on the date of sale with respect
to a limited partner (but not the remaining partners) who sells his entire
interest in the partnership. In such a case the partnership items would be
prorated pursuant to Section 706. In the event of a sale of less than the entire
interest of a limited partner, the partnership year will not terminate with
respect to the selling partner, but his proportionate share of items of income,
gain, loss, deduction and credit will also be determined pursuant to Section
706.
In the case of either the sale of the properties or a sale of a partner's
interest in the partnership, a limited partner may realize taxable income
substantially in excess of the cash, if any, he receives as a result of such
sale. Further, a partner who sells an interest in the partnership may be
required to report a share of partnership income for the year of such sale even
though he received no cash distribution during the year or the amount of cash
distribution was less than his share of income required to be reported.
Character of Income or Loss. Section 469 of the Code distinguishes between
income from a "passive" activity and income described as portfolio income. A
passive activity includes (1) trade or business activities in which the taxpayer
does not materially participate, and (2) rental activities where payments are
primarily for the use of tangible property. In general, losses generated by a
passive activity will only be allowed to offset income from a passive activity.
Portfolio income generally includes interest, dividends, royalty or annuity
income and gain from sales of portfolio assets, for example, property held for
investment. The distinction between passive income and portfolio income thus has
a material effect on the partnership and the limited partners. If the
partnership is engaged in a passive activity, any income from the partnership is
deemed "passive income" which is available to be offset by any other passive
losses which the limited partner has from other sources. Portfolio income cannot
be offset by such passive losses. In certain situations, net income, but not net
loss from a passive activity is treated as nonpassive. One of these items
covered concerns net income from an equity-financed lending activity. An
equity-financed lending activity is defined as an activity that involves a trade
or business of lending money, if the average outstanding balance of liabilities
incurred in the activity for the taxable year does not exceed 80% of the average
outstanding balance of the interest-bearing assets held in the activity for the
year. The general partners do not expect that the average outstanding balance of
our liabilities that are allocable to the partnership's mortgage investment
activities will exceed 80% of the average outstanding balance of its mortgage
loans. If the partnership is deemed to be engaged in the trade or business of
lending money, its income allocable to that business will generally be
recharacterized as nonpassive income, even though its net losses allocable to
that activity or that portion of partners' loss on the sale of a unit that is
allocable to the partnership's mortgage lending business will be treated as
passive activity losses. If the partnership is not considered engaged in a trade
or business of lending money, then income and loss from its mortgage lending
activities will be considered portfolio income and loss, and partners will not
be permitted to offset passive losses from other activities against partners'
share of that portion of income.
Treatment of Loans Containing Participation Features. The partnership may
extend loans with an equity interest in the property securing the loans (See
"INVESTMENT OBJECTIVES AND CRITERIA - Equity Interests in Real Property" at page
40). With respect to loans containing participation features, an issue may arise
as to whether the relationship between the partnership and the mortgagor is that
of debtor and creditor or whether the partnership is engaged in a partnership or
joint venture with the mortgagor. If the partnership is a creditor of the
mortgagor, a limited partner's distributive share of income derived from the
mortgagor will be treated in full as interest income. If the partnership is a
partner or a joint venture with the mortgagor, the income from the participation
feature of the loans and/or the stated interest may be treated as a distribution
65
of profits of the partnership or joint venture. This would result in the receipt
of unrelated business taxable income for certain tax-exempt investors investing
in the partnership and would have material adverse effects for certain trusts.
Repayment or Sale of Loans. No gain or loss will be recognized by the
partnership upon the full repayment of principal of a loan. Any gain recognized
by the partnership on the sale or exchange of a loan will generally be treated
as a capital gain unless the partnership is deemed to be a "dealer" in loans for
federal income tax purposes (See "Property Held Primarily for Sale; Potential
Dealer Status" below) or the loan contains features that are subject to special
rules such as market discount. In such case, a portion or all of the entire
gain, if any, may constitute ordinary income.
Property Held Primarily for Sale; Potential Dealer Status. The partnership
has been organized to invest in loans. However, if the partnership were at any
time deemed for tax purposes to be holding one or more loans primarily for sale
to customers in the ordinary course of business, any gain or loss realized upon
the disposition of those loans would be taxable as ordinary gain or loss rather
than as capital gain or loss (See, "Character of Income or Loss", at page 65).
Furthermore, such income would also constitute unrelated business taxable income
to any investors that are tax-exempt entities (See "Investment by Tax-Exempt
Investors" at page 68). Under existing law, whether property is held primarily
for sale to customers in the ordinary course of business must be determined from
all the facts and circumstances surrounding the particular property and sale in
question. The partnership intends to hold the loans for investment purposes and
to make such occasional dispositions thereof as in the opinion of the general
partners are consistent with the partnership's investment objectives.
Accordingly, the partnership does not anticipate that it will be treated as a
"dealer" with respect to any of its properties. However, there is no assurance
that the Service will not take the contrary position.
Tax Consequences of Reinvestment in Loans. Limited partners may avail
themselves of a plan pursuant to which limited partners may forego current
distributions of cash available for distribution and have said amounts credited
to their capital accounts and used by the partnership in conducting partnership
activities. Limited partners who avail themselves of such an option may incur a
tax liability on their pro rata share of partnership income with no
corresponding cash with which to pay such tax liability. However, unit holders
that are tax-exempt investors should not incur any such tax liability, to the
extent said income is interest income and not UBTI (See "Property Held Primarily
for Sale; Potential Dealer Status" above and "Investment by Tax-Exempt
Investors" at page 68).
Partnership Organization, Syndication Fees and Acquisition Fees. Under
Section 709 of the Code, all organization, syndication fees and acquisition fees
must be capitalized. Organization fees and expenses paid are amortized over a
five year period. Amortization is not allowed with respect to syndication
expenses paid by the partnership. Syndication costs include commissions,
professional fees and printing costs in marketing sales of partnership
interests, brokerage fees and legal and accounting fees regarding disclosure
matters. A portion of the fees incurred will be allocated to organizational
costs. The partnership intends to amortize all organization expenses ratably
over a five year period. The Service may challenge the deductibility of these
organization fees on the basis that these are fees paid in connection with the
syndication of the limited partners interests rather than organization fees. If
the Service were successful in taking these or other positions on such fees, the
partnership's and therefore the limited partners' deductions during the offering
period or for a five year term thereafter might be less than projected although
not significantly so.
Original Issue Discount. The partnership may be subject to the original
issue discount rules with respect to interest to be received with respect to
loans. Original issue discount may arise with respect to loans if (a) the
interest rate varies according to fixed terms; (b) the borrower is permitted to
defer interest payments to years after such interest accrues; and (c) the amount
of the partnership's share of interest income with respect to additional
interest or deferred interest related to the income appreciation from the
mortgage property under a right of participation is determined in a year prior
to the year in which payment of such amount is due. The partnership anticipates
extending mortgage loans under some or all of the proceeding terms, and to the
extent it does, the original discount rules may be applicable. Counsel cannot
opine as to the applicability of these rules prospectively.
The amount of original issue discount under a mortgage loan containing any
of the foregoing terms is to be computed based upon the compound interest method
of calculation, resulting in the reporting of interest income in increasing
amounts each taxable year. Recognition by the partnership of original issue
discount with respect to a loan will increase the partnership's basis in that
loan, thereby reducing all the amount of income the partnership must recognize
in the year payment of the amount giving rise to the original issue discount is
actually received or upon disposition of the loan. The reporting of the
recognition by the partnership of original issue discount as income in any
particular tax year will have the effect of increasing the amount of income
which the limited partners must report from the partnership, without the
concurrent receipt of the cash distribution with which to pay tax, if any,
resulting from the reporting of such income. However, to the extent such
original issue discount constitutes "interest", tax exempt investors may exclude
such original issue discount in computing their unrelated business taxable
income liability.
Deduction of Investment Interest. The Code imposes substantial limitations
upon the deductibility of interest on funds borrowed by an investor to purchase
or to carry investment assets. Code Section 163(d) provides that an individual
may take a deduction for "investment interest" only to the extent of such
individual's net investment income for the taxable year. Investment interest
generally is any interest that is paid or accrued on indebtedness incurred or
continued to purchase or carry investment property. Investment interest includes
interest expenses allocable to portfolio income and investment and interest
expenses allocable to an activity in which the taxpayer does not materially
participate, if such activity is not treated as a passive activity under the
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passive loss rules. Investment interest does not include any interest that is
taken into account in determining a taxpayer's income or loss from a passive
activity or a rental activity in which a taxpayer actively participates.
Therefore, an investment expense attributable to an investment as a limited
partner in the partnership will be subject to the investment interest
limitations. This exclusion will not apply for interest expenses, if any,
allocable to portfolio income.
Net investment income consists of the excess of investment income over
investment expenses. Investment income generally includes gross income from
property held for investment, gain attributable to property held for investment
and amounts treated as portfolio income under the passive loss rules. Investment
income does not include income taken into account in computing gain or loss from
a passive activity. Passive losses allowable solely as a result of the passive
activity loss phase-in rules may, however, reduce investment income. Investment
expenses are deductible expenses (other than interest) directly connected with
the production of investment income. Generally, in calculating investment
expenses, however, only those expenses in excess of two percent (2%) of adjusted
gross income are included.
It is not anticipated the partnership will incur any material amount of
"investment interest" that will be significantly limited by these rules.
However, investment interest that cannot be deducted for any year because of
these limitations may be carried over and deducted in succeeding taxable years,
subject to certain limitations.
Section 754 Election. Because of the complexities of the tax accounting
required, the partnership does not presently intend to file under Section 754 of
the Code an election to adjust the basis of the properties in the case of a
transfer of a limited partnership interest, although the general partners have
the authority to make such an election. The effect of such an election would be
that, with respect to the transferee limited partner only, the basis of the
partnership's properties would either be increased or decreased by the
difference between the transferee's basis for his limited partnership interest
and his proportionate share of the partnership's adjusted basis for all
properties. A substitute limited partner would have to account separately in his
personal income tax return for the special basis (and the deductions in
connection therewith) in his partnership interest attributable to the election
made pursuant to Section 754. Any increase or decrease resulting from such an
adjustment would be allowable among the partnership's assets in accordance with
rules established under the Code. After such adjustment has been made, the
transferee limited partner's share of the adjusted basis of the partnership's
properties would equal the adjusted basis of his limited partnership interest.
If (as presently anticipated) the partnership does not make such an election,
upon a sale of the properties subsequent to a transfer of a limited partnership
interest, taxable gain or loss to the transferee will be measured by the
difference between his share of the gross proceeds of such sale and his share of
the partnership's tax basis in the properties (which, in the absence of a
Section 754 election, will be unchanged by the transfer of the limited
partnership interest to him), rather than by the difference between his share of
such proceeds and the portion of the purchase price for his interest that was
allocable to the properties. As a consequence, such transferee will be subject
to a tax upon a portion of the proceeds which represents as to him a return of
capital, if the purchase price for his interest exceeds his share of the
adjusted basis for all properties. However, in the event of a taxable sale or
other disposition of his limited partnership interest, the purchase price paid
by the transferee is important since, notwithstanding the partnership's failure
to make a Section 754 election, such purchase price will be taken into account
in determining such transferee's basis for such interest. The absence of a right
to have such election made by the partnership may inhibit transferability of a
limited partnership interest since a potential transferee may consider this
factor as reducing the value of the interest.
Termination of the Partnership. A partnership is terminated for tax
purposes only (i) if no part of the partnership business, financial operation or
venture continues to be carried on by any of its partners, or (ii) if, within
any 12-month period, there is a sale or exchange of fifty percent (50%) or more
of the total interest in partnership capital and profits. If, upon such
termination, the partnership business is continued by the partners, the
partnership is deemed to have contributed the partnership property to a
successor entity in consideration of the successor entity's partnership
interests which are deemed to be distributed to the partners in liquidation of
their interests in the original partnership. The original partnership's taxable
year closes with respect to all partners as the result of such a "constructive"
liquidating distribution.
Upon termination of a partnership for federal income tax purposes, a
partner generally will recognize a capital gain to the extent cash distributed,
and the reduction, if any, in his pro rata share of partnership debt exceeds his
adjusted tax basis for his units immediately before the distribution, and will
recognize capital loss to the extent his adjusted tax basis for his units
exceeds the sum of money and the partnership's basis in unrealized receivables
and substantially appreciated inventory distributed to him (if no other property
is distributed). However, if substantially appreciated inventory or unrealized
receivables are distributed non-pro rata in liquidation, such distribution would
be treated as a sale or exchange, with the result that the distributee partners
could be required to recognize both ordinary income and capital gain on the
distribution.
Tax Returns. The partnership will furnish annually to you (but not to
assignees of limited partners unless they become substituted limited partners)
sufficient information from the partnership's tax return for you to prepare your
own federal, state and local tax returns. The partnership's tax returns will be
prepared by accountants to be selected by the general partners. There are
substantial additional penalties for failure to timely file the federal
information tax return of the partnership and/or filing of such a return that
fails to show the information required under Section 6031 of the Code.
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Audit of Tax Returns. The general partners understand that the Service is
paying increased attention to the proper application of the tax laws to
partnerships. While the partnership is not being formed so as to allow investors
to avail themselves of losses or deductions generated by the partnership, the
Service still may choose to audit the partnership's information returns. An
audit of the partnership's information returns may precipitate an audit of the
income tax returns of limited partners. Any expense involved in an audit of a
limited partner's returns must be borne by such limited partner. Prospective
investors should also be aware that if the Service successfully asserts a
position to adjust any item of income, gain, deduction or loss reported on a
partnership information return, corresponding adjustments would be made to the
income tax returns of limited partners. Further, any such audit might result in
Service adjustments to items of non-partnership income or loss.
The tax treatment of items of partnership income, gain, loss, deductions or
credit is to be determined at the partnership level in a unified partnership
proceeding, rather than in separate proceedings with the partners. However, any
partner has the right to participate in any administrative proceeding at the
partnership level. Generally, the "tax matters partner," Michael R. Burwell,
would represent the partnership before the Service and may enter into a
settlement with the Service as to partnership tax issues which generally will be
binding on all of the partners, unless a partner timely files a statement with
the Service providing that tax matters partner shall not have the authority to
enter into a settlement agreement on his behalf. Similarly, only one judicial
proceeding contesting a Service determination may be filed on behalf of a
partnership and all partners. However, if the tax matters partner fails to file
such an action, then any partner, unless such partner owns less than one percent
(1%) interest in a partnership having more than 100 partners) or a group of
partners owning five percent (5%) or more of the profits interest in the
partnership may file such an action. The "tax matters partner" may consent to an
extension of the statute of limitation period for all partners with respect to
partnership items.
Investment by Tax-Exempt Investors. Tax-exempt investors, including
employee trusts and Individual Retirement Accounts ("IRAs"), are generally
exempt from federal income taxation. However, such organizations are subject to
taxation on their "unrelated business taxable income," as defined in Section 512
of the Code. Unrelated business taxable income does not, in general, include
interest, dividends, rents from real property, gain from the sale of property
other than inventory or property held primarily for sale to customers in the
ordinary course of business, and certain other types of passive investment
income, unless such income is derived from "debt-financed property" as defined
in Section 514 of the Code.
In addition to receiving interest income (which will comprise substantially
all of its income), the partnership may also receive payments in the nature of
points or loan servicing or origination fee at the time funds are advanced under
a loan. The fees paid for services rendered in connection with the making or
securing of loans, as opposed to fees paid merely for the use of money, will not
be treated as interest income and will most likely constitute unrelated business
taxable income.
Any partnership borrowing for the purpose of making loans may result in
"debt financed property" and, therefore, unrelated business taxable income to
tax-exempt limited partners to the extent that the Service concludes that such
borrowings are allocable to the limited partners for this purpose. Furthermore,
any borrowings by a limited partner for the purpose of financing his investment
in the partnership can result in "debt-financed property" and, therefore,
unrelated business taxable income.
As a consequence of the exercise of a default remedy under a partnership,
the partnership may be forced to foreclose and hold real or other property
(which secures the loan) for a short period of time. The partnership is
permitted to borrow funds to assist in the operation of any property on the
security of which it has previously made a loan and the operations of which it
has subsequently taken over as a result of a default. Furthermore, the
foreclosed properties may be subject to other existing mortgages. Consequently,
any such acquired property may be deemed to be "debt-financed property." In such
event, net income and gain from any such property may constitute unrelated
business taxable income, although employee trusts (but not most other tax-exempt
organizations, including IRAs) may nevertheless qualify for an exception, found
in Code Section 514(c)(9), which would exempt them from taxation on such net
income in the case of the real property.
The partnership intends to hold its loans for investment and, therefore, no
unrelated business taxable income should result from the disposition of these
assets. Such may not be the case, however, if the partnership does not act in
accordance with this intention and it is determined that the partnership is a
dealer in the business of buying and selling loans. The general partners have
represented that they intend to conduct the activities of the partnership in a
manner so as to minimize or eliminate the risk of having the partnership
classified as a "dealer" for federal income tax purposes (See "Property Held
Primarily For Sale; Potential Dealer Status" at page 66).
In computing unrelated business taxable income, a tax-exempt investor,
including an employee trust or IRA, may deduct a proportionate share of all
expenses which are directly connected with the activities generating such income
or with the "debt-financed property," as the case may be, and is also entitled
to an annual exclusion of $1,000 with respect to unrelated business taxable
income. Even though a portion of the income of a tax-exempt investor is
unrelated business taxable income, income from other sources which is not
unrelated business taxable income will not be subject to federal income
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taxation. In addition, the receipt of unrelated business taxable income by a
tax-exempt investor generally will not affect its tax-exempt status if the
investment is not otherwise inconsistent with the nature of its tax exemption.
Any person who is a fiduciary of a tax exempt investor considering an
investment in units should also consider the impact of minimum distribution
requirements under the Internal Revenue Code. Section 401 (a) (9) of the
Internal Revenue Code provides generally that certain minimum distributions from
retirement plans must be made commencing no later than April 1 following the
calendar year during which the recipient attains age 70 1/2. Accordingly, if
units are held by retirement plans and, before the partnership liquidates its
loans, mandatory distributions are required to be made to an IRA beneficiary or
a qualified plan participant. It is likely that a distribution of the units in
kind will be required to be made. A distribution of units will be includable in
the taxable income of said IRA beneficiary or qualified plan participant for the
year in which the units are received at the fair market value of the units
without any corresponding cash distributions from the partnership with which to
pay the income tax liability arising out of any such distribution. In certain
circumstances, a distribution-in-kind on units may be deferred beyond the date
set for required distributions, but only upon a showing of compliance with the
minimum distribution requirements of the Internal Revenue Code by reason of
distributions from other retirement plans established for the benefit of the
recipient. Compliance with these requirements is complex however, and potential
investors are urged to consult with and rely upon their individual tax advisors
with regard to all matters concerning the tax effects of distributions from
retirement plans. It is unlikely that partnership loans will be sold or
otherwise disposed of in a fashion which would permit sufficient liquidity in
any retirement plan holding units for the retirement plan to be able to avoid
making mandatory distribution of units in kind.
If you are a tax-exempt investor, you are strongly urged to consult your
own tax adviser with regard to the foregoing unrelated business taxable income
aspects of an investment in the partnership. Furthermore, with regard to certain
non-tax aspects of an investment in the partnership you should consider "ERISA
RISKS - Risks of Investment by Tax-Exempt Investors" at page 18 and "ERISA
CONSIDERATIONS" at page 70.
Investment By Charitable Remainder Trusts. In addition to the general tax
treatment of unrelated business taxable income received by tax-exempt investors,
special rules apply to charitable remainder trusts. In general, a charitable
remainder trust is a trust in which a portion of an asset will be transferred to
a charitable organization through the use of a trust and the trust itself will
not be subject to taxation on its income. If a charitable remainder trust (which
includes charitable remainder annuity trusts, charitable remainder unitrusts and
charitable remainder net income trusts) receives any related business taxable
income for any taxable year, the trust is taxable on all of its income as a
complex trust. The reminder trust is taxable on its accumulated income to the
extent the income is not distributed to beneficiaries and to the extent the
income exceeds the amount deductible under Section 661 (a). Although the
partnership does not anticipate that it will generate any significant unrelated
business taxable income it will likely generate at least a nominal amount of
UBTI. Accordingly, prospective investors that are charitable remainder trusts
should review their individual tax situation with their tax advisors to
determine the effect of the receipt of unrelated business taxable income to the
trust.
Foreign Investors As Limited Partners. Foreign investors may purchase units
in the partnership. A foreign investor who purchases units and becomes a limited
partner in the partnership will generally be required to file a United States
tax return on which he must report his distributive share of the partnership's
items of income, gain, loss, deduction and credit. A foreign investor must pay
United States federal income tax at regular United States tax rates on his share
of any net income, whether ordinary or capital gains. A foreign investor may
also be subject to tax on his distributive share of the partnership's income and
gain in his country of nationality or residence or elsewhere. In addition,
distributions of net cash from operations or proceeds from the sale of
properties otherwise payable to a foreign investor from the partnership or
amounts payable upon the sale of a foreign investor's units may be reduced by
United States tax withholdings the partnership is required to make pursuant to
applicable provisions of the Internal Revenue Code. Foreign investors should
consult their own tax advisors with regard to the effect of both the United
States tax laws and foreign laws on an investment in the partnership and the
potential that the partnership will be required to withhold federal income taxes
from amount otherwise payable to foreign investors.
State and Local Taxes. In addition to the federal income tax consequences
described above, prospective investors may be subject to state and local tax
consequences by reason of investment in the partnership. Your distributive share
of the taxable income or loss of the partnership generally will be required to
be included in determining your reportable income for state or local income tax
purposes in the jurisdiction in which you are a resident. Further, upon your
death, estate or inheritance taxes might be payable in such jurisdictions based
upon your interest in the partnership. In addition, you might be subjected to
income tax, estate or inheritance tax, or both. Depending upon the applicable
state and local laws, tax benefits which are available to you for federal income
tax purposes may not be available to you for state or local income tax purposes.
Many states have implemented or are in the process of implementing programs
to require partnerships to withhold and pay state income taxes owed by
non-resident partners relating to income-producing properties located in their
states. For example California has required certain public real estate programs
to withhold and pay state taxes relating to income-producing properties located
in the state. In the event that the partnership is required to withhold state
taxes from cash distributions otherwise payable to limited partners, the amount
of the net cash from operations otherwise payable to such limited partners would
likely be reduced. In addition, such collection and filing requirements at the
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state level may result in increases in the partnership's administrative expenses
which would likely have the effect of reducing returns to the limited partners.
New Legislation. The recently enacted Jobs and Growth Tax Relief
Reconciliation Act of 2003 ("2003 Act") made a number of significant changes for
individuals. For individual taxpayers, the maximum tax rate for most long-term
capital gains falls from 20% to 15% through 2008. The 10% capital gains tax rate
for lower-income individuals falls to 5% through 2007 and to zero for 2008. The
reduced rates are also used when calculating alternative minimum tax (AMT)
liability.
The 2003 Act provided tax rate reductions across the board for individual
taxpayers. This has resulted in a lowering of the 27% rate to 25%, the 30% rate
to 28%, the 35% rate to 33%, and the 38.6% rate to 35%. The reductions are in
effect through 2010.
Perhaps most importantly, dividend income received by an individual
shareholder from a domestic or qualified foreign corporation is now taxed at a
maximum rate of 15% through 2008 (down from the maximum individual rate of
38.6%). For lower-income individuals, a new 5% rate applies to dividend income
through 2007, and dividend income is tax-free for 2008.
The alternative minimum tax (AMT) exemption amount is increased by $4,500
(from $35,750 to $40,250) for single taxpayers and $9,000 (from $49,000 to
$58,000) for married taxpayers filing joint returns for 2003 and 2004.
The more favorable tax rates applicable to regular corporate dividends
could cause investors who are individuals to perceive investments in pass
through entities such as the partnership to now be relatively less attractive
than investments in the stocks of corporations that pay dividends. On the other
hand, while the new dividends tax rate has mitigated the impact of the
double-tax on corporate earnings, this significant disincentive sill exists. It
is not possible to predict whether the 2003 Act will be significant in
investors' preferences for one form of investment vehicle over another.
You are urged to consult your personal tax advisor regarding the impact of
state and local taxes upon an investment in the partnership. A discussion of
state and local tax law is beyond the scope of this prospectus.
ERISA CONSIDERATIONS
General. The law governing retirement plan investment in the partnership is
the Employee Retirement Income Security Act of 1974 ("ERISA") and the Code.
Persons or organizations that exercise discretion or control over plan assets
are deemed to be fiduciaries under ERISA. Section 404 of ERISA provides that a
fiduciary is subject to a series of specific responsibilities and prohibitions
and is required to manage plan assets "solely in the interest of plan
participants." Section 404 of ERISA requires that plan fiduciaries discharge
their duty with care, skill, prudence and diligence (the so called "prudent man
rule") and that the fiduciary diversify the investments of the plan unless under
the circumstances it is clearly not prudent to do so. Regulations issued by the
Department of Labor ("DOL") under these statutory provisions require that in
making investments, the fiduciary consider numerous factors, current return of
the portfolio relative to the anticipated cash flow requirements of the plan,
and the projected return of the portfolio relative to the funding objectives of
the plan. In addition, before the enactment of ERISA, the Internal Revenue
Service, proceeding under a statutory mandate that all qualified plans be for
the exclusive benefit of participants and beneficiaries, issued a similar set of
investment considerations for plan fiduciaries. That Internal Revenue Service
position has not been modified since ERISA. Consequently, a "Tax-Exempt
Investor", which is defined as a qualified profit-sharing, pension or retirement
trust, an HR-10 (Keogh) Plan, or an Individual Retirement Account (IRA), should,
in general, purchase units of limited partnership interest only when,
considering all assets held by such plans, those prudence, liquidity and
diversification requirements are satisfied.
Fiduciaries Under ERISA. A fiduciary of a qualified plan is subject to
certain requirements under ERISA, including the duty to discharge of
responsibilities solely in the interest of, and for the benefit of the qualified
plan's participants and beneficiaries. A fiduciary is required to (a) perform
its duties with the skill, prudence and diligence of a prudent man acting in
like capacity, (b) diversify investments so as to minimize the risk of large
losses and (c) act in accordance with the qualified plan's governing documents.
Fiduciaries with respect to a qualified plan include any persons who
exercise or possess any discretionary power of control, management or
disposition over the funds or other property of the qualified plan. For example,
any person who is responsible for choosing a qualified plan's investments, or
who is a member of a committee that is responsible for choosing a qualified
plan's investments, is a fiduciary of the qualified plan. Also, an investment
professional whose advice will serve as one of the primary basis for a qualified
plan's investment decisions may be a fiduciary of the qualified plan, as may any
other person with special knowledge or influence with respect to a qualified
plan's investment or administrative activities.
While the beneficiary "owner" or "account holder" of an IRA is generally
treated as a fiduciary of the IRA under the Code, IRAs generally are not subject
to ERISA's fiduciary duty rules. Where a participant in a qualified plan
exercises control over such participant's individual account in the qualified
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plan in a "self-directed investment" arrangement that meets the requirements of
Section 404(c) of ERISA, such participant (rather than the person who would
otherwise be a fiduciary of such qualified plan) will generally be held
responsible for the consequences of his investment decisions under
interpretations of applicable regulations of the Department of Labor. Certain
qualified plans of sole proprietorships, partnerships and closely-held
corporations of which the owners of one hundred percent (100%) of the equity of
such business and their respective spouses are the sole participants in such
plans at all times generally not subject to ERISA's fiduciary duty rules,
although they are subject to the Code's prohibited transaction rules, explained
below.
A person subject to ERISA's fiduciary rules with respect to a qualified
plan should consider those rules in the context of the particular circumstances
of the qualified plan before authorizing an investment of a portion of the
qualified plan's assets in units.
Prohibited Transactions Under ERISA and the Code. Section 4975 of the Code
(which applies to all qualified plans and IRAs) and Section 406 of ERISA (which
does not apply to IRAs or to certain qualified plans that, under the rules
summarized above, are not subject to ERISA's fiduciary rules) prohibit qualified
plans and IRAs from engaging in certain transactions involving "plan assets"
with parties that are "disqualified persons" under the Code or "parties in
interest" under ERISA ("disqualified persons" and "parties in interest" are
hereafter referred to as "disqualified persons"). Disqualified persons include
fiduciaries of the qualified plan or IRA, officers, directors, shareholders and
other owners of the company sponsoring the qualified plan and natural persons
and legal entities sharing certain family or ownership relationships with other
disqualified persons.
"Prohibited transactions" include any direct or indirect transfer or use of
a qualified plan's or IRA's assets to or for the benefit of a disqualified
person, any act by a fiduciary that involves the use of a qualified plan's or
IRA's assets in the fiduciary's individual interest or for the fiduciary's own
account, and any receipt by a fiduciary of consideration for his or her own
personal account from any party dealing with a qualified plan or IRA in
connection with a transaction involving the assets of the qualified plan or the
IRA. Under ERISA, a disqualified person that engages in a prohibited transaction
will be required to disgorge any profits made in connection with the transaction
and for any losses sustained by the qualified plan. In addition, ERISA
authorizes additional penalties and further relief from such transaction.
Section 4975 of the Code imposes excise taxes on a disqualified person that
engages in a prohibited transaction with a qualified plan or IRA.
In order to avoid the occurrence of a prohibited transaction under Section
4975 of the Code and/or Section 406 of ERISA, units may not be purchased by a
qualified plan or IRA from assets as to which the general partners or any of
their affiliates are fiduciaries. Additionally, fiduciaries of, and other
disqualified persons with respect to, qualified plans and IRAs should be alert
to the potential for prohibited transactions that may occur in the context of a
particular qualified plan's or IRA's decision to purchase units.
Plan Assets. If the partnership's assets were determined under ERISA or the
Code to be "plan assets" of qualified plans and/or IRAs holding units,
fiduciaries of such qualified plans and IRAs might under certain circumstances
be subject to liability for actions taken by the general partners or their
affiliates. In addition, certain of the transactions described in the prospectus
in which the partnership might engage, including certain transactions with
affiliates, might constitute prohibited transactions under the Code and ERISA
with respect to such qualified plans and IRAs, even if their acquisition of
units did not originally constitute a prohibited transaction. Moreover,
fiduciaries with responsibilities to qualified plans (other than IRAs) might be
deemed to have improperly delegated their fiduciary responsibilities to the
general partner in violation of ERISA.
Although under certain circumstances ERISA and the Code, as interpreted by
the Department of Labor in currently effective regulations, apply a
"look-through" rule under which the assets of an entity in which a qualified
plan or IRA has made an equity investment may generally constitute "plan
assets," the applicable regulations except investments in certain publicly
registered securities from the application of the "look-through" principle.
In order to qualify for the exception described above, the securities in
question must be "publicly-offered securities." Publicly-offered securities are
defined as freely transferable, owned by at least 100 investors independent of
the issuer and of one another, and registered either (a) under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, or (b) sold as part of a public
offering pursuant to an effective registration statement under the Securities
Act of 1933 and registered under the Securities Exchange Act of 1934 within 120
days (or such later time as may be allowed by the Securities and Exchange
Commission) after the end of the issuer's fiscal year during which the offering
occurred.
The partnership's units should constitute "publicly-offered securities"
because (a) the general partners have represented that it is highly likely that
substantially more than 100 independent investors will purchase and hold units
in the partnership, and the Regulation states that, when 100 or more investors
independent of the issuer and of one another purchase a class of securities, the
class will be deemed to be widely held; (b) the general partners have
represented that the partnership's offering the units is registered under the
Securities Act of 1933 and that the general partners intend to register the
units in the partnership under the Securities Exchange Act of 1934; and (c)
although whether a security is freely transferable is a factual determination,
the limitations on the assignment of units and substitution of limited partners
contained in the partnership agreement, with the possible exception for
publicly-traded partnership discussed below, fall within the scope of certain
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restrictions enumerated in the regulation that ordinarily will not affect a
determination that securities are freely transferable when the minimum
investment is $10,000 or less. The partnership agreement prohibits the
assignment or other transfer of units without the general partners' written
consent if the general partners determine in good faith that such transfer might
result in a change in the status of the partnership to a publicly-traded
partnership within the meaning of Section 7704 of the Code, as currently or
hereafter interpreted by the Service in rulings, regulations or other
publications, or by the courts, and such status would have a material adverse
impact on the limited partners or their assignees. In order to prevent the
partnership from being classified as a publicly-traded partnership, the general
partners have represented that it intends to prohibit transfers of units only to
the extent necessary to comply with the publicly traded partnership safe harbors
(See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES - Publicly Traded partnerships"
at page 63). The regulation permits restrictions that prohibit any transfer or
assignment that would result in a reclassification of the entity for federal
income tax purposes. In Advisory Opinion 89-14A, dated August 2, 1989, the
Department of Labor expressed its opinion that a restriction against transfer of
partnership interests that is drafted to avoid reclassification of a partnership
as a publicly-traded partnership would qualify as the type of restriction
contemplated by the regulation. Therefore, the restriction in the partnership
agreement should not, absent unusual circumstances, affect the free
transferability of the units within the meaning of the regulation.
Annual Valuation. Fiduciaries of retirement plans are required to determine
annually the fair market value of the assets of such retirement plans,
typically, as of the close of a plan's fiscal year. To enable the fiduciaries of
retirement plans subject to the annual reporting requirements of ERISA to
prepare reports relating to an investment in the partnership, the general
partners are required to furnish an annual statement of estimated unit value to
the investors. The annual statement will report the estimated value of each unit
based on the estimated amount a unit holder would receive if all partnership
assets were sold as of the close of the partnership's fiscal year for their
estimated values and if such proceeds, without reduction for selling expenses,
together with the other funds of the partnership, were distributed in
liquidation of the partnership.
Such estimated values will be based upon annual valuations of partnership
properties performed by the general partners, but no independent appraisals will
be obtained. While the general partners are required under the partnership
agreement to obtain the opinion of an independent third party stating that their
estimates of value are reasonable, such general partner valuations may not
satisfy the requirements imposed upon fiduciaries under ERISA for all retirement
plans. The estimated value per unit will be reported to limited partners in the
partnership's next annual or quarterly report form 10-K or 10-Q sent to the
limited partners for the period immediately following completion of the
valuation process. There can be no assurance that the estimated value per unit
will actually be realized by the partnership or by the limited partners upon
liquidation in part because estimates do not necessarily indicate the price at
which properties could be sold. Limited partners may not be able to realize
estimated net asset value if they were to attempt to sell their units, because
no public market for units exists or is likely to develop.
Potential Consequences of Treatment as Plan Assets. In the event that the
units do not constitute "publicly-offered securities," the underlying assets of
the partnership are treated as plan assets under the regulations. If the
partnership's underlying assets are deemed to be plan assets, the partnership
may be required to take steps which could affect partners who are subject to
income tax, as well as qualified plans which may invest in the partnership. In
such event, the fiduciary duties, including compliance with the exclusive
benefit rule and the diversification and prudence requirements, must be
considered with respect to the investment in the partnership. Each partner of
the partnership who has authority or control with respect to the management or
disposition of the assets of the partnership, or who renders investment advice
for a fee or other compensation, direct or indirect, with respect to the assets
of the partnership would be treated as a fiduciary and therefore would be
personally liable for any losses to a qualified plan which invests in the
partnership resulting from a breach of fiduciary duty.
The prohibited transaction restrictions would apply to any transactions in
which the partnership engages involving the assets of the partnership and a
party-in-interest. Such restrictions could, for example, require that the
partnership and the general partners avoid transactions with entities that are
affiliated with the partnership or the general partners or that qualified plan
investors be given the opportunity to withdraw from the partnership. Also, the
general partners who participate in a prohibited transaction may be subject to
an excise tax. Finally, entering into a prohibited transaction may result in
loss of the qualified plan's tax-exempt status.
DESCRIPTION OF UNITS
The units will represent a limited partnership interest in the partnership.
Each unit is $1.
The limited partners representing a majority of the outstanding limited
partnership interests may, without the concurrence of the general partners, vote
to take the following actions:
o terminate the partnership;
o amend the limited partnership agreement, subject to certain limitations
described in Section 12.4 of the limited partnership agreement;
72
o approve or disapprove the sale of all or substantially all of the assets
of the partnership; or
o remove or replace one or all of the general partners. In addition,
limited partners representing ten percent (10%) of the limited partner interests
may call a meeting of the partnership. (See "SUMMARY OF THE LIMITED PARTNERSHIP
AGREEMENT" at page 73).
If you assign your units to another person, that person will not become a
substituted limited partner in your place unless the written consent of the
general partners to such substitution has been obtained. Such consent shall not
be unreasonably withheld. A person who does not become a substituted limited
partner shall be entitled to receive allocations and distributions attributable
to the unit properly transferred to him, but shall not have any of the other
rights of a limited partner, including the right to vote as a limited partner
and the right to inspect and copy the partnership's books.
There is not a public trading market for the units and none is likely to
exist. The transferability of the units will be subject to a number of
restrictions. Accordingly, the liquidity of the units will be limited and you
may not be able to liquidate your investment in the event of an emergency,
except as permitted in the withdrawal provisions described below. Any transferee
must be a person that would have been qualified to purchase units in this
offering and no transferee may acquire less than 2000 units. No unit may be
transferred if, in the judgment of the general partners, a transfer would
jeopardize the status of the partnership or cause a termination of the
partnership for federal income tax purposes. Transfers of the units will
generally require the consent of the California Commissioner of Corporations,
except as permitted in the Commissioner's Rules. Additional restrictions on
transfers of units may be imposed under the securities laws of other states upon
transfers occurring in or involving the residents of such states. In addition,
you will not be permitted to make any transfer or assignment of your interests
if the general partners determine such transfer or assignment would result in
the partnership being classified as a "publicly traded partnership" within the
meaning of Section 7704(b) of the Code or any rules, regulations or safe-harbor
guidelines promulgated thereunder.
We will not repurchase any units from you. However, you may withdraw from
the partnership after one year from the date of purchase in four quarterly
installments subject to a ten percent (10%) early withdrawal penalty being
deducted from your capital account. You may also withdraw after five years on an
installment basis, generally a five year period in twenty installments or
longer, without the imposition of any penalty (See "TRANSFER OF UNITS -
Withdrawal from Partnership" at page 76).
SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT
The following is a summary of the limited partnership agreement for the
partnership, and is qualified in its entirety by the terms of the agreement
itself. You are urged to read the entire agreement, which is set forth as
Exhibit A to this prospectus.
Rights and Liabilities of Limited Partners. The rights, duties and powers
of limited partners are governed by the limited partnership agreement and
Sections 15611, et seq. of the California Corporations Code (the California
Revised Limited Partnership Act (the "partnership act")) and the discussion
herein of such rights, duties and powers is qualified in its entirety by
reference to such agreement and partnership act.
You as a limited partnership will not be responsible for the obligations of
the partnership. However, you will be liable to the extent of any deficit in
your capital accounts upon dissolution, and may also be liable for any return of
capital plus interest if necessary to discharge liabilities existing at the time
of such return. Any cash distributed to you may constitute, wholly or in part,
return of capital.
As a limited partner you will have no control over the management of the
partnership, except that limited partners representing a majority of the
outstanding limited partnership interests may, without the concurrence of the
general partners, take the following actions:
o terminate the partnership (including merger or reorganization with one or
more other partnerships);
o amend the limited partnership agreement;
o approve or disapprove the sale of all or substantially all of the assets
of the partnership; or
o remove and replace one or all of the general partners.
The approval of all limited partners is required to elect a new general
partner to continue the business of the partnership where there is no remaining
general partner after a general partner ceases to be a general partner other
than by removal. The general partners shall have the right to increase the size
of this offering or conduct an additional offering of securities without
obtaining the consent of the limited partners. Limited partners representing ten
percent (10%) of the limited partnership interests may call a meeting of the
partnership.
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Capital Contributions. Interests in the partnership will be sold in units
of $1, and no person may acquire less than 2,000 units ($2,000) for initial
investments or 1,000 units (1,000) for additional investments for existing
limited partners. The general partners have the discretion to accept
subscriptions for fractional units in excess of the minimum subscription. The
general partners, collectively, will contribute the sum of l/10th of 1% of the
gross proceeds to the capital of the partnership.
Rights, Powers and Duties of General Partners. Subject to the right of the
limited partners to vote on specified matters, the general partners will have
complete charge of the business of the partnership. The general partners are not
required to devote full time to partnership affairs but only such time as is
required for the conduct of partnership business. Any one of the general
partners acting alone has the power and authority to act for and bind the
partnership. The general partners are granted the special power of attorney of
each limited partner for the purpose of executing any document which the limited
partners have agreed to execute and deliver.
Profits and Losses. Profits and losses of the partnership will be allocated
among the limited partners according to their respective outstanding capital
accounts on a daily basis. Upon transfer of units (if permitted under the
limited partnership agreement and applicable law), profit and loss will be
allocated to the transferee beginning with the next succeeding calendar month.
One percent (1%) of all partnership profit and loss will be allocated to the
general partners.
Cash Distributions. Upon your subscription for units, you will be required
to elect either (i) to receive monthly, quarterly or annual distributions
("periodic distributions"); or (ii) to retain your earnings in your capital
account with us. The election to receive periodic cash distributions is
irrevocable although you may change whether such distributions are received on a
monthly, quarterly or annual basis. If you initially elected to retain your
earnings, you may, after three (3) years, change your election and receive
periodic cash distributions. The general partners will also receive cash
distributions equal to one percent (1%) of total partnership income.
As a result, the relative percentage of partnership interests of
non-electing partners (including voting rights and shares of future income) will
gradually increase due to the compounding effect of crediting income to their
capital accounts, while the percentage interests of partners who receive cash
distributions will decrease during the term of the partnership.
Meeting. A general partner, or limited partners representing ten percent
(10%) of the limited partnership interests, may call a meeting of the
partnership on at least 30 days written notice. Unless the notice otherwise
specifies, all meetings will be held at 2:00 P.M. at our offices. As a limited
partner, you may vote in person or by proxy at the partnership meeting. A
majority of the outstanding limited partnership interests will constitute a
quorum at partnership meetings. There are no regularly scheduled meetings of the
limited partners.
Accounting and Reports. The general partners will cause to be prepared and
furnished to you, an annual report of the partnership's operation which will be
audited by an independent accounting firm. Within 120 days after the close of
the year covered by the report, a copy or condensed version will be furnished to
you. You shall also be furnished such detailed information as is reasonably
necessary to enable you to complete your own tax returns within 90 days after
the end of the year.
The general partners presently maintain the partnership's books and records
on the accrual basis for bookkeeping and accounting purposes, and also intend to
use the accrual basis method of reporting income and losses for federal income
tax purposes. The general partners reserve the right to change such methods of
accounting, upon written notice to limited partners. You may inspect the books
and records of the partnership at all reasonable times.
Restrictions on Transfer. The limited partnership agreement places
substantial limitations upon your ability to transfer units. Any transferee must
be a person that would have been qualified to purchase units in this offering
and no transferee may acquire or hold less than 2,000 units. No unit may be
transferred if, in the judgment of the general partners, and/or their counsel a
transfer would jeopardize our status as a partnership or cause a termination of
the partnership for federal income tax purposes. The written consent of the
California Commissioner of Corporations is also required prior to any sale or
transfer of units except as permitted. In addition, you will not be permitted to
make any transfer or assignment of your units if the general partners and/or
their counsel determine such transfer or assignment would result in the
partnership being classified as a "publicly traded partnership" within the
meaning of Section 7704(b) of the Code or any rules, regulations or safe-harbor
guidelines promulgated thereunder.
General Partners' Interest. Any general partner, or all of them, may retire
from the partnership at any time upon six months written notice to all limited
partners, in which event a retiring general partner would not be entitled to any
termination or severance payment from the partnership, except for the return of
his capital account balance. A general partner may also sell and transfer his
general partner interest in the partnership (including all powers and
authorities associated therewith) for such price as he shall determine in his
sole discretion, and neither the partnership nor the limited partners will have
any interest in the proceeds of such sale. However, the successor general
partner must be approved by limited partners holding a majority of the
outstanding limited partnership interests.
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Term of Partnership. The term of the partnership commenced on the day the
certificate of limited partnership was filed with the California Secretary of
State, in May, 1993, and will continue until December 31, 2032. The partnership
commenced operations in May, 1993. The partnership will dissolve and terminate
if any one of the following occurs:
o upon the removal, death, retirement, insanity, dissolution or bankruptcy
of a general partner, unless the business of the partnership is continued by a
remaining general partner, if any, or if there is no remaining general partner,
by a new general partner elected to continue the business of the partnership by
all the limited partners (or by a majority-in-interest of the limited partners,
in the case of removal);
o upon the affirmative vote of a majority-in interest of the limited
partners;
o upon the sale of all or substantially all (i.e., at least seventy percent
(70%)) of the partnership's assets; or
o otherwise by operation of law.
Winding Up. The partnership will not terminate immediately upon the
occurrence of an event of dissolution, but will continue until its affairs have
been wound up. Upon dissolution of the partnership, the general partners will
wind up the partnership's affairs by liquidating the partnership's assets as
promptly as is consistent with obtaining the fair current value thereof, either
by sale to third parties or by collecting loan payments under the terms of the
loan. All funds received by us shall be applied to satisfy or provide for
partnership debts and the balance shall be distributed to partners in accordance
with the terms of the limited partnership agreement.
Dissenting Limited Partners' Rights. If we participate in any acquisition
of the partnership by another entity, any combination of the partnership with
another entity through a merger or consolidation, or any conversion of the
partnership into another form of business entity (such as a corporation) that
requires the approval of the outstanding limited partnership interests, the
result of which would cause the other entity to issue securities to the limited
partners, then each limited partner who does not approve such reorganization
(the "Dissenting Limited Partner") may require the partnership to purchase for
cash, at its fair market value, his or her interest in accordance with Section
15679.2 of the California Corporations Code. The partnership, however, may
itself convert to another form of business entity (such as a corporation, trust
or association) if the conversion will not result in a significant adverse
change in (i) the voting rights of the limited partners, (ii) the termination
date of the partnership (currently, December 31, 2032, unless terminated earlier
in accordance with the partnership agreement), (iii) the compensation payable to
the general partners or their affiliates, or (iv) the partnership's investment
objectives.
The general partners will make the determination as to whether or not any
such conversion will result in a significant adverse change in any of the
provisions listed in the preceding paragraph based on various factors relevant
at the time of the proposed conversion, including an analysis of the historic
and projected operations of the partnership; the tax consequences (from the
standpoint of the limited partners) of the conversion of the partnership to
another form of business entity and of an investment in a limited partnership as
compared to an investment in the type of business entity into which the
partnership would be converted; the historic and projected operating results of
the partnership's loans, and the then-current value and marketability of the
partnership's loans. In general, the general partners would consider any
material limitation on the voting rights of the limited partners or any
substantial increase in the compensation payable to the general partners or
their affiliates to be a significant adverse change in the listed provisions.
It is anticipated that, under the provisions of the partnership agreement,
the consummation of any such conversion of the partnership into another form of
business entity (whether or not approved by the general partners) would require
the approval of limited partners holding a majority of the units.
TRANSFER OF UNITS
Restrictions on the Transfer of Units. There is no public or secondary
market for the units and none is expected to develop. Moreover, units may only
be transferred if certain requirements are satisfied, and transferees may become
limited partners only with the consent of the general partners. Under Article 7
of the partnership agreement, the assignment or other transfer of units will be
subject to compliance with the minimum investment and suitability standards
imposed by the partnership. (See "INVESTOR SUITABILITY STANDARDS" at page 1).
Under presently applicable state securities law guidelines, except in the case
of a transfer by gift or inheritance or upon family dissolution or an
intra-family transfer, each transferee of units of the partnership must
generally satisfy minimum investment and investor suitability standards similar
to those which were applicable to the original offering of units. Additionally,
following a transfer of less than all of your units, you must generally retain a
sufficient number of units to satisfy the minimum investment standards
applicable to your initial purchase of units. In the case of a transfer in which
a member firm of the National Association of Securities Dealers, Inc., is
involved, that firm must be satisfied that a proposed transferee of units
satisfies the suitability requirements as to financial position and net worth
specified in Section 3(b) of Rule 2810 to the NASD's Conduct Rules. The member
75
firm must inform the proposed transferee of all pertinent facts relating to the
liquidity and marketability of the units during the term of the investment.
Unless the general partners shall give their express written approval, no
units may be assigned or otherwise transferred to:
o a minor or incompetent (unless a guardian, custodian or conservator has
been appointed to handle the affairs of such person);
o any person not permitted to be a transferee under applicable law,
including, in particular but without limitation, applicable federal and state
securities laws;
o any person if, in the opinion of tax counsel, such assignment would
result in the termination under the Code of the partnership's taxable year of
its status as a partnership for federal income tax purposes;
o any person if such assignment would affect the partnership's existence or
qualification as a limited partnership under the California Act or the
applicable laws of any other jurisdiction in which the partnership is then
conducting business.
Any such attempted assignment without the express written approval of the
general partners shall be void and ineffectual and shall not bind the
partnership. In the case of a proposed assignment, which is prohibited for
adverse tax consequences, however, the partnership shall be obligated to permit
such assignment to become effective if and when, in the opinion of counsel, such
assignment would no longer have either of the adverse consequences under the
Code which are specified in that clause.
No Assignment Permitted on Secondary Market. Section 7.03 of the
partnership agreement provides that so long as there are adverse federal income
tax consequences from being treated as a "publicly traded partnership" for
federal income tax purposes, the general partners shall not permit any interest
in a unit to be assigned on a secondary public market (or a substantial
equivalent thereof) as defined under the Code and any regulations promulgated
thereunder. If the general partners determine in their sole discretion, that a
proposed assignment was affected on a secondary market, the partnership and the
general partners have the right to refuse to recognize any such proposed
assignment and to take any action deemed necessary or appropriate in the general
partners' reasonable discretion so that such assignment is not in fact
recognized. For the purposes of Section 7.3 of the partnership agreement, any
assignment which results in a failure to meet the "safe harbor" provisions of
Notice 88-75 (July 5, 1988) issued by the Service established by Treasury
Regulations under Section 7704 shall be treated as causing the units to be
publicly traded. The limited partners agree to provide all information
respecting assignments which the general partners deem necessary in order to
determine whether a proposed transfer occurred on a secondary market. The
general partners shall incur no liability to any investor or prospective
investor for any action or inaction by them in connection with the foregoing,
provided it acted in good faith.
Consequently, you may not be able to liquidate your investment in the event
of emergencies or for any other reasons. In addition, units may not be readily
accepted as collateral for loans.
Withdrawal from Partnership. You have no right to withdraw from the
partnership or to obtain the return of all or any portion of sums paid for the
purchase of units (or reinvested earnings with respect thereto) for one (1) year
after the date such units are purchased. Under the terms of the partnership
agreement, the general partners have the right to withdraw from the partnership
upon not less than six (6) months written notice to the limited partners. The
right of a general partner to withdraw from the partnership does not affect, in
any manner, your right to withdraw from the partnership as set below.
One Year Withdrawal Right. In order to provide a certain degree of
liquidity, after the one year period, you may withdraw all or part of your
capital accounts from the partnership in four equal quarterly installments
beginning the calendar quarter following the quarter in which the notice of
withdrawal is given. Such notice must be given in writing thirty (30) days prior
to the end of the preceding quarter subject to a ten percent (10%) early
withdrawal penalty and must state the amount to be withdrawn and may be
addressed to any general partner or the partnership. No notice of withdrawal
form is available. Investors will not be notified when their one year waiting
period has ended. The ten percent (10%) penalty is applicable to the amount
withdrawn as stated in the notice of withdrawal. The ten percent (10%) penalty
will be deducted, pro rata, from the four quarterly installments paid to you.
The ten percent (10%) early withdrawal penalty after one (1) year will be
received by the partnership, and a portion of the sums collected as such penalty
will be applied toward the next installment(s) of principal, under the formation
loan owed to the partnership by Redwood Mortgage Corp., thereby reducing the
amount owed to the partnership from Redwood Mortgage Corp. Such portion shall be
determined by the ratio between the initial amount of the formation loan and the
total amount of offering costs incurred by the partnership in this offering.
Once offering expenses are repaid, early withdrawal penalties will be
apportioned between the formation loan and the partnership's own account. (See
"PLAN OF DISTRIBUTION" at page 79).
Five Year Withdrawal Right. In addition, you will also have the right after
five years from the date of purchase of the units to withdraw from the
partnership. This will be done on an installment basis, generally, over a
five-year period (in 20 equal quarterly installments), or over such longer
period of time as you may desire or as may be required in light of partnership
76
cash flow as determined by the General Partner. During this five-year (or
longer) period, we will pay any distributions with respect to units being
liquidated directly to the withdrawing limited partner. No penalty will be
imposed on withdrawals made in twenty quarterly installments or longer.
Withdrawal after the one year holding period and before the five year holding
period will be permitted only upon the terms set forth above under the heading
"One Year Withdrawal Right." Withdrawals exceeding 20% per year are subject to a
10% penalty even after the five year waiting period.
Liquidation Upon Death. In the event of your death during your investment
with us, your heirs will be provided with the option to liquidate all or a
portion of your investment. Such liquidations will not be subject to any early
withdrawal penalties but will be limited in amount to $50,000 per year paid in
equal quarterly installments until the account is fully liquidated. Amounts of
$50,000 or less shall be paid in four equal quarterly installments. Your heirs
will be required to notify us of their intent to liquidate your investment
within 6 months from the date of death or the investment will become subject to
our regular liquidation provisions. Due to the complex nature of administering a
decedent's estate, the general partners reserve the right and discretion to
request any and all information they deem necessary and relevant in determining
the date of death, the name of the beneficiaries or any other matters they may
deem relevant.
You may commence withdrawal (or partial withdrawal) from the partnership as
of the end of any calendar quarter. The amount that a withdrawing limited
partner will receive from the partnership is based on the withdrawing limited
partner's capital account. A capital account is a sum calculated for tax and
accounting purposes, and may be greater than or less than the fair market value
of such investor's limited partnership interest in the partnership. The fair
market value of a your interest in the partnership will generally be irrelevant
in determining amounts to be paid upon withdrawal, except to the extent that the
current fair market value of the partnership's loan portfolio is realized by
sales of existing loans (which sales are not required to be made).
Distributions in liquidation of a withdrawing limited partner's interest
are generally tax free to the limited partner. No gain is recognized except to
the extent the amount of money distributed exceeds the limited partner's basis
in his or her partnership interest. A loss will be recognized only to the extent
that the limited partner's basis exceeds the cash and unrealized receivables and
inventory distributed. Generally, any gain or loss recognized will be treated as
capital gain or loss. When dealing with a series of distributions that result in
the eventual liquidation of a limited partner's interest, gain is recognized
only after the aggregate distributions exceed the limited partner's basis in his
or her interest. Loss is not recognized until withdrawal is complete and the
limited partner's interest is terminated. The general partners shall have the
right to liquidate the capital account of any investor who's capital account
balance is less than $1,000. The partnership will provide notice of its intent
to liquidate a capital account no less than 30 days prior to the end of the
calendar quarter in which liquidation shall occur. No penalty will be assessed
in connection with a liquidation of a capital account of less than $1,000 by a
general partner.
We will not establish a reserve from which to fund withdrawals. Our
capacity to return your capital account upon withdrawal is restricted to the
availability of partnership cash flow. For this purpose, cash flow is considered
to be available only after all current partnership expenses have been paid
(including compensation to the general partners and affiliates) and adequate
provision has been made for the payment of all periodic cash distributions on a
pro rata basis which must be paid to limited partners who elected to receive
such distributions upon subscription for units. No more than twenty percent
(20%) of the total limited partners' capital accounts outstanding for the
beginning of any calendar year shall be liquidated during any calendar year.
Notwithstanding this twenty percent (20%) limitation, the general partners shall
have the discretion to further limit the percentage of the total limited
partners' capital accounts that may be withdrawn in order to comply with the
safe harbor provisions of the regulations under Section 7704 of the Code to
avoid the partnership being taxed as a corporation. If notices of withdrawal in
excess of these limitations are received by the general partners, the priority
of distributions among limited partners shall be determined as follows: first to
those limited partners withdrawing capital accounts according to the 20 quarter
or longer installment liquidation period, then ERISA plan limited partners
withdrawing capital accounts after five (5) years, over four (4) quarterly
installments (which need such sums to pay retirement benefits), then to limited
partners withdrawing capital accounts after five years over four quarterly
installments, then to administrators withdrawing capital accounts upon the death
of a limited partner and finally to all other limited partners withdrawing
capital accounts. Except as provided above, withdrawal requests will be
considered by the general partners in the order received.
Upon dissolution and termination of the partnership, a five-year winding-up
period is provided for liquidating the partnership's loan portfolio and
distributing cash to limited partners. Due to high prevailing interest rates or
other factors, the partnership could suffer reduced earnings (or losses) if a
substantial portion of its loan portfolio remains and must be liquidated quickly
at the end of such winding-up period. Limited partners who complete a withdrawal
from the partnership prior to any such liquidation will not be exposed to this
risk. Conversely, if prevailing interest rates have declined at a time when the
loan portfolio must be liquidated, unanticipated profits could be realized by
those limited partners who remained in the partnership until its termination.
77
DISTRIBUTION POLICIES
Distributions to the Limited Partners. The partnership will make monthly,
quarterly or annual distributions of all earnings to those limited partners
affirmatively electing to receive cash distributions upon subscription. All
other limited partners will not receive current distributions of earnings,
rather their earnings will be credited to their capital accounts on a monthly
basis and will increase their capital accounts, in lieu of receiving periodic
cash distributions. Earnings retained in your capital account will be used by us
for making further loans and for other proper partnership purposes. However,
there is no assurance as to the timing or amount of any distribution to the
holders of the units. Once you have made the election to receive cash
distributions, you may not revoke or change your election.
Cash available for distribution will be allocated to you and your assignees
in the ratio which the capital accounts owned by you bears to the capital
accounts then outstanding, subject to adjustment with respect to units issued by
the partnership during the quarter. For such purposes, a transferee will be
deemed to be the owner thereof as of the first day following the day the
transfer is completed and will therefore not participate in distributions for
the period prior to which the transfer occurs.
Earnings means cash funds available from operations from interest payments,
early withdrawal penalties not applied to the formation loan, late and
prepayment charges, interest on short-term investments and working capital
reserve, after deducting funds used to pay or provide for the payment of
partnership expenses and appropriate reserves.
Subject to the right of the general partners to terminate your right to
credit your capital account in lieu of receipt of periodic cash distributions,
such option to credit your capital account in lieu of receiving periodic cash
distributions will continue unless prohibited by applicable federal or state
law.
Cash Distributions. Cash available for distribution will be determined by
computing the net income during the calendar month on an accrual basis and in
accordance with generally accepted accounting principles. The term "Cash
Available for Distribution" means an amount of cash equal to the excess of
accrued income from operations and investment of, or the sale or refinancing or
other disposition of, partnership assets during any calendar month over the
accrued operating expenses of the partnership during such month, including any
adjustments for bad debt reserves or deductions as the general partners may deem
appropriate, all determined in accordance with generally accepted accounting
principles; provided, that such operating expenses shall not include any general
overhead expenses of the general partners not specifically related to, billed to
or reimbursable by the partnership as specified in Sections 10.15 through 10.17
of the limited partnership agreement. All cash available for distribution will
be allocated one percent (1%) to the general partners and ninety-nine percent
(99%) to the limited partners.
Allocation of Net Income and Net Losses. Net income and net loss for
accounting purposes for each fiscal quarter and all items of net profits or net
losses and credits for tax purposes for each quarter shall be allocated to the
partners as set forth in Article V of the limited partnership agreement. Net
income and net loss will be allocated one percent (1%) to the general partners
and ninety-nine percent (99%) to the limited partners.
REPORTS TO LIMITED PARTNERS
Within 90 days after the end of each fiscal year of the partnership, the
general partners will deliver to you such information as is necessary for the
preparation of your federal income tax return, and state income or other tax
returns. Within 120 days after the end of each partnership fiscal year, the
general partners will deliver to you, an annual report which includes audited
financial statements by the partnership's independent certified public
accountants of the partnership prepared in accordance with generally accepted
accounting principles, and which contains a reconciliation of amounts shown
therein with amounts shown on the method of accounting used for tax reporting
purposes. Such financial statements include a profit and loss statement, a
balance sheet of the partnership, a cash flow statement and a statement of
changes in financial position. The annual report for each year reports on the
partnership's activities for that year, identifies the source of partnership
distributions, sets forth the compensation paid to the general partners and
their affiliates and a statement of the services performed in consideration
therefore and contains such other information as is deemed reasonably necessary
by the general partners to advise you of the affairs of the partnership.
For as long as the partnership is required to file quarterly reports on
Form 10-Q and annual reports on Form 10-K with the Securities and Exchange
Commission, the information contained in each such report for a quarter shall be
sent within 60 days after the end of such quarter. If and when such reports are
not required to be filed, you will be furnished, within 60 days after the end of
each of the first three quarters of each partnership fiscal year, an unaudited
financial report for that period including a profit and loss statement, a
balance sheet and a cash flow statement. The foregoing reports for any period in
which fees are paid to the general partners or their affiliates for services
shall set forth the fees paid and the services rendered.
78
PLAN OF DISTRIBUTION
Subject to the conditions set forth in this prospectus and in accordance
with the terms and conditions of the partnership agreement, the partnership
offers through qualified broker dealers on a best efforts basis, a maximum of
75,000,000 units ($75,000,000) of limited partnership interest at $1 per unit.
The minimum subscription is 2,000 units ($2,000) for initial investments and
1,000 units ($1,000) for additional investments for existing limited partners.
Sales Commissions. With respect to each investor, participating broker
dealers will receive sales commissions of 5% of gross proceeds for subscriptions
where investors elect to receive cash distributions and sales commissions of 9%
of gross proceeds will be paid for subscriptions where investors elect to
reinvest their earnings and acquire additional units in the partnership.
Additionally, participating broker dealers may be entitled to receive up to .5%
of the gross proceeds for bona fide due diligence expenses, and up to an
additional 5% of gross proceeds if investors elect to receive cash distributions
or up to 1% of gross proceeds if investors elect to reinvest their earnings for
certain other expense reimbursements and sales seminar expenses payable by the
partnership. In no event will the total of all compensation payable to
participating broker dealers, including sales commissions, expense
reimbursements, sales seminars and/or due diligence expenses exceed ten percent
(10%) of the program proceeds received plus an additional (0.5%) for bona fide
due diligence expenses as set forth in Rule 2810 of the NASD Conduct Rules.
Further, in no event shall any individual participating broker dealer receive
total compensation including sales commissions, expense reimbursements, sales
seminar or expense reimbursement exceed (10%) of the gross proceeds of their
sales plus an additional (0.5%) for bona fide due diligence expenses as set
forth in Rule 2810 of the NASD Conduct Rules (the "Compensation Limitation")
Although total sales commissions payable could equal 9%, the partnership
anticipates, based on historical experience, that the total sales commissions
payable will not exceed 7.6%. This number is based upon the general partners'
assumption, based on historical experience, that 65% of investors will elect to
compound earnings and receive additional units and 35% of investors will elect
to receive distribution. No participating broker dealer shall execute any
transaction in the partnership in a discretionary account without the prior
written approval of the investor.
Sales by Registered Investment Advisors. In addition to purchasing units
though participating broker dealers, we may accept unsolicited orders for units
directly from you if you utilize the services of a registered investment
advisor. A registered investment advisor is an investment professional retained
by you to advise you regarding your investment strategy regarding all of your
assets, not just your investment with us. Registered investment advisors are
paid by you based upon the total amount of your assets being managed by the
registered investment advisor.
If you utilize the services of a registered investment advisor in acquiring
units, Redwood Mortgage Corp. will pay to the partnership, an amount equal to
the sales commissions otherwise attributable to a sale of units through a
participating broker dealer. The partnership will in turn credit such amounts
received by Redwood Mortgage Corp. to the account of the investor who placed the
unsolicited order.
o Election of Investors to Pay Client Fees. If you acquire units directly
from the partnership through the services of a registered investment advisor,
you will have the election to authorize us to pay your registered investment
advisor an estimated quarterly amount of no more than 2% annually of your
capital account that would otherwise be paid to you as periodic cash
distributions or compounded as earnings. For ease of reference, we have referred
to these fees as "client fees." If you elect to compound earnings, then the
amount of the earnings reinvested by you will be reduced by an amount equal to
the amount of the client fees paid. Thus, the amount of the periodic cash
distributions paid or the amount of earnings compounded will be less if you
elect to pay client fees through us. The authorization to pay client fees is
solely at your election and is not a requirement of investment with us.
o Client Fees are not Sales Commissions. All client fees paid will be paid
from those amounts that would otherwise be paid to you or compounded in your
capital account. The payment of all client fees is noncumulative and subject to
the availability of sufficient earnings in your capital account. In no event
will any such client fees be paid by us as sales commissions or other
compensation. We are merely agreeing to pay to the registered investment
advisor, as an administrative convenience to you, a portion of those amounts
that would otherwise be paid to you. In no event will the total of all
compensation including sales commissions, expense reimbursements, sales seminar
and/or due diligence expenses exceed 10% of the program proceeds received plus
an additional .5% for bona fide due diligence expenses as set forth in Rule 2810
of the NASD Conduct Rules.
o Representations and Warranties of Registered Investment Advisors. All
registered investment advisors will represent and warrant to the partnership
that, among other things, the investment in the units is suitable for you, that
he has informed you of all pertinent facts relating to the liquidity and
marketability of units, and that if he is affiliated with an NASD registered
broker or dealer, that all client fees received by him in connection with this
transaction will be run through the books and records of the NASD member in
compliance with Notice to Members 96-33 and Rules 3030 and 3040 of the NASD
Conduct Rules.
79
Payment of Sales Commissions. As of December 31, 2002, total commissions
have averaged 7.52% of limited partner units sold. In no event will the total of
all compensation payable to participating broker dealers, including sales
commissions, expense reimbursements, sales seminars and/or due diligence
expenses exceed ten percent (10%) of the program proceeds received plus an
additional (0.5%) for bona fide due diligence expenses as set forth in Rule 2810
of the NASD Conduct Rules. Further, in no event shall any individual
participating broker dealer receive total compensation including sales
commissions, expense reimbursements, sales seminar or expense reimbursement
exceed (10%) of the gross proceeds of their sales plus an additional (0.5%) for
bona fide due diligence expenses as set forth in Rule 2810 of the NASD Conduct
Rules (the "Compensation Limitation"). Units may also be offered or sold
directly by the general partners for which they will receive no sales
commissions. No commissions will be paid on any units acquired by partners in
lieu of periodic cash distributions.
Payment of Other Fees to Participating Broker Dealers. The partnership will
not pay referral or similar fees to any accountants, attorneys or other persons
in connection with the distribution of the units. Participating broker dealers
are not obligated to obtain any subscriptions, and there is no assurance that
any units will be sold.
The participating broker dealers shall not directly or indirectly finance
or arrange for the financing of, purchase of any units, nor shall the proceeds
of this offering be used either directly or indirectly to finance the purchase
of any units.
The selling agreement provides that with respect to any liabilities arising
out of the Securities Act of 1933, as amended, the general partners shall
indemnify the participating broker dealer. To the extent that indemnification
provisions purport to include indemnification for liabilities arising under the
Securities Act of 1933, such indemnification, in the opinion of the Securities
and Exchange Commission is contrary to public policy and therefore
unenforceable.
Suitability Requirements. You will be required to comply with (i) the
minimum purchase requirement and investor suitability standard of your state of
residence or (ii) the investor suitability standard imposed by the partnership
in the event that your state of residence does not impose such a standard (See
"INVESTOR SUITABILITY STANDARDS" at page 1).
In order to purchase any units, you must complete and execute the signature
page for the subscription agreement. Any subscription for units must be
accompanied by tender of the sum of $1 per unit. The signature page is set forth
at the end of this prospectus at Exhibit B-l. By executing the signature page
for the subscription agreement, you agree to all of the terms of the partnership
agreement including the grant of a power of attorney under certain
circumstances. Units will be evidenced by a written partnership agreement.
Your subscription agreement will be accepted or rejected by the general
partners within thirty (30) days after its receipt. Subscriptions will be
effective only on acceptance by the general partners and the right is reserved
to reject any subscription "in whole or in part" for any reason.
The general partners and their affiliates may, in their discretion,
purchase units for their own. The maximum number of units that may be purchased
by the general partners or their affiliates is $1,000,000 (1,000,000 units).
Purchases of such units by the general partners or their affiliates will be made
for investment purposes only on the same terms, conditions and prices as to
unaffiliated parties. It is not anticipated that the general partners or their
affiliates will regularly purchase units for their own accounts.
Formation Loan. All selling commissions incurred in connection with the
offer and sale of units and all amounts paid in connection with unsolicited
orders will be paid by Redwood Mortgage Corp. Redwood Mortgage Corp. will pay
the commissions from the proceeds of the formation loan that is being made from
the partnership. In other words, the partnership lends to Redwood Mortgage
Corp., funds from the offering proceeds equal to the amount of sales commission
paid to the participating broker dealers. For example, if an investor elects to
invest $10,000 and elects to reinvest his earnings, the participating broker
dealer will be owed a 9% or $900 sales commission. Instead of paying $900 to the
participating broker dealer, the partnership will lend $900 to Redwood Mortgage
Corp. as part of the formation loan. Redwood Mortgage Corp. pays the
participating broker dealer its sales commission and then over time repays the
partnership the amount of the loan, in the case of our example, $900. That loan,
called a formation loan, is non-interest bearing, unsecured, and is paid back to
the partnership by Redwood Mortgage Corp. over time. The total principal balance
of the formation loan will not be known until the offering closes and all sales
commissions are paid. With respect to this offering, the formation loan could
range from a minimum of $3,750,000 assuming all investors elected to receive
current cash distributions to a maximum of $6,750,000 assuming all investors
elected to compound their earnings.
Initially, upon the formation of the partnership, approximately eighty four
percent (84%) of each dollar invested will be available for loans assuming that
all units offered are purchased and no leveraged funds are utilized. However, as
Redwood Mortgage Corp. repays the formation loan, and if working capital
reserves are applied to loans as has occurred in prior programs, approximately
ninety-six percent (96%), will be available for investment in loans.
80
Although it is possible that the amount of the formation loan could be as
much as nine percent (9%) of the gross proceeds, it is anticipated that the
formation loan will average approximately 7.6% of capital raised. The reason for
this lower anticipated formation loan amount is that through historical
experience and knowledge of professionals in the industry, the general partners
anticipate that sixty-five percent (65%) of the limited partners will elect to
compound their earnings and thirty-five percent (35%) will elect to receive
distributions of earnings. However, if more than sixty-five percent of limited
partners elect to compound earnings, then the formation loan will be higher
because there will be more 9% sales commissions paid. Similarly, if more than
thirty-five percent of limited partners elect to receive cash distributions, the
formation loan will be less because there will be more 5% sales commissions
paid. The formation loan will be unsecured, will not bear interest, and will be
repaid in annual installments. Upon commencement of this offering, Redwood
Mortgage Corp. shall make annual installments of one-tenth of the principal
balance of the formation loan as of December 31 of each year, reduced by a
portion of the early withdrawal penalties. Such payments shall be due and
payable by December 31 of the following year. Upon the termination of the
offering, the principal balance outstanding shall be amortized over ten years
with payments being made on or before December 31 of each year in equal annual
installments of 1/10 of the principal amount outstanding as of the termination
date, reduced by a portion of the early withdrawal penalties. Each payment of
principal amounts after the termination date shall be made on or before December
31 of the following year.
The formation loan for the first offering of units ($15,000,000) totaled
$1,075,000, which represented 7.2% of the limited partners contributions. No
payments were due on this formation loan until after the termination of the
offering which occurred in October, 1996. The first payment commenced January,
1997 and was due on December 31, 1997. The final payment will be due December
31, 2006 unless prepaid earlier.
The formation loan for the second offering of units ($30,000,000) totaled
$2,272,000 which represented 7.6% of the limited partners contributions of
$29,993,000. The first payment was due on December 31, 1997. Payments were due
on the formation loan for the second offering at 1/10 of the outstanding
principal balance of the formation loan until the offering terminated. Then
after the offering terminated in August, 2000, the remaining balance at December
31, 2000 is being paid in equally amortized payments over 10 years, which began
December 31, 2001. The final payment will be due December 31, 2010 unless
prepaid earlier.
As of December 31, 2002, the partnership, in connection with the third
formation loan, had loaned $2,218,000 to Redwood Mortgage Corp. from the
offering proceeds to pay sales commissions to participating broker dealers. This
represents 7.4% of limited partner contributions of $29,999,000. The first
payment commenced January, 2001. Payments were due on the formation loan for the
third offering at 1/10 of the principal balance at December 31, of the preceding
year, until the offering terminated and then equally amortized over ten years,
which commenced in January, 2003. The final payment will be due December 31,
2013, unless prepaid earlier.
As of December 31, 2002, the partnership, in connection with the fourth
formation loan, had loaned $1,300,000 to Redwood Mortgage Corp. from the
offering proceeds to pay sales commissions to the participating broker dealers.
This represents 8.0% of limited partner contributions of $16,316,000. Payment on
the fourth formation loan of 1/10th of the principal balance of the loan as of
December 31 of each year is due and payable by December 31 of the following
year. Upon termination of the offering, the principal balance outstanding shall
be equally amortized over ten years with payments being made on or before
December 31. The first payment will be made on or before December 31, 2003.
The following table summarizes the payments that have been made on the
three formation loans through December 31, 2002.
Formation Loans and Payments
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Payments
received
from Application
Principal Principal Principal Principal Total Redwood of early
advanced advanced advanced advanced payments Mortgage withdrawal Total
Year 1st offering 2nd offering 3rd offering 4th offering due Corp. penalties applied Balance
- -----------------------------------------------------------------------------------------------------------------------------------
1993 $206,000 - - - - - $206,000
1994 319,000 - - - - - 525,000
1995 250,000 - - - - - 775,000
1996 300,000 15,000 - - 0 9,000 7,000 16,000 1,074,000
1997 - 421,000 - - 109,000 99,000 9,000 108,000 1,387,000
1998 - 404,000 - - 151,000 134,000 16,000 150,000 1,641,000
1999 - 708,000 - - 186,000 165,000 25,000 190,000 2,159,000
2000 - 724,000 378,000 - 248,000 230,000 20,000 250,000 3,011,000
2001 - - 1,462,000 - 339,000 300,000 46,000 346,000 4,127,000
2002 - - 378,000 1,300,000 488,000 530,000 18,000 548,000 5,257,000
===================================================================================================================================
Total $1,075,000 $2,272,000 $2,218,000 $1,300,000 $1,521,000 $1,467,000 $141,000 $1,608,000
81
Redwood Mortgage Corp., at its option, may prepay all or any part of the
formation loan. Redwood Mortgage Corp. intends to repay the formation loan
principally from loan brokerage commissions earned on loans, and the receipt of
a portion of the early withdrawal penalties and other fees paid by the
partnership. Since Redwood Mortgage Corp. will use the proceeds from loan
brokerage commissions on loans to repay the formation loan, if all or any one of
the initial general partners is removed as a general partner by the vote of a
majority of limited partners and a successor or additional general partner(s) is
thereafter designated, and if such successor or additional general partner(s)
begins using any other loan brokerage firm for the placement of loans, Redwood
Mortgage Corp. will be immediately released from any further obligation under
the formation loans (except for a proportionate share of the principal
installment due at the end of that year, pro rated according to the days
elapsed). In addition, if all of the general partners are removed, no successor
general partners are elected, the partnership is liquidated and Redwood Mortgage
Corp. is no longer receiving any payments for services rendered, the debt on the
formation loan shall be forgiven and Redwood Mortgage Corp. will be immediately
released from any further obligation under the formation loan.
Because the formation loan does not bear interest, it will have the effect
of slightly diluting the rate of return to limited partners, but to a much
lesser extent than if the partnership were required to bear all of its own
syndication expenses as is the case with certain other publicly offered mortgage
pools.
Escrow Arrangements. Funds received by the participating broker dealers
from subscriptions for units will be immediately available to us for investment.
As this is not our first offering, no escrow will be established. Subscription
proceeds will be released to the partnership and deposited into the our
operating account.
Termination Date of Offering. The offering will terminate one (1) year from
the effective date of the prospectus unless terminated earlier by the general
partners, or unless extended by the general partners for additional one year
periods.
Subscription Account. Your subscription will be deposited into a
subscription account at a federally insured commercial bank or depository and
invested in short-term certificates of deposit, a money market or other liquid
asset account. Once your subscription has been accepted, you will be admitted
into the partnership only when your subscription funds are required by the
partnership to fund a mortgage loan, for the formation loan, to create
appropriate reserves, or to pay organizational expenses or other proper
partnership activities (See "ESTIMATED USE OF PROCEEDS" at page 19). During the
period prior to your admittance of as a limited partner, proceeds from the sale
of units will be held by the general partners for your account in the
subscription account. Investors' funds will be transferred from the subscription
account into the partnership on a first-in, first-out basis. Upon your admission
to the partnership, your subscription funds will be released to the partnership
and units will be issued at the rate of $1 per unit or fraction thereon.
Interest earned on subscription funds while in the subscription account will be
returned to you, or if you elect to compound earnings (see below), the amount
equal to such interest will be added to your investment in the partnership, and
the number of units actually issued shall be increased accordingly.
The general partners anticipate that the delay between delivery of a
subscription agreement and admission to the partnership will be approximately 90
days, during which time you will earn interest at pass book savings account
rates. Subscription agreements are non-cancelable and subscription funds are
non-refundable for any reason. After having subscribed for at least 2,000 units
($2,000), you may at any time, and from time to time subscribe to purchase
additional units in the partnership as long as the offering is open with a
minimum additional investment of 1,000 units ($1,000). You are liable for the
payment of the full purchase price of all units for which you have subscribed.
SUPPLEMENTAL SALES MATERIAL
Sales material in addition to this prospectus which may be used in
connection with this offering include a sales brochure which will highlight and
simplify certain information contained herein. If additional sales material is
prepared for use in connection with the offering, use of such material will be
conditioned on filing with and, if required, clearance by appropriate regulatory
authorities.
As of the date of this prospectus, it is anticipated that the following
sales material will be authorized for use by us in connection with this offering
o a brochure entitled Redwood Mortgage Investors VIII;
o a participating broker-dealer only fact sheet;
o a slide presentation;
o participating broker-dealer only updates;
82
Only the brochure entitled Redwood Mortgage Investors VIII will be
delivered to you. All of the other materials will be for broker-dealer use only.
The general partners and their affiliates may also respond to specific
questions from participating broker dealers and prospective investors. Business
reply cards, introductory letters or similar materials may be sent to
participating broker dealers for customer use, and other information relating to
the offering may be made available to participating broker dealers for their
internal use. However, the offering is made only by means of this prospectus.
Except as described herein or in supplements hereto. We have not authorized the
use of other sales materials in connection with the offering. Although the
information contained in such material does not conflict with any of the
information contained in this prospectus, such material does not purport to be
complete and should not be considered as a part of this prospectus or the
registration statement of which this prospectus is a part, or as incorporated in
this prospectus or the registration statement by reference or as forming the
basis of the offering of the units described herein.
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this or
in supplements hereto or in supplemental sales literature issued by the
partnership and referred to in this prospectus or in supplements thereto. If you
receive such information or representations, such information or representations
must not be relied upon. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, any securities other than the units to
which it relates or any of such units to any person in any jurisdiction in which
such offeror solicitation is unlawful. The delivery of this prospectus at any
time does not imply that the information contained herein is correct at any time
subsequent to its date.
LEGAL PROCEEDINGS
In the normal course of business we 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/recoup its investment from the real property
secured by the deeds. None of these actions would typically be of any material
importance. As of the date hereof, we are not involved in any legal proceedings
other than those that would be considered part of the normal course of business.
LEGAL OPINION
Legal matters in connection with the units offered hereby will be passed
upon for the partnership Cox Castle & Nicholson LLP, 555 Montgomery Street, 15th
Floor, San Francisco, California 94111, counsel for the partnership and the
general partners. Such counsel has not represented the limited partners in
connection with the units offered hereby.
EXPERTS
The financial statements of the partnership at December 31, 2002, 2001 and
2000 and for each of the years in the three year period ended December 31,
2002,the balance sheet at December 31, 2002 of Gymno Corporation, a general
partner, and the balance sheet at September 30, 2002 of Redwood Mortgage Corp, a
general partner, all included in this prospectus have been examined by Armanino
McKenna LLP, independent certified public accountants, as set forth in their
reports thereon appearing elsewhere herein and have been included herein in
reliance on such reports and the authority of such firm as experts in accounting
and auditing. The statements under the caption "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" at page 61 and "ERISA CONSIDERATIONS" at page 70 as they relate to
the matters referenced therein have been reviewed by the Cox Castle & Nicholson
LLP, and are included herein in reliance upon the authority of that firm as
experts thereon.
ADDITIONAL INFORMATION
The partnership has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the units offered pursuant to this prospectus.
For further information, reference is made to the registration statement and to
the exhibits thereto which are available for inspection at no fee in the Office
of the Commission in Washington, D.C., 450 Fifth Street, N.W., Washington, D.C.
20549. Photostatic copies of the material containing this information may be
obtained from the Commission upon paying of the fees prescribed by the rules and
regulations at the Washington office only. Additionally, the Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants, such as the partnership, that file
electronically. The address of the Commission's website is http://www.sec.gov.
83
TABULAR INFORMATION CONCERNING PRIOR PROGRAMS
Appendix I contains prior performance and investment information for the
general partners' previous programs. Tables I through III of Appendix I contain
unaudited information relating to the prior offerings of the partnership and
their experience in raising and investing funds, compensation of the general
partners and their affiliates and operating results of prior programs. Table V
of Appendix I contains unaudited information relating to the partnership's prior
programs' payment of mortgage loans. Table IV is not included because none of
the partnerships has completed its operations or disposed of all of its loans.
Purchasers of the units offered by this prospectus will not acquire any
ownership in interest in any prior program identified in Table V and should not
assume that the results of the prior programs will be indicative of the future
results of this partnership. Moreover, the operating results for the prior
programs identified in Table V should not be considered indicative of future
results of the prior programs or whether the prior programs will achieve their
investment objectives which will in large part depend on facts which cannot now
be determined.
GLOSSARY
The following are definitions of certain terms used in the prospectus and
not otherwise defined herein:
Assignee. The term "Assignee" shall mean a person who has acquired a
beneficial interest in one or more units but who is neither a limited partner
nor an assignee of record.
Capital Account. The term "Capital Account", means, with respect to any
partner, the capital account maintained for such partner in accordance with the
following provisions:
(a) To each partner's capital account there shall be credited, such
partner's capital contribution, such partner's distributive share of profits,
and any items in the nature of income and gain (from unexpected adjustments,
allocations or distributions) that are specially allocated to a partner and the
amount of any partnership liabilities that are assumed by such partner or that
are secured by any partnership property distributed to such partner.
(b) To each partner's capital account there shall be debited the amount of
cash and the gross asset value of any partnership property distributed to such
partner pursuant to any provision of this agreement, such partner's distributive
share of losses, and any items in the nature of expenses and losses that
specially allocated to a partner and the amount of any liabilities of such
partner that are assumed by the partnership or that are secured by any property
contributed by such partner to the partnership.
Distributions. The term "Distributions" means any cash or other property
distributed to holders and the general partners arising from their interests in
the partnership, but shall not include any payments to the general partners
under the provisions of Article 10 of the partnership agreement.
Earnings. The term "Earnings" means all revenues earned by the partnership
less all expenses incurred by the partnership.
Holders. The term "Holders" means the owners of units who are either
partners or assignees of record, and reference to a "Holder" shall be to any one
of them.
Limited Partnership Interest. The term "Limited Partnership Interest" means
a limited partnership interest in Redwood Mortgage Investors VIII, acquired
pursuant to the purchase of units and thereafter means the percentage ownership
interest of any limited partner in the partnership determined at any time by
dividing a limited partner's current capital account by the total outstanding
capital accounts of all limited partners.
Net Income or Net Loss. The term "Net Income or Net Loss" means for each
fiscal year or any other period, an amount equal to the partnership's taxable
income or loss for such fiscal year or other given period, determined in
accordance with Section 703(a) of the Code (for this purpose, all items of
income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) Any income of the partnership that is exempt from federal income tax
and not otherwise taken into account in computing profits or losses shall be
added to such taxable income or loss;
(b) Any expenditures of the partnership described in Section 105(a)(2)(B)
of the Code or treated as Section 105(a)(2)(B) expenditures pursuant to Treasury
Regulation Section 1.7041(b)(2)(iv)(i), and not otherwise taken into account in
computing profits or losses pursuant to Section 10.16 of the partnership
agreement, shall be subtracted from such taxable income or loss;
84
(c) Gain or loss resulting from any disposition of partnership property
with respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the gross asset value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its gross asset value;
(d) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account depreciation, amortization or other cost recovery
deductions for such fiscal year or other period, computed such that if the gross
asset value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of a fiscal year or other period, depreciation,
amortization or other cost recovery deductions shall be an amount which bears
the same ratio to such beginning gross asset value as the federal income tax
depreciation, amortization or other cost recovery deductions for such fiscal
year or other period bears to such beginning adjusted tax basis; and
(e) Notwithstanding any other provision of Section 10.16 of the partnership
agreement, any items in the nature of income or gain or expenses or losses,
which are specially allocated, shall not be taken into account in computing
profits or losses.
Special-Use Properties. The term "Special-Use Properties" shall mean
bowling alleys, churches and gas stations.
Subscription Agreement. The term "Subscription Agreement" means the
agreement, attached to this prospectus as Exhibit B, in which a prospective
investor agrees to purchase units in Redwood Mortgage Investors VIII.
Tax-Exempt Investors. The term "Tax-Exempt Investor(s)" means qualified
pension, profit sharing and other private retirement trusts, bank funds for such
trusts, government pension and retirement trusts, HR-10 (Keogh) plans and
individual retirement accounts (IRAs).
Working Capital Reserve. The term "Working Capital Reserve" shall mean a
portion of the invested capital which the general partners, in their discretion,
determine is prudent to be maintained by the partnership to pay for operating,
and other costs and expenses the partnership may incur with respect to its
activities.
85
INDEX TO THE FINANCIAL STATEMENTS
Redwood Mortgage Investors VIII
Independent Auditors' Report.................................................88
Financial Statements, December 31, 2002, 2001 and 2000.......................89
Interim Financial Statements, June 30, 2003 (unaudited).....................109
GYMNO Corporation
Independent Auditors' Report................................................118
Balance Sheet as of December 31, 2002.......................................119
Interim Balance Sheet, as of June 30, 2003 (unaudited)......................123
Redwood Mortgage Corp.
Independent Auditors' Report................................................125
Balance Sheet as of September 30, 2002......................................126
Interim Balance Sheet, as of June 30, 2003 (unaudited)......................133
86
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
FINANCIAL STATEMENTS
DECEMBER 31, 2002
87
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Boulevard, Suite 500
San Ramon, CA 94583
(925) 790-2600
INDEPENDENT AUDITORS' REPORT
To the Partners
Redwood Mortgage Investors VIII
Redwood City, California
We have audited the accompanying consolidated balance sheets of Redwood
Mortgage Investors VIII (a California limited partnership) as of December 31,
2002 and 2001 and the related consolidated statements of income, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Redwood
Mortgage Investors VIII as of December 31, 2002 and 2001and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
ARMANINO McKENNA LLP
/s/ Thomas E. Gard
San Ramon, California
February 21, 2003
88
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 2002 AND 2001 (in thousands)
ASSETS
2002 2001
-------------- --------------
Cash and cash equivalents $ 7,188 $ 1,917
Loans
Loans secured by deeds of trust 83,650 82,790
Loans, unsecured - 4
Allowance for loan losses (3,021) (2,247)
-------------- --------------
Net loans 80,629 80,547
-------------- --------------
Interest and other receivables
Accrued interest and late fees 3,913 3,345
Advances on loans 279 195
Other receivables 888 -
-------------- --------------
5,080 3,540
-------------- --------------
Loan origination fees, net 22 6
Real estate held for sale (net of reserve of $500) 9,286 -
-------------- --------------
9,308 6
-------------- --------------
Total assets $ 102,205 $ 86,010
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ - $ 11,400
Accounts payable 449 74
Payable to affiliate 294 109
Deferred interest 112 -
Note payable 1,782 -
-------------- --------------
Total liabilities 2,637 11,583
-------------- --------------
Minority interest 1,213 -
-------------- --------------
Investors in applicant status 2,578 673
-------------- --------------
Partners' capital
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $592 and $400 for 2002 and 2001, respectively; and
formation loan receivable of $5,257 and $4,126 for 2002
and 2001, respectively 95,690 73,687
General partners' capital, net of unallocated syndication costs
of $6 and $4 for 2002 and 2001, respectively 87 67
-------------- --------------
Total partners' capital 95,777 73,754
-------------- --------------
Total liabilities and partners' capital $ 102,205 $ 86,010
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
89
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except for per limited partner amounts)
2002 2001 2000
--------------- -------------- ---------------
Revenues
Interest on loans $ 11,416 $ 8,920 $ 6,261
Late fees 114 99 66
Other 7 16 22
--------------- -------------- ---------------
11,537 9,035 6,349
--------------- -------------- ---------------
Expenses
Mortgage servicing fees 1,098 552 506
Interest expense 516 972 887
Amortization of loan origination fees 12 14 12
Provisions for losses on loans 780 957 376
Provisions for losses on real estate 500 - -
Asset management fees 325 158 61
Clerical costs from Redwood Mortgage Corp. 266 241 114
Professional services 66 13 64
Broker expense 444 - -
Other 44 35 42
--------------- -------------- ---------------
4,051 2,942 2,062
--------------- -------------- ---------------
Net income $ 7,486 $ 6,093 $ 4,287
=============== ============== ===============
Net income
General partners (1%) $ 75 $ 61 $ 43
Limited partners (99%) 7,411 6,032 4,244
--------------- -------------- ---------------
$ 7,486 $ 6,093 $ 4,287
=============== ============== ===============
Net income per $1,000 invested by limited partners
for entire period
Where income is reinvested and compounded $ 87 $ 90 $ 86
=============== ============== ===============
Where partner receives income in periodic distributions $ 84 $ 86 $ 83
=============== ============== ===============
The accompanying notes are an integral part of these consolidated financial
statements
90
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of changes in partners' capital
For the Years Ended December 31, 2002, 2001 and 2000 (in thousands)
Limited Partners
----------------------------------------------------------
Capital
Investors In Account Unalloc. Formation Total
Applicant Limited Syndicat.on Loan Partners'
Status Partners' Costs Receivable Capital
---------------- -------------- ------------ -------------- --------------
Balances at December 31, 1999 $ 330 $ 39,531 $ (342) $ (2,159) $ 37,030
Contributions on application 14,887 - - - -
Formation loan increases - - - (1,102) (1,102)
Formation loan payments - - - 230 230
Interest credited to partners in applicant
status 5 - - - -
Interest withdrawn (1) - - - -
Transfers to partners' capital (14,996) 14,981 - - 14,981
Net income - 4,244 - - 4,244
Syndication costs incurred - - (227) - (227)
Allocation of syndication costs - (248) 248 - -
Partners' withdrawals - (1,976) - - (1,976)
Early withdrawal penalties - (30) 10 20 -
---------------- -------------- ------------ -------------- --------------
Balances at December 31, 2000 225 56,502 (311) (3,011) 53,180
Contributions on application 19,712 - - - -
Formation loan increases - - - (1,462) (1,462)
Formation loan payments - - - 300 300
Interest credited to partners in applicant
status 1 - - - -
Transfers to partners' capital (19,265) 19,245 - - 19,245
Net income - 6,032 - - 6,032
Syndication costs incurred - - (291) - (291)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,317) - - (3,317)
Early withdrawal penalties - (70) 24 46 -
---------------- -------------- ------------ -------------- --------------
Balances at December 31, 2001 673 78,214 (400) (4,126) 73,687
Contributions on application 21,563 - - - -
Formation loan increases - - - (1,677) (1,677)
Formation loan payments - - - 530 530
Interest credited to partners in applicant
status 1 - - - -
Transfers to partners' capital (19,659) 19,659 - - 19,659
Net income - 7,411 - - 7,411
Syndication costs incurred - - (377) - (377)
Allocation of syndication costs - (178) 178 - -
Partners' withdrawals - (3,543) - - (3,543)
Early withdrawal penalties - (23) 7 16 -
---------------- -------------- ------------ -------------- --------------
Balances at December 31, 2002 $ 2,578 $ 101,540 $ (592) $ (5,257) $ 95,690
================ ============== ============ ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
91
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of changes in partners' capital
For the Years Ended December 31, 2002, 2001 and 2000 (in thousands)
General Partners
----------------------------------------------------------
Capital Account Unallocated Total Total
General Syndication General Partners' Partners'
Partners' Costs Capital Capital
-------------------- ---------------- ------------------- ------------------
Balances at December 31, 1999 $ 35 $ (3) $ 32 $ 37,062
Contributions on application - - - -
Formation loan increases - - - (1,102)
Formation loan payments - - - 230
Interest credited to partners in applicant status - - - -
Capital contributed 15 - 15 14,996
Net income 43 - 43 4,287
Syndication costs incurred - (2) (2) (229)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (40) - (40) (2,016)
Early withdrawal penalties - - - -
-------------------- ---------------- ------------------- ------------------
Balances at December 31, 2000 51 (3) 48 53,228
Contributions on application - - - -
Formation loan increases - - - (1,462)
Formation loan payments - - - 300
Interest credited to partners in applicant status - - - -
Capital contributed 20 - 20 19,265
Net income 61 - 61 6,093
Syndication costs incurred - (3) (3) (294)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (59) - (59) (3,376)
Early withdrawal penalties - - - -
-------------------- ---------------- ------------------- ------------------
Balances at December 31, 2001 71 (4) 67 73,754
Contributions on application - - - -
Formation loan increases - - - (1,677)
Formation loan payments - - - 530
Interest credited to partners in applicant status - - - -
Capital contributed 22 - 22 19,681
Net income 75 - 75 7,486
Syndication costs incurred - (4) (4) (381)
Allocation of syndication costs (2) 2 - -
Partners' withdrawals (73) - (73) (3,616)
Early withdrawal penalties - - - -
-------------------- ---------------- ------------------- ------------------
Balances at December 31, 2002 $ 93 $ (6) $ 87 $ 95,777
==================== ================ =================== ==================
The accompanying notes are an integral part of these consolidated financial
statements
92
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of cash flows
For the Years Ended December 31, 2002, 2001 and 2000 (in thousands)
2002 2001 2000
---------------- ---------------- ---------------
Cash flows from operating activities
Net income $ 7,486 $ 6,093 $ 4,287
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan and real estate losses 1,280 957 376
Change in operating assets and liabilities
Unsecured loans 4 50 (5)
Accrued interest and late fees (1,253) (2,306) (328)
Advances on loans (312) (23) (139)
Other receivables (888) - -
Loan origination fees (16) 7 6
Accounts payable 375 44 1
Payable to affiliate 185 109 -
Deferred interest 112 (82) (131)
---------------- ---------------- ---------------
Net cash provided by operating activities 6,973 4,849 4,067
---------------- ---------------- ---------------
Cash flows from investing activities
Loans originated (32,601) (47,512) (49,289)
Principal collected on loans 26,083 33,239 16,546
Payments for development of real estate (219) - -
Proceeds from disposition of real estate - - 360
---------------- ---------------- ---------------
Net cash used in investing activities (6,737) (14,273) (32,383)
---------------- ---------------- ---------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net (11,400) (5,000) 16,400
Repayments on note payable (7) - -
Contributions by partner applicants 21,586 19,713 14,892
Interest withdrawn by partners in applicant status - - (1)
Partners' withdrawals (3,616) (3,376) (2,017)
Syndication costs paid (381) (294) (229)
Formation loan lending (1,677) (1,462) (1,102)
Formation loan collections 530 300 230
---------------- ---------------- ---------------
Net cash provided by financing activities 5,035 9,881 28,173
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,271 457 (143)
Cash and cash equivalents - beginning of year 1,917 1,460 1,603
---------------- ---------------- ---------------
Cash and cash equivalents - end of year $ 7,188 $ 1,917 $ 1,460
================ ================ ===============
Supplemental disclosures of cash flow information
Cash paid for interest $ 516 $ 972 $ 888
================ ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements
93
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 1 - Organizational and General
Redwood Mortgage Investors VIII, a California Limited Partnership (the
"Partnership"), was organized in 1993. The general partners are Michael R.
Burwell, an individual, Gymno Corporation, and Redwood Mortgage Corp., both
California corporations. 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., a general partner. At December 31, 2002, the Partnership
was in its fourth offering stage, wherein contributed capital totaled
$91,238,920 of approved aggregate offerings of $125,000,000. As of December 31,
2002 and 2001, $ 2,578,000 and $673,000, respectively, remained in applicant
status, and total Partnership Units sold of 88,660,947 and were in the aggregate
of $91,239,000 and $69,676,000 respectively.
A minimum of $250,000 and a maximum of $15,000,000 in Partnership Units
were initially offered through qualified broker-dealers. This initial offering
closed in October 1996. In December 1996, the Partnership commenced a second
offering of an additional $30,000,000, which closed on August 30, 2000. On
August 31, 2000, the Partnership commenced a third offering for an additional
$30,000,000, which closed in April 2002. On October 30, 2002, the Partnership
commenced a fourth offering for an additional $50,000,000. As loans are
identified, partners are transferred from applicant status to admitted partners
participating in loan operations.
Sales commissions - formation loans
Sales commissions are not paid directly by the Partnership out of the
offering proceeds. Instead, the Partnership loans to Redwood Mortgage Corp., one
of the general partners, amounts to pay all sales commissions and amounts
payable in connection with unsolicited orders. This loan is unsecured and
non-interest bearing and is referred to as the "formation loan."
The Formation Loan relating to the initial $15,000,000 offering totaled
$1,075,000, which was 7.2% of limited partners' contributions of $14,932,000. It
is being repaid, without interest, in ten annual installments of $107,000, which
commenced on January 1, 1997, following the year the initial offering closed.
The Formation Loan relating to the second offering ($30,000,000) totaled
$2,272,000, which was 7.6% of limited partners' contributions of $29,993,000. It
is being repaid, without interest, in ten equal annual installments of $201,000,
which commenced on January 1, 2001, following the year the second offering
closed. Additional payments on this loan were also made during the offering
period.
The Formation Loan relating to the third offering ($30,000,000) totaled
$2,218,000, which was 7.4% of the limited partners' contributions of
$29,999,000. It is to be repaid, without interest, in ten annual installments of
$178,000, which will commence on January 1, 2003. Additional payments on this
loan were also made during the offering stage.
The Formation Loan relating to the fourth offering ($50,000,000) totaled
$1,300,000 as of December 31, 2002, which was 8.0% of the limited partners
contributions of $16,316,000 through December 31, 2002. An equal annual
repayment schedule on this loan, without interest, will commence in the year
subsequent to the closing of this offering.
For the fourth offering, sales commissions paid to brokers range from 0%
(units sold by general partners) to 9% of gross proceeds. The Partnership
anticipates that the sales commissions will approximate 7.6% based on the
assumption that 65% of investors will elect to reinvest earnings, thus
generating full 9% commissions. The principal balance of the Formation Loan will
increase as additional sales of units are made. The amount of the annual
installment payment to be made by Redwood Mortgage Corp., during the offering
stage, will be determined at annual installments of one-tenth of the principal
balance of the Formation Loan as of December 31 of each year.
94
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 1 - Organizational and General (continued)
Sales commissions - formation loans (continued)
The following summarizes Formation Loan transactions to December 31, 2002
(in thousands):
Initial Subsequent Third Fourth
Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 Total
------------- -------------- -------------- ------------- ------------
Limited Partner
Contributions $ 14,932 $ 29,993 $ 29,999 $ 16,316 $ 91,239
============= ============== ============== ============= ============
Formation Loan made $ 1,075 $ 2,272 $ 2,218 $ 1,300 $ 6,865
Repayments to date (595) (661) (211) - (1,467)
Early withdrawal
penalties applied (50) (63) (28) - (141)
------------- -------------- -------------- ------------- ------------
Balance,
December 31, 2002 $ 430 $ 1,548 $ 1,979 $ 1,300 $ 5,257
============= ============== ============== ============= ============
Percent loaned 7.2% 7.6% 7.4% 8.0% 7.5%
The Formation Loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced.
Syndication costs
The Partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses and filing fees. Syndication costs are charged against partners'
capital and are being allocated to individual partners consistent with the
partnership agreement.
Through December 31, 2002, syndication costs of $2,071,000 had been
incurred by the Partnership with the following distribution (in thousands):
Costs incurred $2,071
Early withdrawal penalties applied (72)
Allocated to date (1,401)
---------------
December 31, 2002 balance $ 598
===============
Syndication costs attributable to the initial offering ($15,000,000) were
limited to the lesser of 10% of the gross proceeds or $600,000 with any excess
being paid by the general partners. Applicable gross proceeds were $14,932,000.
Related expenditures totaled $582,000 ($570,000 syndication costs plus $12,000
organization expense) or 3.9%.
Syndication costs attributable to the second offering ($30,000,000) were
limited to the lesser of 10% of the gross proceeds or $1,200,000 with any excess
being paid by the general partners. Gross proceeds of the second offering were
$29,993,000. Syndication costs totaled $598,000 or 2% of contributions.
95
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 1 - Organizational and General (continued)
Syndication costs (continued)
Syndication costs attributable to the third offering ($30,000,000) were
limited to the lesser of 10% of the gross proceeds or $1,200,000 with any excess
being paid by the general partners. Gross proceeds of the third offering were
$29,999,000. Syndication costs totaled $643,000 or 2% of contributions.
Syndication costs attributable to the fourth offering ($50,000,000) will be
limited to the lesser of 10% of the gross proceeds or $2,000,000 with any excess
to be paid by the general partners. As of December 31, 2002, the fourth offering
had incurred syndication costs of $260,000 (1.6% of contributions).
Term of the Partnership
The Partnership is scheduled to terminate on December 31, 2032, unless
sooner terminated as provided.
note 2 - Summary of Significant Accounting Policies
Basis of presentation
The Partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiary, Russian Hill Property Company, LLC ("Russian") and
its 66%-owned subsidiary, Stockton Street Property Company, LLC ("Stockton").
All significant intercompany transactions and balances have been eliminated in
consolidation.
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year classification.
Management estimates
The preparation of consolidated 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 date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. 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 by the effective interest method.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
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.
96
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 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 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, 2002 and 2001, loans
categorized as impaired by the Partnership were $0 and $710,000, respectively,
with a reduction in the carrying value of the impaired loans of $0 and $88,000,
respectively. The reduction in the carrying value of the impaired loans is
included in the allowance for loan losses. The average impaired recorded
investment in impaired loans was $355,000 for 2002 and 2001, and was $0 for
2000.
At December 31, 2002, the Partnership had twenty loans, past due 90 days or
more totaling $28,650,000, of which $9,454,500 had been brought current in
February, 2003. The Partnership does not consider 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. As presented in Note
11 to the consolidated financial statements, the average loan to appraised value
of security at the time the loans were consummated for loans outstanding at
December 31, 2002 and 2001 was 60.61% and 59.67%, respectively. When loans are
considered impaired, the allowance for loan losses is updated to reflect the
change in the valuation of collateral security. However, a low loan to value
ratio has the tendency to minimize reductions for impairment.
During 2002, the Partnership restructured three previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$1,090,000. Had the loans been current in accordance with their original terms
and had been outstanding throughout the entire year, the Partnership would have
recognized gross interest income of $85,000 for the year ended December 31,
2002. The Partnership recognized $61,000 of interest income on the restructured
loans for the year ended December 31, 2002.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2002
and 2001 was as follows (in thousands):
2002 2001
------------- -------------
Impaired loans $ - $ 88
Specified loans 120 -
General 2,901 2,155
Unsecured loans - 4
------------ -------------
$ 3,021 $ 2,247
============ =============
97
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the years ended
December 31:
2002 2001 2000
------------- -------------- --------------
Beginning balance $ 2,247 $ 1,345 $ 834
Restructured loans 11 - -
Additions charged to income 780 873 469
Write-offs (17) 29 42
------------- -------------- --------------
$ 3,021 $ 2,247 $ 1,345
============= ============== ==============
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. During 2002, there were two properties acquired by the
Partnership. Both of these properties are held in limited liability
corporations, which are majority owned by the Partnership (see Note 5).
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposition of Long Lived Assets," the
Partnership periodically compares the carrying value of real estate to expected
undiscounted future cash flows for the purpose of assessing the recoverability
of the recorded amounts. If the carrying value exceeds future undiscounted cash
flows, the assets are reduced to estimated fair value. The Partnership increased
the allowance for losses on real estate held for sale by $500,000 during the
year ended December 31, 2002.
Loan origination fees
The Partnership capitalizes fees for obtaining bank financing. The fees are
amortized over the life of the financing using the straight-line method.
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated 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 held 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 selected other options.
98
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 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 2002, 2001 and 2000, late fee revenue of $114,000, $99,000 and
$66,000, respectively, was recorded. The Partnership has a recorded late fee
receivable at December 31, 2002 and 2001 of $133,000 and $80,000, respectively.
An allowance for uncollectible late fees of $58,000 and $0 at December 31, 2002
and 2001, respectively is reflected in the allowance for loan losses.
Recently issued accounting pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any
variable interest entities created after January 31, 2003 and is effective
beginning in the third quarter of 2002 to any variable interest entities created
prior to the issuance of the interpretation. FIN 46 provides a new framework to
identify variable interest entities and determining when an entity should
include the assets, liabilities, non-controlling interests and the results of
activities of a variable interest entity in its financial statements. The
implementation of FIN 46 is not anticipated to have any significant effect on
the Partnership.
note 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 all 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.
Applicant status
Subscription funds received from purchasers of Partnership units are not
admitted to the Partnership until appropriate lending opportunities are
available. During the period prior to the time of admission, which is
anticipated to be between 1 - 90 days, purchasers' subscriptions will remain
irrevocable and will earn interest at money market rates, which are lower than
the anticipated return on the Partnership's loan portfolio.
During 2002, 2001 and 2000, interest totaling $1,000, $800 and $5,000,
respectively, were credited to partners in applicant status. As loans were made
and partners were transferred to regular status to begin sharing in income from
loans secured by deeds of trust, the interest credited was either paid to the
investors or transferred to partners' capital along with the original
investment.
99
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 3 - Other Partnership Provisions (continued)
Election to receive monthly, quarterly or annual distributions
At subscription, investors elect 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.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is non-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 as stated in the notice of
withdrawal 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 is restricted to the availability of Partnership cash flow.
Guaranteed interest rate for offering period
For the first three offerings, the general partners guaranteed an earnings
rate equal to the greater of actual earnings from mortgage operations or 2%
above The Weighted Average Cost of Funds Index for the Eleventh District Savings
Institutions (Savings & Loan & Thrift Institutions) as computed by the Federal
Home Loan Bank of San Francisco on a monthly basis, up to a maximum interest
rate of 12%. The interest rate was guaranteed during the period commencing with
the day a limited partner was admitted to the Partnership and ended three months
after the initial through third offering termination date, which in all cases
was August 2002. Through August 2002, actual earnings exceeded the guaranteed
amount for each month.
100
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 4 - General Partners and Related Parties
The following are commissions and/or fees, which are paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership 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. In 2002, 2001 and 2000, loan brokerage commissions paid by the
borrowers were $996,000, $1,156,000 and $1,878,000, 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., 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 thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans. Mortgage servicing fees of
$1,098,000, $552,000 and $506,000 were incurred for 2002, 2001 and 2000,
respectively. The Partnership has a payable to Redwood Mortgage Corp. for
servicing fees of $294,000 and $109,000 at December 31, 2002 and 2001,
respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual). Asset management fees of $325,000, $158,000 and $61,000 were
incurred for 2002, 2001 and 2000, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
Redwood Mortgage Corp., a general partner, is reimbursed by the Partnership
for all operating expenses 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 2002, 2001 and 2000,
operating expenses totaling $266,000, $241,000 and $114,000 respectively, were
reimbursed to Redwood Mortgage Corp.
Contributed capital
The general partners jointly or severally are to contribute 1/10 of 1% of
limited partners' contributions in cash contributions as proceeds from the
offerings are received from the limited partners. As of December 31, 2002 and
2001, Gymno Corporation, a general partner, had capital in accordance with
Section 4.02(a) of the Partnership Agreement.
101
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 5 - Real Estate Held for Sale
During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs"). The Partnership's
investments in the LLCs are reflected at the lower of cost or fair value,
including estimated costs of property disposition.
The following schedule reflects the cost of the LLCs' properties and
recorded reductions to estimated fair values:
Costs of properties $ 9,786
Reduction in value (500)
-------------
Real estate held for sale $ 9,286
=============
Russian
During 2002, a single-family residence that secured a Partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian was formed by the Partnership to complete the
development and sale of the property. The assets and liabilities of Russian have
been consolidated into the accompanying consolidated balance sheets of the
Partnership. Costs related to the sale of this property are being capitalized;
thus, there was no income or expense recognized by Russian during 2002. As of
December 31, 2002, the Partnership had advanced approximately $37,000 to Russian
for sales costs. At December 31, 2002, the Partnership's total investment in
Russian was $3,913,000, net of a valuation allowance of $500,000.
Stockton
During 2002, six condominium units that secured a Partnership loan totaling
$2,163,000, including accrued interest and advances, were transferred via a
statutory warranty deed to a new entity named Stockton Street Property Company,
LLC ("Stockton"). In addition, senior debt was assumed by Stockton on the
property in the amount of $1,789,000 (see Note 7). Stockton was formed by the
Partnership and an affiliate to complete development and sales of the
condominium units. The Partnership is co-manager of Stockton along with the
other member and is to receive 66% of the profits or losses. As such, the assets
and liabilities of Stockton have been consolidated into the accompanying
consolidated balance sheets of the Partnership. Development costs are being
capitalized; thus, there was no income or expense recognized by Stockton during
2002. As of December 31, 2002, advances of approximately $238,000 were made for
construction and other related development costs and $87,000 of interest expense
was capitalized. At December 31, 2002, the Partnership's total investment in
Stockton was $5,373,000.
note 6 - Bank Line of Credit
The Partnership has a bank line of credit expiring July 10, 2004, of up to
$20,000,000 at prime secured by its loan portfolio. The outstanding balances
were $0 and $11,400,000 at December 31, 2002 and 2001, respectively. The
interest rate was 4.25% (prime) at December 31, 2002. The line of credit calls
for certain financial covenants. The Partnership was in compliance with these
covenants for the years ended December 31, 2002 and 2001.
Should the general partners choose not to renew the line of credit, the
balance then outstanding would be converted to a three-year term loan.
102
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 7 - Note Payable
The Partnership assumed a bank loan of $1,789,000 in connection with the
foreclosure on a property (see Note 5). As of December 31, 2002, $1,782,000 was
outstanding on this note. The loan is secured by the property and bears interest
at 5.68% at December 31, 2002.
Future maturities on the note payable are as follows (in thousands):
2003 $ 22
2004 23
2005 24
2006 26
2007 27
Thereafter 1,660
------------
$ 1,782
============
note 8 - Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the consolidated financial statements to the tax basis of Partnership capital
(in thousands):
2002 2001
------------- --------------
Partners' capital per consolidated
financial statements $ 95,777 $ 73,754
Non-amortized syndication costs 598 403
Allowance for loan losses 3,521 2,247
Formation loans receivable 5,257 4,126
------------- --------------
Partners' capital - tax basis $105,153 $ 80,530
============= ==============
In 2002 and 2001, approximately 47% and 48% of taxable income was allocated
to tax-exempt organizations (i.e., retirement plans), respectively. Such
organizations generally do not have to file income tax returns.
note 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 carrying value was $83,650,000 and $82,790,000 at
December 31, 2002 and 2001, respectively. The fair value of these loans of
$84,976,000 and $84,000,000, 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.
103
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, AND 2001 and 2000
note 10 - Non-cash Transactions
During 2002, the Partnership foreclosed on two properties (see Note 5),
which resulted in an increase in real estate held for sale and notes payable of
$8,354,000 and $1,789,000, respectively and a decrease in loans receivable,
accrued interest and advances of $5,986,000, $383,000 and $196,000,
respectively.
During 2002, the Partnership restructured three loans that resulted in an
increase to loans receivable and the allowance for loan losses of $345,000 and
$11,000, respectively and a decrease to accrued interest and advances of
$302,000 and $32,000, respectively.
note 11 - Asset Concentrations and Characteristics
The loans are secured by recorded deeds of trust. At December 31, 2002 and
2001, there were 70 and 76 secured loans outstanding, respectively, with the
following characteristics (dollars in thousands):
2002 2001
--------------- ---------------
Number of secured loans outstanding 70 76
Total secured loans outstanding $ 83,650 $82,790
Average secured loan outstanding $ 1,195 $ 1,089
Average secured loan as percent of total 1.43% 1.32%
Average secured loan as percent of partners' capital 1.25% 1.48%
Largest secured loan outstanding $ 4,943 $ 7,000
Largest secured loan as percent of total 5.91% 8.46%
Largest secured loan as percent of partners' capital 5.16% 9.49%
Number of counties where security is located (all California) 15 12
Largest percentage of secured loans in one county 27.22% 41.40%
Average secured loan to appraised value of security 60.61% 59.67%
at time loan was consummated
Number of secured loans in foreclosure status 6 3
Amount of secured loans in foreclosure $ 4,029 $ 1,051
104
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 11 - Asset Concentrations and Characteristics (continued)
The following secured loan categories were held at December 31, 2002 and 2001
(in thousands):
2002 2001
------------- --------------
First trust deeds $ 46,117 $ 42,984
Second trust deeds 30,930 34,641
Third trust deeds 6,603 5,165
------------- --------------
Total loans 83,650 82,790
Prior liens due other lenders 79,846 67,945
------------- --------------
Total debt $ 163,496 $ 150,735
============= ==============
Appraised property value at time of loan $ 269,773 $ 252,604
Total investments as a percent of appraisals 60.61% 59.67%
Investments by type of property
Owner occupied homes $ 12,854 $ 11,019
Non-owner occupied homes 23,720 26,523
Apartments 6,572 7,337
Commercial 40,504 37,911
------------- --------------
$ 83,650 $ 82,790
============= ==============
The interest rates on the loans range from 7.50% to 14.00% at December 31,
2002.
Scheduled maturity dates of secured loans as of December 31, 2002 are as
follows:
Year Ending December 31,
------------------------------------
2003 $44,101
2004 12,912
2005 11,879
2006 1,723
2007 8,198
Thereafter 4,837
--------------
$83,650
==============
The scheduled maturities for 2002 include fifteen loans totaling
$18,765,000 (22.4%), which are past maturity at December 31, 2002. Interest
payments on thirteen of these loans were delinquent. Two of these loans totaling
$7,000,000 were paid off subsequent to year-end.
105
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 11 - Asset Concentrations and Characteristics (continued)
Cash deposits at December 31, 2002 of $7,370,000 were in one bank. The
balances exceeded FDIC insurance limits (up to $100,000 per bank) by
approximately $7,270,000. This bank is the same financial institution that has
provided the Partnership with the $20,000,000 maximum line of credit. As and
when deposits in the Partnership's bank accounts increase significantly beyond
the insured limit, the funds are either placed on new loans or used to pay-down
the line of credit balance.
note 12 - Commitments and Contingencies
Construction loans
The Partnership has construction loans, which are at various stages of
completion. The Partnership has approved the borrowers up to a maximum loan
balance; however, disbursements are made during completion phases throughout the
construction process. At December 31, 2002, there was $2,338,000 of
undistributed construction loans.
Workout agreements
The Partnership has negotiated various workout agreements with borrowers.
The Partnership is not obligated to fund additional money as of December 31,
2002. There are approximately six loans totaling $5,209,000 in workout
agreements as of December 31, 2002.
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.
106
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
note 13 - Selected Financial Information (Unaudited)
Calendar Quarter
-------------------------------------------------------------------------
(in thousands, except for Net income per $1,000 invested amounts)
-------------------------------------------------------------------------
First Second Third Fourth Annual
----------- ----------- ----------- ------------- ------------
Revenues
2002 $2,602 $2,515 $3,165 $ 3,266 $11,548
2001 2,151 2,195 2,265 2,425 9,035
2000 1,094 1,373 1,884 1,998 6,349
Expenses
2002 799 665 1,311 1,287 4,062
2001 802 711 676 753 2,942
2000 164 337 763 798 2,062
Net income allocated to general partners
2002 18 18 19 20 75
2001 13 14 15 17 61
2000 9 10 11 12 43
Net income allocated to limited partners
2002 1,784 1,831 1,836 1,960 7,411
2001 1,335 1,469 1,573 1,655 6,032
2000 920 1,026 1,110 1,188 4,244
Net income per $1,000 invested
Where income is reinvested
2002 21 21 21 24 87
2001 22 22 22 24 90
2000 21 21 21 23 86
Where income is withdrawn
2002 21 21 21 21 84
2001 20 22 22 20 86
2000 20 21 21 21 83
note 14 -Subsequent Events
Subsequent to year-end and through the date of this report, the Partnership
has received $5,799,000 of new investor money for the current offering and had
admitted $2,379,000 of partners in applicant status into the Partnership.
107
REDWOOD MORTGAGE INVESTORS VIII
INTERIM FINANCIAL STATEMENTS
In the opinion of the general partners of Redwood Mortgage Investors VIII,
all adjustments necessary for a fair presentation of the financial position and
results of operations and cash flows for the interim period presented herein
have been made. All such adjustments are of a normal, recurring nature. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. However, the
general partners believe that the disclosures contained herein are adequate to
make the information presented not misleading. It is suggested that these
unaudited financial statements be read in conjunction with the corresponding
audited financial statements and the notes thereto included elsewhere in this
prospectus.
108
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003 (unaudited)
(in thousands)
ASSETS
June 30,
2003
---------------
Cash and cash equivalents $ 6,790
---------------
Loans
Loans secured by deeds of trust 109,927
Loans, unsecured 34
---------------
Allowance for loan losses (2,606)
---------------
Net loans 107,355
---------------
Interest and other receivables
Accrued interest and late fees 2,823
Advances on loans 184
Other receivables 650
---------------
3,657
---------------
Loan origination fees, net 13
Real estate held for sale, net of
allowance of $500 9,748
---------------
Total assets $ 127,563
===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 643
Payable to affiliate 283
Deferred interest -
Note payable 1,771
---------------
Total liabilities 2,697
---------------
Minority interest 1,352
---------------
Investors in applicant status 5,540
---------------
Partners' capital
Limited partners' capital, subject to redemption net
of unallocated syndication costs of $751 and
formation loan receivable of $6,710 117,865
General partners' capital, net of unallocated syndication
costs of $8 109
---------------
Total partners' capital 117,974
---------------
Total liabilities and partners' capital $ 127,563
===============
The accompanying notes are an integral part of the consolidated financial
statements.
109
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (unaudited)
(in thousands, except for per limited partner amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- -------------
Revenues
Interest on loans $ 2,942 $ 2,505 $ 5,706 $ 5,093
Interest-bank 23 - 40 -
Late fees 93 7 100 20
Other 14 3 15 4
-------------- -------------- -------------- -------------
3,072 2,515 5,861 5,117
-------------- -------------- -------------- -------------
Expenses
Mortgage servicing fees 241 221 447 464
Interest expense - 89 1 224
Amortization of loan origination fees 3 3 6 6
Provisions for losses on loans and real estate 133 179 245 405
Asset management fees 111 80 209 156
Clerical costs from Redwood Mortgage Corp. 72 66 142 131
Professional services 22 15 67 52
Broker expense 100 - 181 -
Other 29 12 72 27
-------------- -------------- -------------- -------------
711 665 1,370 1,465
-------------- -------------- -------------- -------------
Net income $ 2,361 $ 1,850 $ 4,491 $ 3,652
============== ============== ============== =============
Net income: general partners (1%) $ 24 $ 19 $ 45 $ 37
limited partners (99%) 2,337 1,831 4,446 3,615
-------------- -------------- -------------- -------------
$ 2,361 $ 1,850 $ 4,491 $ 3,652
============== ============== ============== =============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and compounded $19.20 $21.05 $39.48 $42.84
============== ============== ============== =============
-where partner receives income in
periodic distributions $19.08 $20.93 $38.05 $42.10
============== ============== ============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
110
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (unaudited)
(in thousands)
June 30,
-------------------------------
2003 2002
------------- -------------
Cash flows from operating activities
Net income $4,491 $3,652
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan and real estate losses 245 405
Change in operating assets and liabilities
Accrued interest and late fees (297) 296
Advances on loans (125) (195)
Other receivables 238 -
Loan origination fees 9 6
Accounts payable 194 (74)
Payable to affiliate (11) -
Deferred interest (112) -
------------- -------------
Net cash provided by operating activities 4,632 4,090
------------- -------------
Cash flows from investing activities
Loans originated (45,861) (22,875)
Principal collected on loans 20,497 19,688
Payments for development of real estate (323) -
------------- -------------
Net cash used in investing activities (25,687) (3,187)
------------- -------------
Cash flows from financing activities
Borrowings (repayments) on line of credit, net - (2,200)
Repayments on note payable (11) -
Contributions by partner applicants 24,743 5,253
Partners' withdrawals (2,338) (1,822)
Syndication costs paid (258) (135)
Formation loan lending (1,772) (378)
Formation loan collections 293 291
------------- -------------
Net cash provided by financing activities 20,657 1,009
------------- -------------
Net increase (decrease) in cash and cash equivalents (398) 1,912
Cash and cash equivalents - beginning of period 7,188 1,917
------------- -------------
Cash and cash equivalents - end of period $6,790 $3,829
============= =============
Supplemental disclosures of cash flow information
Cash paid for interest $ 1 $ 224
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
111
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the Partnership, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
of normal, recurring adjustments, necessary to present fairly the consolidated
financial information included therein. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the Partnership's Form 10-K for the fiscal year ended December 31,
2002 filed with the Securities and Exchange Commission. The results of
operations for the three and six month periods ended June 30, 2003 are not
necessarily indicative of the operating results to be expected for the full
year.
Sales commissions - Formation Loans
The following summarizes Formation Loan transactions to June 30, 2003 (in
thousands):
Initial Second Third Fourth
Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 Total
------------- ------------- ------------ ------------- --------------
Limited partner contributions $14,932 $29,993 $29,999 $41,009 $115,933
============= ============= ============ ============= ==============
Formation loan made $1,075 $2,272 $2,218 $3,072 $8,637
Repayments to date (643) (752) (299) (66) (1,760)
Early withdrawal penalties applied (56) (73) (38) - (167)
------------- ------------- ------------ ------------- --------------
Balance June 30, 2003 $376 $1,447 $1,881 $3,006 $6,710
============= ============= ============ ============= ==============
Percent loaned 7.2% 7.6% 7.4% 7.5% 7.4%
============= ============= ============ ============= ==============
The Formation Loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced.
Syndication costs
The Partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses, and filing fees. Syndication costs are charged against partners'
capital and are being allocated to the individual partners consistent with the
partnership agreement.
Through June 30, 2003, syndication costs of $2,330,000 had been incurred by
the Partnership with the following distribution (in thousands):
Costs incurred $ 2,330
Early withdrawal penalties applied (79)
Allocated and amortized to date (1,492)
--------------
June 30, 2003 balance $ 759
==============
Syndication costs attributable to the fourth offering ($50,000,000) will be
limited to the lesser of 10% of the gross proceeds or $2,000,000 with any excess
to be paid by the general partners. As of June 30, 2003, the fourth offering had
incurred syndication costs of $519,000 (1.3% of contributions).
112
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiary, Russian Hill Property Company, LLC ("Russian") and
its 66%-owned subsidiary, Stockton Street Property Company, LLC ("Stockton").
All significant intercompany transactions and balances have been eliminated in
consolidation.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year classification.
Loans, secured by deeds of trust
At June 30, 2003, loans categorized as impaired by the Partnership was $0.
The reduction in the carrying value of the impaired loans is included in the
allowance for loan losses. The average impaired recorded investment in impaired
loans was $355,000 for 2002.
At June 30, 2003, the Partnership had thirteen loans, past due 90 days or
more totaling $14,057,000. The Partnership does not consider 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.
Allowance for loan losses
The composition of the allowance for loan losses as of June 30, 2003 was as
follows (in thousands):
June 30,
2003
---------------
Impaired loans $ -
Specified loans 120
General 2,486
Unsecured loans -
---------------
$ 2,606
===============
Activity in the allowance for loan losses is as follows for the three
months through June 30, 2003 (in thousands):
June 30,
2003
---------------
Beginning balance $ 3,021
Restructured loans -
Additions charged to income 245
Write-offs (660)
---------------
$ 2,606
===============
113
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated 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 held 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 selected other options.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Such estimates relate principally to the
impaired loans and the valuation of real estate held for sale. Actual results
could differ slightly from these estimates.
note 3 - General Partners and Related Parties
The following are commissions and/or fees, which are paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership 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.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans. .
Asset management fees
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual).
114
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES (continued)
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
The general partners are reimbursed by the Partnership for all operating
expenses incurred by them 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.
note 4 - Real Estate Held for Sale
During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs"). The Partnership's
investments in the LLCs are reflected at the lower of cost or fair value,
including estimated costs of property disposition.
The following schedule reflects the cost of the LLCs' properties and
recorded reductions to estimated fair values (in thousands):
June 30,
2003
----------------
Costs of properties $ 10,248
Reduction in value (500)
----------------
Real estate held for sale $ 9,748
================
note 5 - Bank Line of Credit
The Partnership has a bank line of credit expiring July 10, 2004, of up to
$20,000,000 at prime secured by its loan portfolio. The outstanding balance was
$0 at June 30, 2003 and December 31, 2002. The interest rate was 4.00% (prime)
at June 30, 2003. The line of credit calls for certain financial covenants. The
Partnership was in compliance with these covenants for the six month period
ended June 30, 2003.
Should the general partners choose not to renew the line of credit, the
balance then outstanding would be converted to a three-year term loan.
note 6 - Note Payable
The Partnership assumed a bank loan of $1,789,000 in connection with the
foreclosure on a property (see Note 4). As of June 30, 2003, $1,771,000 was
outstanding on this note. The loan is secured by the property and bears interest
at 5.52% at June 30, 2003.
Future maturities on the note payable are as follows (in thousands):
2003 $ 11
2004 23
2005 24
2006 26
2007 27
Thereafter 1,660
--------------
$ 1,771
==============
115
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $109,927,000 at June 30, 2003. The fair
value of these loans of $110,750,000 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 considered in
evaluating the fair value versus the carrying value.
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)
Most loans are secured by recorded deeds of trust. At June 30, 2003 there
were 69 secured loans outstanding, with the following characteristics:
June 30,
2003
--------------
Number of secured loans outstanding 69
Total secured loans outstanding $ 109,927
Average secured loan outstanding $ 1,593
Average secured loan as percent of total 1.45%
Average secured loan as percent of partners' capital 1.35%
Largest secured loan outstanding $ 10,440
Largest secured loan as percent of total 9.50%
Largest secured loan as percent of partners' capital 8.85%
Number of counties where security is located (all
California) 16
Largest percentage of secured loans in one county 19.58%
Average secured loan to appraised value of security
at time loan was consummated 60.08%
Number of secured loans in foreclosure status 5
Amount of secured loans in foreclosure $ 3,740
The following loan categories were held at June 30, 2003:
June 30,
2003
--------------
First Trust Deeds $ 65,248
Second Trust Deeds 42,050
Third Trust Deeds 2,629
--------------
Total loans 109,927
Prior liens due other lenders 93,660
--------------
Total debt $ 203,587
--------------
Appraised property value at time of loan $ 338,881
--------------
Total investment as a percent of appraisals 60.08%
--------------
Investments by type of property
Owner occupied homes $ 15,522
Non-owner occupied homes 20,466
Apartments 22,919
Commercial 51,020
--------------
$ 109,927
==============
116
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
The interest rates on the loans range from 7.50% to 18.00% at June 30,
2003.
Scheduled maturity dates of loans as of June 30, 2003 are as follows:
Year Ending
December 31, Amount
----------------- ---------------
2003 $ 19,742
2004 29,029
2005 31,990
2006 17,093
2007 8,253
Thereafter 3,820
---------------
$ 109,927
===============
The remaining scheduled maturities for 2003 include twelve loans totaling
$11,832,000, which are past maturity at June 30, 2003. Interest payments on
twelve of these loans were 90 days or more delinquent.
Cash deposits at June 30, 2003 of $5,776,000, before clearing deposits in
transit and outstanding checks, were in one bank. The balances exceeded FDIC
insurance limits (up to $100,000 per bank) by $5,676,000. This bank is the same
financial institution that has provided the Partnership with the $20,000,000
limit line of credit (LOC). As and when deposits in the Partnership's bank
accounts increase significantly beyond the insured limit, the funds are
typically either placed on new loans or used to pay-down the line of credit
balance.
NOTE 9 - COMMITMENTS & CONTINGENCIES
Construction Loans
The Partnership has construction loans, which are at various stages of
completion of the construction process at June 30, 2003. The Partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made during completion phases throughout the construction process. At June 30,
2003, there were $6,331,000 of undistributed loans which will be funded by a
combination of borrower monthly mortgage payments, line of credit draw-downs,
retirement of principal on current loans, cash and capital contributions from
investors.
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 on these
loans as of June 30, 2003. There are approximately 7 loans totaling $5,630,000
in workout agreements as of June 30, 2003.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
NOTE 10 - NON-CASH TRANSACTIONS
During the six months ended June 30, 2003, the partnership sold two loans
that resulted in an increase to secured loans receivable of $466,000 and a
decrease to the accrued interest and late fees, advances and allowance for loan
losses of $944,000, $183,000 and $661,000, respectively.
During the six months ended June 30, 2003, the partnership restructured
several loans that resulted in an increase to secured loans receivable of
$1,659,000 and a decrease to accrued interest and late fees and advances of
$1,529,000 and $129,000, respectively.
117
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gymno Corporation
Redwood City, California
We have audited the accompanying balance sheet of Gymno Corporation as of
December 31, 2002. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express and opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Gymno Corporation as of December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Thomas E. Gard
ARMANINO McKENNA LLP
San Ramon, California
February 21, 2003
118
GYMNO CORPORATION
Balance Sheet
December 31, 2002
ASSETS
2002
-----------------
Cash $111,941
Other assets 869
-----------------
Total current assets 112,810
-----------------
Investment in partnerships
Redwood Mortgage Investors IV 7,500
Redwood Mortgage Investors V 5,000
Redwood Mortgage Investors VI 9,773
Redwood Mortgage Investors VII 11,998
Redwood Mortgage Investors VIII 91,227
-----------------
125,498
-----------------
$238,308
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable - related party $ 73,809
Accrued income taxes 2,125
-----------------
Total current liabilities 75,934
-----------------
Stockholders' equity
Common stock, authorized 1,000,000
shares; issued and outstanding 500 shares 5,000
Additional paid-in capital 7,500
Retained earnings 149,874
-----------------
Total stockholders' equity 162,374
-----------------
$ 238,308
=================
The accompanying notes are an integral part of the financial statement.
119
GYMNO CORPORATION
Notes to Balance Sheet
December 31, 2002
1. Organization
Gymno Corporation (the "Company") was formed in July 1986 by D. Russell
Burwell and Michael R. Burwell, each owning 250 shares. The Company was formed
for the purpose of serving as the corporate general partner of certain
California limited partnerships, (presently, Redwood Mortgage Investors I, II,
III, IV, V, VI, VII, and VIII) which invest in high-yield debt instruments,
primarily promissory notes secured by deeds of trust on California real estate.
As the corporate general partner, the Company receives management fees
and/or a percentage of income for its services, which are performed by
stockholders. In addition, the Company receives reconveyance fees.
2. Summary of Significant Accounting Policies
Cash
Cash represents cash and short term, highly liquid investments with
maturities of three months or less at the time of purchase.
Investment in partnerships
The Company accounts for its investments in partnerships using the equity
method. Pursuant to the equity method, the Company increases (decreases) its
investment account for its share of partnership earnings (loss) and cash
contributions (withdrawals) related to the partnerships.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
3. Investment in Partnerships
The following is a summary of the Company's investments in the Redwood
Mortgage Investors ("RMI") partnerships as of December 31, 2002:
Gymno
Gymno Corporation
Corporation Investment
Partnership Partnership Partnership Percent of
Net Assets Net Income Investment Net Assets
-------------- ---------------- -------------- ---------------
RMI IV $ 5,979,155 $ 402,926 $ 7,500 0.13%
RMI V 2,212,950 115,212 5,000 0.23%
RMI VI 6,772,966 369,983 9,773 0.14%
RMI VII 9,052,268 763,482 11,998 0.13%
RMI VIII 95,776,547 7,486,687 91,227 0.10%
-------------- ---------------- --------------
$119,793,886 $ 9,138,290 $ 125,498
============== ================ ==============
120
GYMNO CORPORATION
Notes to Balance Sheet
December 31, 2002
4. Related Party Payable
The Company has a payable to an affiliate, Redwood Mortgage Corp. ("RMC")
in the amount of $73,809 at December 31, 2002. During 2002, the Company began
incurring a servicing fee to RMC of $6,000 per month for usage of space,
utilities, personnel and management expertise.
5. Concentrations of Credit Risk
Cash in Bank
Cash deposits at December 31, 2002, that exceeded federal insurance
limits (up to $100,000), were $28,302.
6. Commitments
The Company is a guarantor on two separate lines of credit for two of its
partnership investments. The lines of credit provide for borrowings up to
$3,500,000 at .25% over prime and $20,000,000 at the bank's prime rate of
interest. There were no outstanding balances on the lines of credit at December
31, 2002.
121
GYMNO CORPORATION
INTERIM FINANCIAL STATEMENT
In the opinion of the management of Gymno Corporation, a California
corporation, all adjustments necessary for a fair presentation of the financial
position for the interim period presented herein have been made. All such
adjustments are of a normal, recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. However, management of Gymno Corporation
believes that the disclosures contained herein are adequate to make the
information presented not misleading. It is suggested that this unaudited
balance sheet be read in conjunction with the corresponding audited balance
sheet and the notes thereto included elsewhere in this prospectus.
122
GYMNO CORPORATION
BALANCE SHEET
June 30, 2003
(UNAUDITED)
ASSETS
Cash $ 47,580
Other assets 869
--------------
Total current assets 48,449
--------------
Investment in partnerships
Redwood Mortgage Investors IV 7,500
Redwood Mortgage Investors V 5,000
Redwood Mortgage Investors VI 9,773
Redwood Mortgage Investors VII 11,998
Redwood Mortgage Investors VIII 115,920
--------------
150,191
--------------
$ 198,640
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable - related party $ 436
Accrued income taxes 2,125
--------------
Total current liabilities 2,561
--------------
Stockholders' equity
Common stock, no par, authorized 1,000,000
shares; issued and outstanding 500 shares 5,000
Additional paid-in capital 7,500
Retained earnings 183,579
--------------
Total stockholders' equity 196,079
--------------
$198,640
==============
The accompanying notes are an integral part of this financial statement
123
GYMNO CORPORATION
Notes to Balance Sheet
June 30, 2003
1. Organization
Gymno Corporation (the "Company") was formed in July 1986. The Company was
formed for the purpose of serving as the corporate general partner of certain
California limited partnerships, (presently Redwood Mortgage Investors I, II,
III, IV, V, VI, VII and VIII), which invest in high-yield debt instruments,
primarily promissory notes secured by deeds of trust on California real estate.
As the corporate general partner, the Company receives management fees
and/or a percentage of income for its services, which are performed by the
stockholders. In addition, the Company receives reconveyance fees.
2. Summary of Significant Accounting Policies
Cash
Cash represents cash and short-term, highly liquid investments with
maturities of three months or less at the time of purchase.
Investment in partnerships
The Company accounts for its investment in partnerships using the equity
method. Pursuant to the equity method, the Company increases (decreases) its
investment account for its share of partnership earnings (losses) and cash
contributions (withdrawals) related to the partnerships.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
3. Investment in Partnerships
The following is a summary of the Company's investments in the Redwood
Mortgage Investors ("RMI") partnerships as of June 30, 2003:
Gymno
Gymno Corporation
Corporation Investment
Partnership Partnership Partnership Percent of
Net Assets Net Income Investment Net Assets
---------------- --------------- ---------------- ---------------
RMI IV $ 5,945,421 $ 183,333 $ 7,500 0.13%
RMI V 2,158,496 53,446 5,000 0.23%
RMI VI 6,722,282 167,303 9,773 0.15%
RMI VII 9,030,487 310,101 11,998 0.13%
RMI VIII 117,973,171 4,491,414 115,920 0.10%
$141,829,857 $5,205,597 $150,191
================ =============== ================
4. Related Party Transcations
The Company incurs a management fee to Redwood Mortgage Corp. of $6,000 per
month for usage of space, utilities, personnel and management expertise.
5. Commitments
The Company is a guarantor on two separate lines of credit for two of its
partnership investments. The lines of credit provide for borrowings up to
$3,500,000 at .25% over prime and $20,000,000 at the bank's prime rate of
interest. The outstanding balances on the lines of credit at June 30, 2003 were
$0 and $0, respectively.
124
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Redwood Mortgage Corp.
Redwood City, California
We have audited the accompanying balance sheet of Redwood Mortgage Corp. as
of September 30, 2002. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining on a test
basis evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Redwood Mortgage Corp. as of
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Thomas E. Gard
ARMANINO McKENNA LLP
San Ramon, California
November 15, 2002
125
REDWOOD MORTGAGE CORP.
Balance Sheet
September 30, 2002
ASSETS
Cash in bank $ 2,227,797
Mutual funds 97,027
Receivables
Due from affiliates 53,221
Accrued interest 43,333
Fixed assets, net of accumulated depreciation and amortization of $184,502 72,619
Investment in mortgage loans 433,519
Note receivable - LLC 250,000
Prepaid expenses 48,257
Deferred costs of brokerage related rights, net 3,881,377
--------------
Total assets $ 7,107,150
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 3,757
Accrued compensated absences 41,444
Deposits 3,338
Advances from partnerships 4,078,874
Deferred income taxes 1,324,000
--------------
Total liabilities 5,451,413
--------------
Stockholder's equity
Common stock, wholly-owned by The Redwood Group, Ltd., at $4 stated value
(1,000 shares authorized, issued and outstanding) 4,000
Retained earnings 1,651,737
--------------
Total stockholder's equity 1,655,737
--------------
Total liabilities and stockholder's equity $ 7,107,150
==============
The accompanying notes are an integral part of this financial statement
126
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2002
1. Organization
Redwood Mortgage Corp. (the "Company"), is a wholly-owned subsidiary of The
Redwood Group, LTD. (the "Parent"), which is owned by D. Russell Burwell and
related parties. Michael R. Burwell, the son of D. Russell Burwell, and Gymno
Corporation (owned by the Burwells) are general partners in eight limited
partnerships, which invest in high-yield debt instruments, primarily promissory
notes secured by deeds of trust on California real estate. In addition, another
related company is general partner in a ninth limited partnership. Currently,
Redwood Mortgage Corp. is a general partner in only one of the partnerships,
Redwood Mortgage Investors VIII.
The Company maintains "trust accounts" to service mortgage investments made
principally by the aforementioned nine limited partnerships. As a real estate
broker licensed with the State of California, the Company arranges loans with
various maturities, all of which are secured by deeds of trust. At September 30,
2002, the Company was servicing a portfolio totaling $117,811,785 owned
primarily by the aforementioned partnerships.
2. Summary of Significant Accounting Policies
Accrual basis
The accompanying balance sheet was prepared on the accrual basis of
accounting.
Use of estimates
In preparing financial statements in accordance with accounting principles
generally accepted in the United States of America, management is required to
make estimates that affect the reported amounts of assets and liabilities as of
the balance sheet date. Such estimates relate principally to lives assigned to
furniture and equipment and to the period of recoverability of deferred costs of
brokerage related rights. Actual results could differ from these estimates.
Deferred costs of brokerage related rights
Consistent with Accounting Principles Board Opinion # 17, the Company has
recognized as an asset rights to act as the mortgage loan broker for various of
its affiliated limited partnerships. Such rights result in brokerage commissions
to the Company. The initial costs of these rights include fees paid to
broker-dealers on behalf of affiliated partnerships. Such costs are being
amortized over the anticipated 25 year period that brokerage fee net cash flows
are expected to be received in proportion to the expected receipt of these cash
flows.
In accordance with Statement of Financial Accounting Standards No 121 (FAS
121) as amended by Statement of Financial Accounting Standards No 142 (FAS 142),
the Company thereafter evaluates the fair value of these rights to determine if
the brokerage rights have been impaired. Fair value is determined based on the
estimated brokerage fee net cash flows to be received by the Company over the
expected 25 year lives of the partnerships' underlying loan portfolios. It is
the Company's experience that the underlying loan portfolios increase as partner
capital is raised and accumulated for the first seven years of a partnership's
existence, and then will begin to decline gradually over the subsequent 18 years
of their estimated lives. If the carrying value of the deferred mortgage
brokerage rights exceeds their estimated fair value, an impairment loss is
recognized. The Company has determined that its deferred mortgage brokerage
rights have incurred no impairment of value at September 30, 2002.
Cash
Cash represents cash and short-term, highly liquid investments with
original maturities of three months or less.
127
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2002
2. Summary of Significant Accounting Policies (continued)
Furniture, equipment and leasehold improvements, net
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are computed primarily on a straight-line basis
over the lesser of the related lease term or the assets' estimated useful lives
ranging from 3 to 7 years.
Income taxes
The Company's operating results are included in the consolidated tax
returns of the Parent, which files its income tax returns on the cash basis of
accounting. Income taxes are allocated to the Company by the Parent for those
taxes currently payable and those deferred as if the Company were filing
separate tax returns. Income taxes are provided for deferred taxes resulting
from differences in the timing of reporting revenue and expense items for
financial versus tax purposes.
3. Partnership Services
The following are commissions and/or fees derived by the Company from
services provided to its affiliated partnerships:
Loan commissions
The Company earns loan commissions in connection with the review,
selection, evaluation, negotiation and extension of partnership mortgage
investments in an amount up to 12% of the mortgage investments until 6 months
after the termination date of a partnership offering. Only 1 of the 9 affiliated
limited partnerships is in the offering stage. Thereafter, loan commissions are
limited to an amount not to exceed 4% of the total partnership assets per year.
The loan commissions are paid by the borrowers, and thus, are not an expense of
the partnerships.
Loan servicing fees
The Company earns loan servicing fees of up to 1/8 of 1% monthly (1.5%
annually) of the unpaid principal or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located.
Other fees and charges
The limited partnership agreements provide for other fees such as
reconveyance, mortgage assumption and mortgage extension fees. Such fees are
incurred by the borrowers and are paid to the Company. In addition, the Company
is reimbursed for expenses and clerical costs associated with accounting and
related services incurred on behalf of the limited partnerships.
Subsidies to partnerships
Occasionally, the Company subsidizes a particular partnership by refunding
a portion of the loan servicing fees received from the partnership during the
year.
When the Company issues a subsidy, it may be a general subsidy or a
specific subsidy tied to loss concerns on a particular property. If the subsidy
is property specific, it may delineate the terms for repayment after the
partnership sells the impaired property. The Company is not obligated to provide
any subsidies nor does it guarantee a rate of return for the various
partnerships.
128
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2002
4. Advances from Partnerships
The Company has financed the payment of brokerage related rights with
advances from partnerships. These advances are non-interest bearing and are
being repaid equally over an approximate ten-year period from the date of the
close of a partnership offering.
Advances from partnerships mature as follows:
Year Ending September 30:
2003 $ 451,052
2004 451,052
2005 451,052
2006 451,052
2007 370,997
Thereafter 1,903,669
--------------
Total $4,078,874
==============
5. Note Receivable - LLC
The Company has a convertible note receivable from a limited liability
company totaling $250,000 at September 30, 2002. The note is currently in the
form of a promissory note bearing 8% interest and maturing in January 2004. The
Company has the sole discretion to convert the promissory note to a membership
interest in the LLC. As of September 30, 2002, the Company had not converted the
receivable into an equity investment. It is anticipated that when the LLC's
project is complete, the Company will convert the note to an investment in the
LLC.
6. Fixed Assets
Fixed assets consist of the following at September 30, 2002:
Furniture and equipment $ 189,845
Computer software 63,108
Leasehold improvements 4,168
--------------
257,121
Less accumulated depreciation and amortization (184,502)
--------------
Fixed assets, net $ 72,619
==============
129
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2002
7. Income Taxes
The Company's annual taxable income (loss) is included in the consolidated
income tax filing of its parent, The Redwood Group, LTD and its affiliate, A & B
Financial Services, Inc. Income taxes are allocated to the Company and reflected
in its financial statements as if the Company were filing separate returns.
The Company has net operating loss ("NOL") carry forwards available of
approximately $800,000 for Federal tax purposes and approximately $100,000 for
California tax purposes. The NOLs were generated in fiscal years ended September
30, 1998, 1999, and 2001 and can be carried forward twenty years for federal tax
purposes and five years for California purposes.
Significant components of the Company's net deferred tax liability includes
the following at September 30, 2002:
Cash to accrual differences $ 31,400
Deferred costs of brokerage related rights 1,662,800
State deferred taxes (117,700)
Net operating loss carryforwards (286,000)
Other 33,500
---------------
$ 1,324,000
===============
8. Investment in Mortgage Loans
At September 30, 2002, the Company had investments in mortgage loans as
follows:
Fiscal Year
of Maturity
September 30,
-----------------
Mortgage loans 2003 $245,000
Mortgage loans 2004 -
Mortgage loans 2005 100,000
Mortgage loans 2006 -
Mortgage loans 2007 88,519
---------------
$433,519
===============
The average interest rates of the mortgage loans were 11.18% as of
September 30, 2002. All loans are due in lump sum balloon payments, and interest
payments on mortgage loans are current. The properties securing the loans are
all located in the San Francisco Bay Area. The fair value of the mortgage loans
approximates the carrying value.
9. Related Party Transactions
Partnership transactions
As described in Notes 1 and 3, the Company's main source of revenue is from
originating and servicing mortgage obligations from nine limited partnerships
whose general partners are related to the Company (one such general partner is
the Company). The Company has received advances from these limited partnerships
to help finance the costs of brokerage related rights.
During the year, the Company assigned approximately 80% of a note
receivable to Redwood Mortgage Investors VIII. The amount assigned was
approximately $810,000.
130
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
September 30, 2002
10. Concentrations of Risk
Cash in bank
Cash deposits at September 30, 2002, that exceeded federal insurance limits
(up to $100,000), were $1,957,579.
Mortgage loans
The mortgage loans described in Note 8 are secured by properties located in
the San Francisco Bay Area. Fluctuations in the value of real estate in the San
Francisco Bay Area could significantly affect the underlying security value of
these mortgage loans. Fluctuations in general property values also affect the
performance of mortgage investments in the affiliated limited partnerships.
11. Commitments
Beginning March 1, 2001, the Company contracted with an independent service
bureau for computer processing services for the partnership accounting function
at approximately $4,750 per month for 36 months. The contract is subject to
renewal at the end of its term. The Company receives reimbursement of a major
portion of its computer processing expenses from the nine limited partnerships.
The Company is a guarantor on a line of credit for one of the partnerships.
The line of credit provides for borrowings up to $20,000,000 at .25% over prime.
The balance on the line of credit at September 30, 2002 was $18,250,000. Should
the Partnership choose not to renew the line of credit, the balance would be
converted to a three year fully amortized loan.
12. Operating Leases
In 2001, the Company entered into several noncancelable operating leases
for office space that expire in June 2004. The leases require monthly rent of
$4,950 with stated annual rent increases. The Company also has an option to
renew these leases for an additional three years.
In 2002, the Company entered into a noncancelable operating lease agreement
for office space to replace their current space. The lease terminates July 29,
2009. The lease requires monthly payments of $14,083, with stated annual
increases. The Company also has the option to renew this lease for an additional
five years.
Noncancelable future minimum lease payments under these leases as of
September 30, 2002, are as follows:
2003 $ 231,717
2004 222,462
2005 183,772
2006 189,288
2007 194,972
Thereafter 318,526
-------------
$1,340,737
=============
13. Subsequent Events
Redwood Mortgage Investors VIII, for which the Company is a general
partner, had registered an investment offering for an additional 50,000,000
units ($50,000,000) which was approved by the Securities and Exchange Commission
in October, 2002.
Subsequent to year end, the Company entered into a sub-lease agreement to
sub-lease some of the Company's previous office space. The sub-lease is
noncancelable, calls for monthly sub-lease payments of $853, and terminates in
2003.
131
REDWOOD MORTGAGE CORP.
INTERIM FINANCIAL STATEMENT
In the opinion of the management of Redwood Mortgage Corp., a California
corporation, all adjustments necessary for a fair presentation of the financial
position for the interim period presented herein have been made. All such
adjustments are of a normal, recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. However, management of Redwood Mortgage Corp.
believes that the disclosures contained herein are adequate to make the
information presented not misleading. It is suggested that this unaudited
balance sheet be read in conjunction with the corresponding audited balance
sheet and the notes thereto included elsewhere in this prospectus.
132
REDWOOD MORTGAGE CORP.
BALANCE SHEET
June 30, 2003
(UNAUDITED)
ASSETS
Cash $ 2,406,599
Mutual funds 117,678
Receivables
Due from affiliates 391,669
Accrued interest 43,333
Insurance proceeds 750,000
Fixed assets, net of accumulated depreciation and amortization
of $199,485 206,333
Investment in mortgage loans 187,642
Other investment 50,000
Note receivable - LLC 250,000
Prepaid expenses 14,583
Rental real estate 1,150,000
Deferred costs of brokerage related rights, net 6,524,639
-----------------
Total assets $12,092,476
=================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $ 9,338
Note payable 747,500
Advances from partnerships 6,710,076
Deferred compensation 720,000
Deferred income taxes 1,715,000
-----------------
Total liabilities 9,901,914
-----------------
Stockholder's equity
Common stock, wholly-owned by The Redwood Group Ltd.,
at $4 stated value (1,000 shares authorized, issued and
outstanding) 4,000
Retained earnings 2,186,562
-----------------
Total stockholder's equity 2,190,562
-----------------
Total liabilities and stockholder's equity $12,092,476
=================
The accompanying notes are an integral part of this financial statement
133
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
June 30, 2003
(Unaudited)
1. Organization
Redwood Mortgage Corp. (the "Company"), is a wholly-owned subsidiary of The
Redwood Group, LTD. (the "Parent"), which is owned by The Burwell Trusts.
Michael R. Burwell and Gymno Corporation (owned by Michael Burwell and The
Burwell Trusts) are general partners in eight limited partnerships, which invest
in high-yield debt instruments, primarily promissory notes secured by deeds of
trust on California real estate. In addition, another related company is general
partner in a ninth limited partnership. Currently, Redwood Mortgage Corp. is a
general partner in only one of the partnerships, Redwood Mortgage Investors
VIII.
The Company maintains "trust accounts" to service mortgage investments made
principally by the aforementioned nine limited partnerships. As a real estate
broker licensed with the State of California, the Company arranges loans with
various maturities, all of which are secured by deeds of trust. At June 30,
2003, the Company was servicing a portfolio totaling $131,510,455 owned
primarily by the aforementioned partnerships.
2. Summary of Significant Accounting Policies
Accrual basis
The accompanying balance sheet was prepared on the accrual basis of
accounting.
Use of estimates
In preparing financial statements in accordance with accounting principles
generally accepted in the United States of America, management is required to
make estimates that affect the reported amounts of assets and liabilities as of
the balance sheet date. Such estimates relate principally to lives assigned to
furniture and equipment and to the period of recoverability of deferred costs of
brokerage related rights. Actual results could differ from these estimates.
Deferred costs of brokerage related rights
The Company has recognized as an asset rights to act as the mortgage loan
broker for various of its affiliated limited partnerships. Such rights result in
brokerage commissions to the Company. The initial costs of these rights include
fees paid to broker-dealers on behalf of affiliated partnerships. Such costs are
being amortized over the anticipated 25 year period that brokerage fee net cash
flows are expected to be received in proportion to the expected receipt of these
cash flows.
In accordance with Statement of Financial Accounting Standards No 142 (FAS
142) as amended by Statement of Financial Accounting Standards No 144 (FAS 144),
the Company thereafter evaluates the fair value of these rights to determine if
the brokerage rights have been impaired. Fair value is determined based on the
estimated brokerage fee net cash flows to be received by the Company over the
expected 25 year lives of the partnerships' underlying loan portfolios. It is
the Company's experience that the underlying loan portfolios increase as partner
capital is raised and accumulated for the first seven years of a partnership's
existence, and then will begin to decline gradually over the subsequent 18 years
of their estimated lives. If the carrying value of the deferred mortgage
brokerage rights exceeds their estimated fair value, an impairment loss is
recognized. The Company has determined its deferred mortgage brokerage rights
incurred no impairment of value at June 30, 2003.
Cash
Cash represents cash and short-term, highly liquid investments with
original maturities of three months or less.
Furniture, equipment and leasehold improvements, net
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are computed primarily on a straight-line basis
over the lesser of the related lease term or the assets' estimated useful lives
ranging from 3 to 7 years.
134
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
June 30, 2003
(Unaudited)
2. Summary of Significant Accounting Policies (continued
Rental real estate
Rental real estate is stated at the lower of cost or the property's
estimated fair value. As of June 30, 2003, the Company had acquired one property
in Menlo Park, California, for $1,150,000.
In accordance with FAS 144, the Company periodically assesses the
recoverability of the recorded amounts. If the carrying value of the real estate
exceeds its fair value, the asset is reduced to estimated fair value. The
Company has determined that no reduction of the rental real estate was required
as of June 30, 2003.
Income taxes
The Company's operating results are included in the consolidated tax
returns of the Parent, which files its income tax returns on the cash basis of
accounting. Income taxes are allocated to the Company by the Parent for those
taxes currently payable and those deferred as if the Company were filing
separate tax returns. Income taxes are provided for deferred taxes resulting
from differences in the timing of reporting revenue and expense items for
financial versus tax purposes.
3. Partnership Services
The following are commissions and/or fees derived by the Company from
services provided to its affiliated partnerships:
Loan commissions
The Company earns loan commissions in connection with the review,
selection, evaluation, negotiation and extension of partnership mortgage
investments in an amount up to 12% of the mortgage investments until 6 months
after the termination date of a partnership offering. Only 1 of the 9 affiliated
limited partnerships is in the offering stage. Thereafter, loan commissions are
limited to an amount not to exceed 4% of the total partnership assets per year.
The loan commissions are paid by the borrowers, and thus, are not an expense of
the partnerships.
Loan servicing fees
The Company earns loan servicing fees of up to 1/8 of 1% monthly (1.5%
annually) of the unpaid principal or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located.
Other fees and charges
The limited partnership agreements provide for other fees such as
reconveyance, mortgage assumption and mortgage extension fees. Such fees are
incurred by the borrowers and are paid to the Company. In addition, the Company
is reimbursed for expenses and clerical costs associated with accounting and
related services incurred on behalf of the limited partnerships.
Subsidies to partnerships
Occasionally, the Company subsidizes a particular partnership by refunding
a portion of the loan servicing fees received from the partnership during the
year.
When the Company issues a subsidy, it may be a general subsidy or a
specific subsidy tied to loss concerns on a particular property. If the subsidy
is property specific, it may delineate the terms for repayment after the
partnership sells the impaired property. The Company is not obligated to provide
any subsidies nor does it guarantee a rate of return for the various
partnerships.
135
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
June 30, 2003
(Unaudited)
4. Advances from Partnerships
The Company has financed the payment of brokerage related rights with
advances from partnerships. These advances are non-interest bearing and are
being repaid equally over an approximate ten-year period from the date of the
close of a partnership offering.
Advances from partnerships mature as follows:
Fiscal Year
of Maturity
September 30:
-------------------
2003 $ 154,029
2004 786,768
2005 786,768
2006 786,768
2007 706,556
Thereafter 3,489,187
----------------
Total $ 6,710,076
================
5. Insurance Proceeds Receivable
At June 30, 2003, the Company had an insurance proceeds receivable related
to the anticipated collection of proceeds on two life insurance policies, which
insured the life of a former Company officer.
6. Note Receivable - LLC
The Company has a convertible note receivable from a limited liability
company totaling $250,000 at June 30, 2003. The note is currently in the form of
a promissory note bearing 8% interest and maturing in January 2004. The Company
has the sole discretion to convert the promissory note to a membership interest
in the LLC. As of June 30, 2003, the Company had not converted the receivable
into an equity investment. It is anticipated that when the LLC's project is
complete, the Company will convert the note to an investment in the LLC.
7. Fixed Assets
Fixed assets consist of the following at June 30, 2003:
Furniture and equipment $ 320,923
Computer software and equipment 80,727
Leasehold improvements 4,168
---------------
405,818
Less accumulated depreciation and amortization (199,485)
---------------
Fixed assets, net $ 206,333
===============
136
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
June 30, 2003
(Unaudited)
8. Income Taxes
The Company's annual taxable income (loss) is included in the consolidated
income tax filing of its parent, The Redwood Group, LTD and its affiliate, A & B
Financial Services, Inc. Income taxes are allocated to the Company and reflected
in its financial statements as if the Company were filing separate returns.
The Company has net operating loss ("NOL") carryforwards available of
approximately $2,891,000 for Federal tax purposes and approximately $1,257,000
for California tax purposes. The NOLs were generated in 1998, 1999, 2001 and
2003 and can be carried forward twenty years for federal tax purposes and five
years for California purposes.
Significant components of the Company's net deferred tax liability includes
the following at June 30, 2003:
Cash to accrual differences $ 168,000
Deferred costs of brokerage related rights 2,795,000
State deferred taxes (172,000)
Net operating loss carryforwards (1,100,000)
Other 24,000
---------------
$ 1,715,000
===============
9. Investment in Mortgage Loans
At June 30, 2003, the Company had investments in mortgage loans as follows:
Fiscal Year
of Maturity
September 30,
------------------
Mortgage loans 2003 $ -
Mortgage loans 2004 -
Mortgage loans 2005 99,943
Mortgage loans 2006 -
Mortgage loans 2007 87,699
--------------
$ 187,642
==============
The average interest rates of the mortgage loans were 11.47% as of June 30,
2003. All loans are due in lump sum balloon payments, and interest payments on
mortgage loans are current. The properties securing the loans are all located in
the San Francisco Bay Area. The fair value of the mortgage loans approximates
the carrying value.
10. Note Payable
At June 30, 2003, the Company had a promissory note payable with a bank for
$747,500, which is secured by real property. The note accrues interest at the
bank's index rate plus 1.0% (5.25% at June 30, 2003). The note calls for monthly
interest only payments commencing February, 2003. The note matures on December
2, 2004 when all unpaid interest and principal is due in full.
137
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
June 30, 2003
(Unaudited)
11. Related Party Transactions
Partnership transactions
As described in Notes 1 and 3, the Company's main source of revenue is from
originating and servicing mortgage obligations from nine limited partnerships
whose general partners are related to the Company (one such general partner is
the Company). The Company has received advances from these limited partnerships
to help finance the costs of brokerage related rights.
Deferred compensation
In recognition of past service, the Company is committed to payments of
$9,000 per month to the spouse of a deceased former Company officer. At June 30,
2003, the Company has recorded the net present value of such payments utilizing
a discount rate of 4.9%. The balance of this deferred compensation liability at
June 30, 2003 was $720,000.
12. Concentrations of Risk
Cash in bank
Cash deposits at June 30, 2003, that exceeded federal insurance limits (up
to $100,000), were approximately $2,268,604.
Mortgage loans
The mortgage loans described in Note 8 are secured by properties located in
the San Francisco Bay Area. Fluctuations in the value of real estate in the San
Francisco Bay Area could significantly affect the underlying security value of
these mortgage loans. Fluctuations in general property values also affect the
performance of mortgage investments in the affiliated limited partnerships.
13. Commitments
Beginning March 1, 2001, the Company contracted with an independent service
bureau for computer processing services for the partnership accounting function
at approximately $4,750 per month for 36 months. The contract is subject to
renewal at the end of its term. The Company receives reimbursement of a major
portion of its computer processing expenses from the nine limited partnerships.
The Company is a guarantor on a line of credit for one of the partnerships.
The line of credit provides for borrowings up to $20,000,000 at .25% over prime.
The balance on the line of credit at June 30, 2003, was $0. Should the
Partnership choose not to renew the line of credit, any balance would be
converted to a three year fully amortized loan.
The Company has guaranteed to fund any losses sustained by certain
partnerships on specific restructured loans for which there is a current
collateral shortfall. As of June 30, 2003, the estimated collateral shortfall on
these loans ranged from $294,000 to $541,000.
14. Operating Leases
In 2001, the Company entered into several non-cancelable operating leases
for office space that expire in June 2004. The leases require monthly rent of
$4,950 with stated annual rent increases. The Company also has an option to
renew these leases for an additional three years.
In 2002, the Company entered into a non-cancelable operating lease
agreement for office space to replace their previous space. The lease terminates
July 29, 2009. The lease requires monthly payments of $14,083, with stated
annual increases. The Company also has the option to renew this lease for an
additional five years.
138
REDWOOD MORTGAGE CORP.
Notes to Balance Sheet
June 30, 2003
(Unaudited)
14. Operating Leases (continued)
Non-cancelable future minimum lease payments under these leases as of June
30, 2003, are as follows:
Fiscal Year
of Maturity
September 30,
------------------
2003 $ 58,935
2004 222,462
2005 183,772
2006 189,288
2007 194,972
Thereafter 318,526
---------------
$ 1,167,955
===============
15. Sublease
During the nine months ended June 30, 2003, the Company entered into a
sub-lease agreement to sub-lease some of the Company's previous office space.
The sub-lease is non-cancelable, calls for monthly sub-lease payments of $853,
and terminates in 2003.
139
PRIOR PERFORMANCE TABLES
The prior performance tables as referenced in the Prior Performance Summary
of the prospectus presents information on programs previously sponsored by the
general partners. The purpose of the tables is to provide information on the
performance of these partnerships to assist prospective investors in evaluating
the experience of the general partners as sponsors of such partnerships. In the
opinion of the general partners, all of the partnerships included in the tables
had investment objectives which were similar to those of the partnership.
Factors considered in making such determination included the type of
investments, expected benefits from investments and structure of the programs.
Each of such prior programs had the following objectives: (i) to yield a high
rate of return from mortgage lending; and (ii) preservation of the partnership's
capital. The inclusion of these tables does not imply that the investors in this
offering of the partnership will experience results comparable to those
experienced in the previous offerings of the partnership or prior programs
referred to in the tables.
The tables consist of:
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I summarizes, as a percentage basis, all funds received through
December 31, 2002, for the four prior public offerings of the partnership.
TABLE II - COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
Table II summarizes the compensation paid to the general partners and
affiliates in connection with the 4 prior offerings of the partnership on an
aggregate basis.
TABLE III - OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
Table III summarizes the annual operating results from January 1, 1997,
through December 31, 2002 for the partnership.
TABLE V - PAYMENT OF MORTGAGE LOANS
Table V presents information on the payment of the partnership and prior
partnerships' mortgages within the three (3) years ending December 31, 2002.
Table IV which provides certain information on programs which have
concluded operations, is not included herein as no prior programs sponsored by
the general partners or their affiliates have concluded operations.
If you purchase interests in the partnership, you will not acquire any
ownership interest in any of the prior partnerships to which Table V relates.
The inclusion of the following tables in the prospectus does not imply that the
partnership will continue to make investments comparable to those reflected in
the tables with respect to cash flow, income tax consequences available to
investors, or other factors, nor does it imply that the partnership will
continue to experience returns, if any, comparable to those experienced by the
partnership in the past in any of the previous offerings of the partnership
referred to in Table V.
The general partners have sponsored two (2) other public programs
registered with the Securities and Exchange Commission. Table V also includes
information about prior non public programs whose investment objectives are
similar to those of the partnership. These partnerships were offered without
registration under the Securities Act of 1933 with reliance upon intrastate
offering, exemption from registration requirements, and/or exemption for
transactions not involving a public offering.
Additional information regarding the Description Of Open Loans Of Prior
Limited Partnerships is provided in Table VI in Part II of this Registration
Statement. The partnership will furnish, without charge to each person to whom
this prospectus is delivered, upon request, a copy of Table VI.
As of December 31, 2002, thirty nine percent (39%) of the loans held by the
partnerships are fractionalized loans and held as undivided interests with other
partnerships and third parties. The information presented in Table V as to
fractionalized loans represents only that partnership's interest in a certain
loan.
140
DEFINITIONS AND GLOSSARY OF TERMS
The following terms used in the tables have the following meanings:
"Cash Generated From Operations" shall mean excess or deficiency of
operating cash receipts over operating cash expenditures.
"GAAP" shall mean accounting principles generally accepted in the United
States of America.
"Months To Invest 90% Of Amount Available For Investment" shall mean the
time period from commencement of the offering to date of close of escrow of
initial loans.
141
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
REDWOOD MORTGAGE INVESTORS VIII
(AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table I presents in tabular form on a percentage basis, all proceeds
received by Redwood Mortgage Investors VIII in its previous four public
offerings through December 31, 2002. Table I also sets forth on a percentage
basis, how the proceeds were utilized by the partnership. In addition, Table I
sets forth information with respect to the date each offering commenced in this
partnership, the length of the offering and how long it took to commit 90% of
the amount available for investment. As of December 31, 2002, the general
partners did not have any public or private programs which have closed in the
past three years other than the second and third offerings in Redwood Mortgage
Investors VIII. For consistency, the general partners have included information
for the first offering in Redwood Mortgage Investors VIII even though this
offering was concluded more than three years ago. Please be advised that there
can be no assurance that the results of this offering will be comparable to
those of prior offerings of the partnership.
(in thousands)
1st Offering 2nd Offering 3rd Offering 4th Offering
-------------- -------------- -------------- -------------
Dollar Amount Offered $15,000 $30,000 $30,000 $50,000
Dollar Amount Raised $14,932 $29,993 $29,999 $16,316
Percentage of Amount Raised 99.55% 99.98% 100% 32.63%
Less Offering Expenses:
Organization Expense 3.90% 2.00% 2.05% 1.59%
Selling Commissions Paid to Non Affiliates (1) 0 0 0 0
Selling Commissions Paid to Affiliates 0 0 0 0
Percentage Available for Investment
Net of Offering Expenses 96.10% 98.00% 97.95% 98.41%
Loans Funded from Offering Proceeds
Secured by Deeds of Trust 87.90% 89.40% 89.55% 74.64%
Formation Loan 7.20% 7.60% 7.40% 7.97%
Loan Commitments 0 0 0 0
Loan Application or Mortgage
Processing Fees 0 0 0 0
Funds Available for Future Commitments 0 0 0 0
Reserve 1.00% 1.00% 1.00% 15.80%
-------------- -------------- -------------- -------------
Total 96.10% 98.00% 97.95% 98.41%
============== ============== ============== =============
Date Offering Commenced 03/03/93 12/4/96 08/31/00 10/31/02
Length of Offering 44 months 44 months 20 months Open
Months to Commit 90% of Amount
Available for Investment (Measured from Beginning of
Offering) 45 months 45 months 21 months N/A
(1) Commissions are paid by Redwood Mortgage Corp. through the Formation
Loan (See" PLAN OF DISTRIBUTION - Formation Loan" at Page 83).
142
TABLE II
COMPENSATION TO GENERAL PARTNERS AND AFFILIATES
(AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table II sets forth in tabular form, the compensation received by the
general partners and affiliates in connection with the four previous offerings
of units in the partnership as of December 31, 2002. This information is
presented on an aggregated basis for all four prior offerings of the
partnership. It is impossible to trace on a dollar for dollar basis, which
dollars from which offering are being used to pay fees to the general partners.
RMI VIII
(In thousands)
----------------
Date Offering Commenced (1) 03/03/93
Dollar Amount Raised (2) $91,239
Amount Paid to General Partners and
Affiliates from:
Offering Proceeds 0
Selling Commissions 0
Loan Application or Loan Processing Fees 0
Reimbursement of Expenses, at Cost 182
Acquisition Fees 0
Advisory Fees 0
Other 0
Loan Points, Processing and Other Fees Paid
by the Borrowers to Affiliates:
Points (3) 7,100
Processing Fees (3) 129
Other (3) 22
Dollar Amount of Cash Generated from
Operations Before Deducting
Payments to General Partners and Affiliates: 40,700
Amount Paid to General Partners and Affiliates
from Operations:
Partnership Management Fees 677
Earnings Fee 260
Mortgage Servicing Fee 3,277
Reimbursement of Expenses, at Cost 902
Early Withdrawal 141
(1) Indicated the date the first offering in the partnership commenced
(2) Indicated the aggregate dollar amount raised in all four prior
offerings of the partnership as of December 31, 2002.
(3) These sums were paid by borrowers of partnership funds, and were not
expenses of the partnerships.
143
TABLE III
OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table III presents the annual operating results of this partnership since
inception. This information is presented on an aggregate basis for the three
prior offerings and the ongoing fourth offering of Redwood Mortgage Investors
VIII.
$'s in thousands except for cash distribution per $1,000
-------------------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- ---------------
Gross Revenues $119 $498 $1,050 $1,727
Less: General Partners' Mgmt Fee 0 6 12 17
Loan Servicing Fee 6 29 85 156
Administrative Expenses 4 27 51 86
Provision for Uncollected Accts 0 13 26 55
Amortization of Organization Costs 1 3 3 3
Offering Period Interest Expense to
Limited Partners 4 14 19 2
Interest Expense 0 0 26 189
------------- ------------- -------------- ---------------
Net Income (GAAP Basis) dist. to
Limited Partners $104 $406 $828 $1,219
------------- ------------- -------------- ---------------
Federal Taxable Income $109 $433 $873 $1,299
------------- ------------- -------------- ---------------
Sources of Funds - Net Income $104 $406 $828 $1,219
Reduction in Assets 0 0 0 0
Increase in Liabilities 0 0 1,914 0
Early Withdrawal Penalties Applied to
Syndication Costs 0 0 0 4
Increase in Applicant's Deposit 129 61 0 311
Increase in Partners' Capital
Collection on Formation Loan 0 0 0 17
Admittance of New Partners 2,766 4,514 3,843 3,864
------------- ------------- -------------- ---------------
Cash generated from Operations 2,999 4,981 6,585 5,415
Use of Funds-Increase in Assets 2,364 4,192 5,671 3,860
Reduction in Liabilities 0 0 0 176
Decrease in Applicant's Deposit 0 0 189 0
Decrease in Partner's Capital
Formation Loan 206 319 250 315
Syndication Costs 200 81 175 214
Offering Period Interest Expense to
Limited Partners 2 6 8 1
Investment Income Paid to LP's 47 166 303 418
Return of Capital to LP's 0 0 6 147
------------- ------------- -------------- ---------------
Net Increase (Decrease) in Cash 180 217 (17) 284
Cash at the beginning of the year 0 180 397 380
------------- ------------- -------------- ---------------
Cash at the end of the year $180 $397 $380 $664
Table III continued on following pages
144
TABLE III (continued)
OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1993 1994 1995 1996
------------- ------------- -------------- ---------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $83 $81 $83 $84
Cash Distribution Data paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $80 $79 $80 $81
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $36 $33 $32 $31
Capital (1) $0 $0 $0.60 $11
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $96 $92 $96 $99
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $93 $89 $92 $95
NOTES:
(1) Based upon capital balances as of January 1 for each year.
(2) Based upon cash distributions actually paid to limited partners
receiving monthly earning distributions compared to all limited partners. Cash
distributions credited to compounding limited partners are not included for
purposes of this calculation.
Table III continued on following pages
145
TABLE III (continued)
OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table III presents the annual operating results of this partnership since
inception. This information is presented on an aggregate basis for the three
prior offerings and the ongoing fourth offering of Redwood Mortgage Investors
VIII.
$'s in thousands except for cash distribution per $1,000
-------------------------------------------------------------------
1997 1998 1999 2000
------------- ------------- -------------- ---------------
Gross Revenues $2,630 $3,406 $4,426 $6,349
Less: General Partners' Mgmt Fee 25 32 42 61
Loan Servicing Fee 190 295 359 506
Administrative Expenses 144 147 174 270
Provision for Uncollected Accts 140 163 409 375
Amortization of Organization Costs 0 0 0 0
Offering Period Interest Expense to
Limited Partners 9 4 2 5
Interest Expense 341 514 527 887
------------- ------------- -------------- ---------------
Net Income (GAAP Basis) dist. to
Limited Partners $1,781 $2,251 $2,913 $4,245
------------- ------------- -------------- ---------------
Federal Taxable Income $1,929 $2,411 $3,331 $4,755
------------- ------------- -------------- ---------------
Sources of Funds - Net Income $1,781 $2,251 $2,913 $4,245
Reduction in Assets 0 0 0 0
Increase in Liabilities 3,988 348 0 16,269
Early Withdrawal Penalties Applied to
Syndication Costs 5 8 13 10
Increase in Applicant's Deposit 0 0 330 0
Increase in Partners' Capital
Collection on Formation Loan 108 150 191 250
Admittance of New Partners 5,572 5,110 9,202 14,997
------------- ------------- -------------- ---------------
Cash generated from Operations 11,454 7,867 12,649 35,771
Use of Funds-Increase in Assets 9,905 6,598 3,439 32,472
Reduction in Liabilities 0 0 5,832 0
Decrease in Applicant's Deposit 311 0 0 105
Decrease in Partner's Capital
Formation Loan 420 404 708 1,102
Syndication Costs 189 126 177 227
Offering Period Interest Expense to
Limited Partners 2 2 1 1
Investment Income Paid to LP's 495 614 826 1,245
Return of Capital to LP's 133 257 592 762
------------- ------------- -------------- ---------------
Net Increase (Decrease) in Cash (1) (134) $1,074 $(143)
Cash at the beginning of the year 664 663 529 1,603
------------- ------------- -------------- ---------------
Cash at the end of the year $663 $529 $1,603 $1,460
Table III continued on following pages
146
TABLE III (continued)
OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
1997 1998 1999 2000
------------- ------------- -------------- ---------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $84 $84 $84 $86
Cash Distribution Paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $81 $81 $81 $83
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $31 $29 $31 $34
Capital (1) 8 12 $22 $21
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $100 $98 $102 $102
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $97 $95 $99 $98
NOTES:
(1) Based upon capital balances as of January 1 for each year.
(2) Based upon cash distributions actually paid to limited partners
receiving monthly earning distributions compared to all limited partners. Cash
distributions credited to compounding limited partners are not included for
purposes of this calculation.
Table III continued on following pages
147
TABLE III (continued)
OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table III presents the annual operating results of this partnership since
inception. This information is presented on an aggregate basis for the three
prior offerings and the ongoing fourth offering of Redwood Mortgage Investors
VIII.
$'s in thousands except for cash
distribution per $1,000
----------------------------------------
2001 2002
---------------- ----------------
Gross Revenues $ 9,035 $11,537
Less: General Partners' Mgmt Fee 158 325
Loan Servicing Fee 552 1,098
Administrative Expenses 363 906
Provision for Uncollected Accts 957 1,280
Amortization of Organization Costs 0 0
Offering Period Interest Expense to
Limited Partners 1 1
Interest Expense 972 516
---------------- ----------------
Net Income (GAAP Basis) dist. to
Limited Partners $ 6,032 $ 7,411
---------------- ----------------
Federal Taxable Income $ 6,926 $ 8,719
---------------- ----------------
Sources of Funds - Net Income $ 6,032 $ 7,411
Reduction in Assets 0 0
Increase in Liabilities 0 0
Early Withdrawal Penalties Applied to
Syndication Costs 24 6
Increase in Applicant's Deposit 448 1,905
Increase in Partners' Capital
Collection on Formation Loan 346 546
Admittance of New Partners $19,266 $19,680
---------------- ----------------
Cash generated from Operations 26,116 29,548
Use of Funds-Increase in Assets 15,480 10,924
Reduction in Liabilities 5,038 7,733
Decrease in Applicant's Deposit 0 0
Decrease in Partner's Capital
Formation Loan 1,462 1,677
Syndication Costs 291 377
Offering Period Interest Expense to
Limited Partners 0 0
Investment Income Paid to LP's 1,962 2,517
Return of Capital to LP's 1,426 1,049
---------------- ----------------
Net Increase (Decrease) in Cash $ 457 $ 5,271
Cash at the beginning of the year 1,460 1,917
---------------- ----------------
Cash at the end of the year $ 1,917 $ 7,188
Table III continued on following page
148
TABLE III (continued)
OPERATING RESULTS OF PRIOR LIMITED PARTNERSHIPS
RMI VIII - AGGREGATED (AS OF DECEMBER 31, 2002)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
2001 2002
-------------- --------------
Cash Distribution Credited on
$1,000 Invested for a Compounding
Limited Partner (GAAP Basis) $90 $87
Cash Distribution Paid for
$1,000 Invested for a Limited
Partner Receiving Monthly Earnings
Distribution (GAAP Basis) $87 $84
Cash Distribution to All Investors for
$1,000 Invested (2)
Income (1) $37 $34
Capital (1) $27 $19
Federal Income Tax Results for
$1,000 Invested Capital for a
Compounding Limited Partner $106 $105
Federal Income Tax Results for $1,000
Invested for a Limited Partner Receiving
Monthly Earnings Distributions $103 $101
NOTES:
(1) Based upon capital balances as of January 1 for each year.
(2) Based upon cash distributions actually paid to limited partners
receiving monthly earning distributions compared to all limited partners. Cash
distributions credited to compounding limited partners are not included for
purposes of this calculation.
149
TABLE V
PAYMENT OF LOANS
CORPORATE MORTGAGE INVESTORS I & II
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
Table V presents information on the payment of loans for the partnership
and the previous public and non public programs sponsored by the general
partners and their affiliates for the three years ending December 31, 2002. The
information concerning the payment of loans in the partnership is presented on
an aggregated basis for all three prior offerings of the partnership.
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Francisco 11/04/98 07/05/00 270,000.00 50,796.60 320,796.60
San Mateo 03/30/99 07/06/00 21,250.00 3,321.52 24,571.52
San Mateo 01/06/92 07/06/00 25,000.00 23,054.69 48,054.69
Santa Clara 12/30/93 08/27/01 175,000.00 159382.98 334382.98
Napa 05/02/95 10/25/01 40,000.00 27447.19 67447.19
San Mateo 07/31/00 10/16/01 150,000.00 22,861.32 172,861.32
Santa Clara 11/06/01 06/05/02 100,000.00 5,901.81 105,901.81
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Mateo 11/22/96 12/15/00 100,000.00 47,557.54 147,554.54
Alameda 03/22/00 04/19/01 100,000.00 12,577.13 112,577.13
Stanislaus 07/24/98 03/13/02 150,000.00 42,295.62 192,295.62
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county) (1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Mateo 09/08/99 02/29/00 92,000.00 5,202.20 97,202.20
Sacramento 08/27/93 04/19/00 67,500.00 41,078.79 108,578.79
Alameda 08/11/00 12/29/00 80,015.00 3,758.69 83,773.69
El Dorado 02/23/95 07/08/02 44,100.00 35,017.01 79,117.01
Stanislaus 02/06/98 08/13/02 149,996.00 80,738.97 230,734.97
Riverside 03/15/97 12/20/02 100,000.00 43,058.96 143,058.96
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 71,000 square feet
150
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS I
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Sacramento 11/28/94 07/07/00 13,125.00 5,264.90 18,389.90
San Mateo 11/25/98 08/16/00 99,988.00 20,922.62 120,910.62
San Mateo 01/25/00 06/27/01 69,999.20 11,235.86 81,235.06
Santa Clara 05/25/01 04/24/02 50,000.00 5,591.12 55,591.12
Sonoma 09/18/96 04/30/02 4,873.50 2,185.37 7,058.87
Santa Clara 04/24/02 05/30/02 68,750.00 864.80 69,614.80
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county) (1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Stanislaus 11/16/93 12/18/00 35,002.69 6,560.08 41,562.77
Santa Clara 11/02/98 04/19/01 100,000.00 27,415.08 127,415.08
Placer 12/30/96 01/24/02 55,000.00 33,519.78 88,519.78
Alameda 11/16/93 03/29/02 150,000.00 124,797.19 274,797.19
Alameda 11/16/93 03/29/02 49,586.38 25,483.23 75,069.61
Santa Clara 01/21/94 03/29/02 178,180.70 149,309.32 327,490.02
Santa Clara 11/15/96 03/29/02 6,369.10 4,187.46 10,556.56
El Dorado 02/23/95 07/08/02 44,100.00 35,017.01 79,117.01
Riverside 03/15/97 12/20/02 100,000.00 62,617.99 162,617.99
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 5,000 square feet to approximately 17,500 square feet
151
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS II
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Ventura 12/05/96 05/15/00 52,000.00 24,755.95 76,755.95
Ventura 12/05/96 05/15/00 52,000.00 24,748.95 76,748.95
Santa Clara 11/28/94 07/07/00 13,125.00 5,264.90 18,389.90
San Mateo 05/31/00 01/04/01 50,000.00 3,302.24 53,302.24
San Mateo 07/31/00 10/16/01 50,000.00 31,375.88 56136.08
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL (county) (1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Francisco 02/02/00 02/14/02 82,008.48 19,223.17 101,231.65
Alameda 11/16/93 03/29/02 100,000.00 83,198.13 183,198.13
Alameda 11/16/93 03/29/02 26,445.95 13,591.00 40,036.95
Santa Clara 01/21/94 03/29/02 123,934.27 103,852.67 227,786.94
Santa Clara 11/15/96 03/29/02 4,430.90 2,913.16 7,344.06
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 1,500 square feet to approximately 1,500 square feet
152
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS III
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
-----------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
-----------------------------------------------------------------------------------------------------------
San Mateo 09/19/91 03/31/00 136,000.80 167,215.49 303,216.29
San Mateo 12/31/96 04/21/00 36,570.00 13,175.19 49,745.19
San Mateo 11/25/98 08/16/00 99,988.00 20,922.62 120,910.62
Santa Clara 04/14/00 09/27/00 174,999.00 8,561.02 183,560.02
San Mateo 05/31/00 01/04/01 50,000.00 3,302.24 53,302.24
Santa Cruz 10/06/97 03/26/01 82,000.00 34,473.24 116,473.24
Alameda 04/10/01 06/07/01 56,000.00 1,303.30 57,303.30
Alameda 07/01/97 11/08/01 170000.00 109761.99 279761.99
Tuolumne 06/28/01 01/25/02 89,999.00 6,136.75 96,135.75
Contra Costa 10/30/01 03/12/02 96,000.00 3,883.88 99,883.88
San Mateo 02/23/01 03/15/02 150,000.00 19,238.22 169,238.22
Alameda 11/16/93 03/29/02 150,000.00 124,797.19 274,797.19
Alameda 11/16/93 03/29/02 39,668.93 20,386.49 60,055.42
Santa Clara 05/25/01 04/24/02 150,000.00 16,773.36 166,773.36
Sonoma 09/18/96 04/30/02 7,546.48 3,383.99 10,930.47
San Mateo 07/09/02 10/22/02 67,750.00 2,078.35 69,828.35
-----------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
------------------------------------------------------------------------------------------------------------
San Francisco 01/31/01 08/10/01 300,025.00 5,691.63 305,716.63
------------------------------------------------------------------------------------------------------------
153
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS III
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county) (1)
------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
------------------------------------------------------------------------------------------------------------
San Mateo 02/26/98 08/21/00 205,200.00 61,071.30 266,271.30
San Mateo 01/25/00 10/30/00 100,000.00 8,115.67 108,115.67
Stanislaus 11/16/93 12/18/00 35,002.69 6,560.08 41,562.77
Alameda 08/11/00 12/29/00 159,997.50 7,515.86 167,513.36
Contra Costa 05/31/00 02/07/01 255,000.00 22,379.13 277,379.13
Santa Clara 11/02/98 04/19/01 100,000.00 27,415.08 127,415.08
Alameda 08/08/97 09/29/01 31,500.00 15,500.93 47,000.93
San Francisco 02/02/00 02/14/02 27,891.53 6,537.91 34,429.44
Alameda 11/16/93 03/29/02 150,000.00 124,797.19 274,797.19
Alameda 11/16/93 03/29/02 39,668.93 20,386.49 60,055.42
San Mateo 06/11/02 11/22/02 100,000.00 4,936.46 104,936.46
Riverside 03/15/97 12/20/02 100,000.00 62,617.99 162,617.99
------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 150,000 square feet
154
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS IV
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Ventura 12/05/96 01/31/00 65,000.00 32,318.29 97,318.29
Contra Costa 03/21/00 03/31/01 108,500.00 13,765.97 122,265.97
Sonoma 11/18/87 12/26/02 70,000.00 86,359.95 156,359.95
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Santa Clara 09/19/91 03/16/00 12,500.00 14,802.54 27,302.54
San Francisco 03/20/95 04/14/00 50,004.00 9,648.93 59,652.93
San Francisco 11/30/95 12/29/00 78,000.00 48,516.57 126,516.57
San Mateo 07/16/90 05/17/01 170,000.00 212,112.03 382,112.03
San Francisco 01/31/01 08/10/01 474,980.00 9,010.62 483,990.62
Alameda 10/10/89 12/23/02 195,000.00 345,756.46 540,756.46
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL (county) (1)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Francisco 12/29/94 01/27/00 325,000.00 178,188.72 503,188.72
Santa Clara 06/16/99 04/05/00 162,501.50 15,001.73 177,503.23
Alameda 08/06/92 04/26/00 82,873.25 57,482.82 140,356.07
San Mateo 04/13/89 08/03/00 59,999.50 79,707.34 139,706.84
Stanislaus 11/16/93 12/18/00 199,998.56 37,483.01 237,481.57
Alameda 08/11/00 12/29/00 49,985.00 2,348.04 52,333.04
San Mateo 03/05/99 03/28/01 450,000.00 100,663.32 550,663.32
San Francisco 06/23/00 05/31/01 500,000.00 51,989.77 551,989.77
San Francisco 08/11/99 08/30/01 120,933.85 28,624.69 149,558.54
San Francisco 05/27/99 08/30/01 100,002.00 27,413.84 127,415.84
Marin 10/29/99 11/16/01 60,000.00 16472.94 76,472.94
Stanislaus 07/24/98 03/13/02 422,000.00 56,394.16 478,394.16
Alameda 11/16/93 03/29/02 575,000.00 478,389.24 1,053,389.24
Alameda 11/16/93 03/29/02 99,172.75 50,966.46 150,139.21
Santa Clara 01/21/94 03/29/02 671,366.60 562,582.20 1,233,948.80
Santa Clara 11/15/96 03/29/02 24,000.00 15,779.17 39,779.17
Stanislaus 02/06/98 08/13/02 200,002.00 107,655.91 307,657.91
San Mateo 05/17/01 09/13/02 204,000.00 31,751.79 235,751.79
San Francisco 02/22/00 10/01/02 173,865.38 52,515.02 226,380.40
San Francisco 02/22/00 10/01/02 226,138.63 56,002.09 282,140.72
- -------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,500 square feet to approximately 100,000 square feet
155
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS V
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
San Mateo 04/01/99 03/15/00 176,000.00 19,856.47 195,856.47
San Mateo 04/25/00 05/26/00 260,001.20 2,389.29 262,390.49
Santa Clara 11/28/94 07/07/00 26,250.00 10,529.80 36,779.80
Santa Clara 10/13/89 09/11/00 142,000.00 307,230.27 449,230.27
Alameda 10/31/98 06/04/01 167,500.00 206,433.10 373,933.10
San Mateo 07/31/00 10/16/01 195,000.00 24,345.67 219,345.67
Sonoma 09/18/96 04/30/02 20,633.18 9,252.33 29,885.51
- ------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- ------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- ------------------------------------------------------------------------------------------------------------
Santa Clara 09/19/91 03/06/00 55,000.00 65,131.17 120,131.17
San Francisco 03/20/95 04/14/00 50,004.00 9,648.93 59,652.93
San Mateo 07/16/90 05/17/01 170,000.00 212,112.03 382,112.03
San Francisco 01/31/01 08/10/01 300,025.00 5,691.63 305,716.63
Alameda 10/10/89 12/23/02 195,000.00 226,406.98 421,406.98
- ------------------------------------------------------------------------------------------------------------
COMMERCIAL (county) (1)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Santa Clara 06/16/99 04/05/00 80,000.13 7,385.41 87,385.54
San Mateo 04/13/89 08/03/00 179,998.50 239,122.01 419,120.51
San Mateo 07/07/00 10/30/00 78,125.00 3,086.04 81,211.04
San Mateo 01/25/00 10/30/00 150,000.00 12,173.50 162,173.50
Stanislaus 11/16/93 12/18/00 74,998.69 14,055.98 89,054.67
Alameda 08/11/00 12/29/00 159,997.50 7,515.86 167,513.36
Alameda 11/16/93 03/29/02 95,000.00 79,038.22 174,038.22
Alameda 11/16/93 03/29/02 33,057.87 16,988.97 50,046.84
Santa Clara 01/21/94 03/29/02 167,841.65 140,645.55 308,487.20
Santa Clara 11/15/96 03/29/02 6,000.00 3,944.79 9,944.79
San Mateo 05/17/01 09/13/02 204,000.00 31,751.79 235,751.79
- -------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,000 square feet to approximately 71,000 square feet
156
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VI
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Mateo 09/19/91 03/31/00 24,000.00 29,508.44 53,508.44
San Mateo 03/30/99 07/06/00 38,250.00 5,978.74 44,228.74
San Mateo 01/06/92 07/06/00 45,000.00 41,498.43 86,498.43
Santa Clara 11/28/94 07/07/00 52,500.00 21,059.60 73,559.60
San Mateo 10/13/99 10/31/00 35,000.00 4,212.07 39,212.07
San Francisco 03/13/90 01/30/01 40,000.00 55,585.80 95,585.80
San Francisco 06/19/89 01/30/01 73,000.00 102,395.46 175,395.46
Santa Clara 12/12/00 02/27/01 220,000.00 6,680.93 226,680.93
Santa Clara 07/27/00 02/28/01 50,000.00 3,457.80 53,457.80
Alameda 10/31/98 06/04/01 167,500.00 206,433.10 373,933.10
San Mateo 01/25/00 06/27/01 100,000.80 16,051.55 116,052.35
Santa Clara 06/22/01 07/13/01 200,000.00 1,584.31 201,584.31
San Mateo 07/30/00 10/16/01 150,000.00 22,861.32 172,861.32
Tuolumne 06/28/01 01/25/02 170,001.00 11,591.83 181,592.83
Sonoma 09/18/96 04/30/02 22,701.71 10,179.89 32,881.60
Santa Clara 11/06/01 06/05/02 160,000.00 9,443.10 169,443.10
San Mateo 07/09/02 10/22/02 67,750.00 2,078.35 69,828.35
- -------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Santa Clara 09/19/91 03/06/00 56,250.00 66,611.42 122,861.42
San Francisco 03/20/95 04/14/00 150,000.00 28,944.48 178,944.48
Santa Clara 05/17/89 04/20/00 40,000.00 60,185.95 100,185.95
Santa Clara 02/24/89 04/20/00 100,000.00 153,208.52 253,208.52
San Mateo 07/16/90 05/17/01 160,000.00 199,634.85 359,634.85
Placer 10/28/99 08/02/01 522,212.43 80,893.41 603,105.84
Placer 01/11/01 07/31/02 63,865.00 17,316.05 81,181.05
Placer 03/30/00 09/30/02 74,594.32 30,266.65 104,860.97
Sacramento 07/29/97 12/23/02 265,000.00 110,226.06 375,226.06
Alameda 10/10/89 12/23/02 169,555.45 119,349.49 288,904.94
- -------------------------------------------------------------------------------------------------------------
157
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VI
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county) (1)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Alameda 08/06/92 04/26/00 82,873.25 57,482.82 140,356.07
Sonoma 06/21/94 05/26/00 135,250.00 76,675.01 211,925.01
San Mateo 04/13/89 08/03/00 310,002.00 411,827.33 721,829.33
San Mateo 07/07/00 10/30/00 78,125.00 3,086.04 81,211.04
San Mateo 01/25/00 10/30/00 250,000.00 20,289.17 270,289.17
Santa Clara 07/24/96 12/04/00 382,250.00 205,572.32 587,822.32
Stanislaus 11/16/93 12/18/00 199,998.56 37,483.01 237,481.57
Alameda 08/11/00 12/29/00 149,987.50 7,045.64 157,033.14
San Francisco 08/11/99 08/30/01 120,933.85 28,624.69 149,558.54
San Francisco 05/27/99 08/30/01 100,002.00 27,413.84 127,415.84
Santa Clara 12/01/00 03/08/02 330,750.00 55,302.25 386,052.25
Alameda 11/16/93 03/29/02 575,000.00 478,389.24 1,053,389.24
Alameda 11/16/93 03/29/02 99,172.75 50,966.46 150,139.21
Santa Clara 01/21/94 03/29/02 1,376,301.53 1,153,293.52 2,529,595.05
Santa Clara 11/15/96 03/29/02 49,200.00 32,347.29 81,547.29
San Mateo 05/17/01 09/13/02 192,000.00 29,884.04 221,884.04
- -------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,000 square feet to approximately 71,000 square feet
158
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Mateo 09/19/91 03/31/00 79,999.20 98,360.49 178,359.69
San Mateo 07/30/99 04/11/00 15,246.42 1,456.34 16,702.76
San Francisco 04/26/99 04/14/00 219,654.50 25,454.01 245,108.51
Ventura 12/05/96 05/15/00 13,000.00 6,188.99 19,188.99
Ventura 12/05/96 05/15/00 13,000.00 6,189.74 19,189.74
San Mateo 04/25/00 05/26/00 199,998.80 1,837.90 201,836.70
Contra Costa 02/01/00 06/29/00 152,940.44 7,476.17 160,416.61
San Mateo 01/06/92 07/06/00 30,000.00 27,665.62 57,665.62
San Mateo 02/10/93 05/01/01 15,000.00 9,850.00 24,850.00
Alameda 10/29/93 07/11/01 81,825.00 40,416.06 122,241.06
Santa Cruz 12/23/99 07/17/01 476,250.00 87,706.92 563,956.92
Alameda 12/19/96 11/08/01 340,000.00 303,581.45 473,581.45
Sonoma 09/18/96 04/30/02 11,932.63 5,350.83 17,283.46
Los Angeles 08/28101 06/06/02 375,000.00 36,283.07 411,283.07
San Mateo 06/30/93 07/17/02 29,700.00 29,327.78 59,027.78
- --------------------------------------------------------------------------------------------------------------
MULTIPLE 5+ UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Santa Clara 09/19/91 03/06/00 86,250.00 102,137.52 188,387.52
San Francisco 03/20/95 04/14/00 549,996.00 106,128.99 656,124.99
Alameda 03/22/00 04/19/01 150,000.00 18,865.69 168,865.69
Placer 10/28/99 08/02/01 696,255.98 107,853.66 804,109.64
Santa Clara 08/22/01 03/25/02 439,250.00 31,779.41 471,029.41
Placer 01/11/01 07/31/02 85,150.00 23,087.17 108,237.17
Placer 03/30/00 09/30/02 99,455.20 40,353.95 139,809.15
San Francisco 08/05/01 12/26/02 800,000.00 117,187.05 917,187.05
- --------------------------------------------------------------------------------------------------------------
159
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county) (1)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
San Francisco 10/22/97 04/14/00 1,111,928.85 210,747.08 1,322,675.93
Alameda 08/06/92 04/26/00 46,803.51 32,464.01 79,267.52
Sonoma 06/21/94 05/26/00 135,250.00 76,675.01 211,925.01
San Mateo 03/05/99 08/21/00 440,797.86 63,921.94 504,719.80
San Mateo 02/26/98 08/21/00 478,800.00 142,499.70 621,299.70
San Mateo 10/28/97 08/21/00 46,000.00 15,836.53 61,836.53
San Mateo 04/02/97 08/21/00 235,400.00 95,814.80 331,214.80
Santa Clara 07/24/96 12/04/00 382,250.00 205,572.32 587,822.32
Stanislaus 11/16/93 12/18/00 73,748.81 13,821.74 87,570.55
Contra Costa 05/31/00 02/07/01 1,147,500.00 100,706.06 1,248,206.06
San Mateo 03/05/99 03/28/01 750,000.00 167,772.20 917,772.20
San Francisco 06/23/00 05/31/01 400,000.00 41,591.81 441,591.81
Santa Clara 12/01/00 03/08/02 330,750.00 55,302.25 386,052.25
Stanislaus 07/24/98 03/13/02 500,000.00 140,985.40 640,985.40
Alameda 11/16/93 03/29/02 412,500.00 343,192.28 755,692.28
Alameda 11/16/93 03/29/02 49,586.38 25,483.23 75,069.61
Santa Clara 01/21/94 03/29/02 335,683.30 281,291.10 616,974.40
Santa Clara 11/15/96 03/29/02 12,000.00 7,889.58 19,889.58
Stanislaus 02/06/98 08/13/02 400,004.00 215,311.81 615,315.81
San Francisco 02/22/00 10/01/02 434,653.87 131,284.65 565,938.52
San Francisco 02/22/00 10/01/02 565,334.12 140,002.14 705,336.26
Contra Costa 11/16/99 12/12/02 829,500.00 265,960.28 1,095,460.28
- --------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,000 square feet to approximately 150,000 square feet
160
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002 (in thousands)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
SINGLE FAMILY 1-4 UNITS (county)
- --------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- --------------------------------------------------------------------------------------------------------------
Santa Clara 02/23/99 3/31/00 896 78 974
San Francisco 04/26/99 04/14/00 430 50 480
Santa Clara 07/20/99 06/22/00 950 92 1,042
San Mateo 03/30/99 07/06/00 26 4 30
San Mateo 11/25/98 08/16/00 2,600 544 3,144
Marin 03/24/98 08/30/00 894 315 1,209
Santa Clara 04/14/00 09/27/00 125 6 131
San Francisco 11/13/98 09/30/00 1,145 298 1,443
Marin 09/22/00 12/29/00 368 11 379
San Mateo 07/30/99 01/10/01 950 100 1,050
San Mateo 08/22/00 01/10/01 1,449 65 1,514
San Francisco 04/06/00 02/28/01 94 47 141
Santa Clara 07/27/00 02/28/01 200 14 214
San Mateo 08/29/00 03/19/01 1,497 90 1,587
Santa Clara 06/06/00 05/02/01 1,300 122 1,422
Marin 12/28/00 08/15/01 523 52 575
Marin 04/27/00 08/15/01 910 112 1,022
Lake 08/06/99 09/30/01 738 167 905
San Mateo 01/17/02 03/21/02 608 25 633
San Mateo 02/03/00 04/08/02 1,293 232 1,525
San Mateo 09/21/00 04/09/02 1,300 245 1,545
San Francisco 03/29/96 04/23/02 105 82 187
San Francisco 02/23/01 04/26/02 950 134 1,084
San Francisco 03/21/01 04/26/02 694 54 748
San Mateo 01/25/02 04/30/02 491 14 505
San Mateo 07/26/00 05/13/02 1,634 176 1,810
Santa Clara 01/04/02 05/17/02 1,849 75 1,924
Los Angeles 08/28101 06/06/02 375 36 411
Alameda 05/07/97 06/28/02 50 34 84
San Mateo 10/22/97 07/25/02 250 94 344
Contra Costa 02/15/01 08/27/02 650 117 767
San Mateo 06/14/01 09/04/02 350 55 405
Santa Clara 03/29/02 09/13/02 174 10 184
San Mateo 06/22/01 10/10/02 1,724 127 1,851
Santa Clara 05/10/02 10/11/02 500 24 524
San Mateo 02/08/02 10/23/02 1,950 154 2,104
Santa Clara 06/12/01 12/11/02 500 83 583
- --------------------------------------------------------------------------------------------------------------
161
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002 (in thousands)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
MULTIPLE 5+ UNITS (county)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Mateo 09/18/97 01/14/00 1,819 493 2,312
Santa Clara 09/19/91 03/06/00 40 47 87
San Francisco 03/20/95 04/14/00 400 77 477
Contra Costa 02/28/00 05/08/00 650 13 663
San Joaquin 10/05/94 08/31/00 200 138 338
San Francisco 02/21/01 07/27/01 1,062 37 1,099
Placer 10/28/99 08/02/01 2,870 445 3,315
San Francisco 01/31/01 08/10/01 3,525 67 3,592
San Francisco 05/09/00 10/12/01 350 59 409
Santa Clara 08/22/01 03/25/02 439 32 471
San Francisco 10/12/01 06/26/02 734 71 805
Placer 01/11/01 07/31/02 351 95 446
Placer 03/30/00 09/30/02 410 166 576
Santa Clara 04/09/01 11/21/02 1,831 347 2,178
San Francisco 08/05/01 12/26/02 2,000 29 2,029
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL (county) (1)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
San Francisco 12/29/94 01/27/00 325 178 503
Contra Costa 01/05/96 03/31/00 104 55 159
Santa Clara 06/16/99 04/05/00 120 11 131
San Francisco 10/22/97 04/14/00 2,178 413 2,591
Sacramento 08/27/93 04/19/00 68 41 109
Santa Clara 11/03/00 05/11/00 1,074 73 1,147
Alameda 08/11/00 12/29/00 1,800 85 1,885
Contra Costa 05/31/00 02/07/01 1,148 101 1,249
San Francisco 03/30/00 03/23/01 2,200 250 2,450
San Francisco 07/21/00 03/23/01 2,533 150 2,683
San Mateo 03/05/99 03/28/01 2,800 626 3,426
Santa Clara 11/02/98 04/19/01 1,800 493 2,293
San Francisco 06/23/00 05/31/01 600 62 662
San Mateo 04/23/97 07/27/01 370 153 523
San Francisco 08/11/99 08/30/01 1,028 243 1,271
San Francisco 05/27/99 08/30/01 850 233 1,083
Fresno 06/15/95 09/30/01 130 114 244
Santa Clara 08/31/00 01/18/02 750 142 892
Alameda 12/28/00 02/08/02 7,000 989 7,989
San Mateo 02/16/96 03/13/02 75 54 129
San Mateo 08/20/96 03/13/02 65 43 108
- -------------------------------------------------------------------------------------------------------------
162
TABLE V
PAYMENT OF LOANS
REDWOOD MORTGAGE INVESTORS VIII
FOR THE THREE YEARS ENDING
DECEMBER 31, 2002 (in thousands)
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANT)
COMMERCIAL (county) (1)(continued)
- -------------------------------------------------------------------------------------------------------------
CLOSED LOAN INTEREST/ PROCEEDS
PROPERTY FUNDED ON AMOUNT LATE/MISC TO DATE
- -------------------------------------------------------------------------------------------------------------
Stanislaus 07/24/98 03/13/02 1,072 302 1,374
Alameda 11/16/93 03/29/02 193 160 353
Santa Clara 01/21/94 03/29/02 5,033 422 5,455
Santa Clara 11/15/96 03/29/02 18 12 30
San Francisco 12/09/99 06/11/02 550 152 702
Stanislaus 02/06/98 08/13/02 350 188 538
San Francisco 06/11/02 09/19/02 583 17 600
San Francisco 02/22/00 10/01/02 1,304 394 1,698
San Francisco 02/22/00 10/01/02 1,696 420 2,116
Contra Costa 11/16/99 12/12/02 1,541 494 2,035
Riverside 03/15/97 12/20/02 50 20 70
San Mateo 03/07/00 12/26/02 2,900 1,014 3,914
- -------------------------------------------------------------------------------------------------------------
(1) The commercial property securing the partnership loans ranges in size
from approximately 2,000 square feet to approximately 150,000 square feet
163
FIFTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
REDWOOD MORTGAGE INVESTORS VIII
A California Limited Partnership
THIS FIFTH AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT was made and
entered into as of the 7th day of October 2003, by and among MICHAEL R. BURWELL,
an individual, GYMNO CORPORATION, a California corporation and REDWOOD MORTGAGE
CORP., a California corporation (collectively, the "General Partners") and such
other persons who have become Limited Partners ("Existing Limited Partners") and
as may be added pursuant to the terms hereof (the "New Limited Partners")
(collectively the "Limited Partners").
RECITALS
A. On or about October 1993, the General Partners and the Limited Partners
entered into an agreement of limited partnership for the Partnership. The
Partnership offered $15,000,000 Units of limited partnership interest ("Units")
and $14,932,017 were acquired by investors. The Offering closed on October 31,
1996.
B. In order to increase the Partnership's capital base and permit the
Partnership to further diversify its portfolio, in September, 1996, the General
Partners elected to offer an additional 30,000,000 Units of limited partnership
interest ("Units") and $29,992,574 were acquired by investors. The second
offering closed on August 31, 2000.
C. In January 2000, the General Partners elected to revise their prospectus
in order to meet the "Plain English" rules promulgated by the Securities and
Exchange Commission ("SEC").
D. In order to increase the Partnership's capital base and permit the
Partnership to further diversify its portfolio, on August 31, 2000, the General
Partners elected to offer an additional $30,000,000 of Units of limited
partnership interest ("Units") and $29,998,622 were acquired by investors. The
third offering closed April, 2002.
E. In order to further increase the Partnership's capital base and permit
the Partnership to further diversify its portfolio, on October 30, 2002, the
General Partners elected to offer an additional $50,000,000 of Units. The fourth
offering closed October 6, 2003.
F. In order to further increase the Partnership's capital base and permit
the Partnership to further diversify its portfolio, on October 7, 2003, the
General Partners elected to offer an additional $75,000,000.00 of Units.
G. In connection with the additional offering of $75,000,000 of Units, the
General Partners have elected to amend and restate the agreement of limited
partnership (the "Agreement").
ARTICLE 1
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article I shall, for
all purposes of this Agreement, have the meanings as defined herein:
1.1 "Affiliate" means (a) any person directly or indirectly controlling,
controlled by or under common control with another person, (b) any person owning
or controlling ten percent (10%) or more of the outstanding voting securities of
such other person, (c) any officer, director or partner of such person, or (d)
if such other person is an officer, director or partner, any company for which
such person acts in any such capacity.
1.2 "Agreement" means this Limited Partnership Agreement, as amended from
time to time.
1.3 "Capital Account" means, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
a) To each Partner's Capital Account there shall be credited, in the event
such Partner utilized the services of a Participating Broker Dealer, such
Partner's capital contribution, or if such Partner acquired his Units through an
unsolicited sale, such Partner's capital contribution plus the amount of the
sales commissions otherwise payable is paid, such Partner's distributive share
of Profits and any items in the nature of income or gain (from unexpected
adjustments, allocations or distributions) that are specially allocated to a
Partner and the amount of any Partnership liabilities that are assumed by such
Partner or that are secured by any Partnership property distributed to such
Partner.
164
b) To each Partner's Capital Account there shall be debited the amount of
cash and the Gross Asset Value of any Partnership property distributed to such
Partner pursuant to any provision of this Agreement, such Partner's distributive
share of Losses, and any items in the nature of expenses or losses that are
specially allocated to a Partner and the amount of any liabilities of such
Partner that are assumed by the Partnership or that are secured by any property
contributed by such Partner to the Partnership.
In the event any interest in the Partnership is transferred in accordance
with Section 7.2 of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred interest.
In the event the Gross Asset Values of the Partnership assets are adjusted
pursuant to Section 1.14, the Capital Accounts of all Partners shall be adjusted
simultaneously to reflect the aggregate net adjustment as if the Partnership
recognized gain or loss equal to the amount of such aggregate net adjustment.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in
a manner consistent with such Regulation. In the event the General Partners
shall determine that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto, are computed in order to comply with
the then existing Treasury Regulation, the General Partners may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Article IX hereof upon the
dissolution of the Partnership. The General Partners shall adjust the amounts
debited or credited to Capital Accounts with respect to (a) any property
contributed to the Partnership or distributed to the Partners, and (b) any
liabilities that are secured by such contributed or distributed property or that
are assumed by the Partnership or the Partners, in the event the General
Partners shall determine such adjustments are necessary or appropriate pursuant
to Treasury Regulation Section 1.704-l(b)(2)(iv) as provided for in Section 5.4.
The General Partners shall make any appropriate modification in the event
unanticipated events might otherwise cause this Agreement not to comply with
Treasury Regulation Section 1.704-l(b) as provided for in Sections 5.6 and
12.4(k).
1.4 "Cash Available for Distribution" means an amount of cash equal to the
excess of accrued income from operations and investment of, or the sale or
refinancing or other disposition of, Partnership assets during any calendar
month over the accrued operating expenses of the Partnership during such month,
including any adjustments for bad debt reserves or deductions as the General
Partners may deem appropriate, all determined in accordance with generally
accepted accounting principles; provided, that such operating expenses shall not
include any general overhead expenses of the General Partners not specifically
related to, billed to or reimbursable by the Partnership as specified in
Sections 10.13 through 10.15.
1.5 "Code" means the Internal Revenue Code of 1986 and corresponding
provisions of subsequent revenue laws.
1.6 "Continuing Servicing Fee" means an amount equal to approximately
(0.25%) of the Limited Partnership's capital account which amount shall be paid
to certain participating Broker Dealers payable only in connection with the
initial offering of 150,000 Units pursuant to the Prospectus dated May 19, 1993.
1.7 "Deed of Trust" means the lien or liens created on the real property or
properties of the borrower securing the borrower's obligation to the Partnership
to repay the Mortgage Investment.
1.8 "Earnings" means all revenues earned by the Partnership less all
expenses incurred by the Partnership.
1.9 "Fiscal Year" means a year ending December 31st.
1.10 "Fifth Formation Loan" means a loan to Redwood Mortgage Corp., an
affiliate of the General Partners, in connection with the offering of
$75,000,000 Units pursuant to the Prospectus dated October 7, 2003 equal to the
amount of the sales commissions and the amounts payable in connection with
unsolicited sales. Redwood Mortgage Corp. will pay all sales commissions and
amounts due in connection with unsolicited sales from the Fifth Formation Loan.
The Fifth Formation Loan will be unsecured, not bear interest and will be repaid
in annual installments.
1.11 "First Formation Loan" means a loan to Redwood Mortgage Corp., an
affiliate of the General Partners, in connection with the initial offering of
15,000,000 Units pursuant to the Prospectus dated May 19, 1993, equal to the
amount of the sales commissions (excluding any Continuing Servicing Fees) and
all amounts payable in connection with any unsolicited sales. Redwood Mortgage
Corp. will pay all sales commissions (excluding any Continuing Servicing Fees)
and all amounts payable in connection with any unsolicited sales from the First
Formation Loan. The First Formation Loan will be unsecured, and will be repaid
in ten (10) equal annual installments of principal, without interest commencing
on December 31 of the year in which the initial offering terminates.
1.12 "Fourth Formation Loan" means the loan to Redwood Mortgage Corp., a
General Partner, in connection with the offering of 50,000,000 Units pursuant to
the Prospectus dated October 30, 2002 equal to the amount of the sales
commissions and the amounts payable in connection with the unsolicited sales.
Redwood Mortgage Corp. will pay all sales commissions and amounts due in
connection with the unsolicited sales from the Fourth Formation Loan. The Fourth
Formation Loan will be unsecured, not bear interest, and will be repaid in
annual installments.
165
1.13 "Formation Loans" means collectively the First, Second, Third, Fourth
and Fifth Formation Loans.
1.14 "General Partners" means Michael R. Burwell, Gymno Corporation, a
California corporation, and Redwood Mortgage Corp., a California corporation or
any Person substituted in place thereof pursuant to this Agreement. "General
Partner" means any one of the General Partners.
1.15 "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a Partner to
the Partnership shall be the gross fair market value of such asset, as
determined by the contributing Partner and the Partnership;
(b) The Gross Asset Values of all Partnership assets shall be adjusted to
equal their respective gross fair market values, as determined by the General
Partners, as of the following times: (a) the acquisition of an additional
interest in the Partnership (other than pursuant to Section 4.2) by any new or
existing Partner in exchange for more than a de minimis capital contribution;
(b) the distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership property other than money, unless all Partners receive
simultaneous distributions of undivided interests in the distributed property in
proportion to their Interests in the Partnership; and (c) the termination of the
Partnership for federal income tax purposes pursuant to Section 708(b)(1)(B) of
the Code; and
(c) If the Gross Asset Value of an asset has been determined or adjusted
pursuant to clause (a) or (b) above, such Gross Asset Value shall thereafter be
adjusted by the depreciation, amortization or other cost recovery deduction
allowable which is taken into account with respect to such asset for purposes of
computing Profits and Losses.
1.16 "Limited Partners" means the Initial Limited Partner until it shall
withdraw as such, and the purchasers of Units in Redwood Mortgage Investors
VIII, who are admitted thereto and whose names are included on the Certificate
and Agreement of Limited Partnership of Redwood Mortgage Investors VIII.
Reference to a "Limited Partner" shall be to any one of them.
1.17 "Limited Partnership Interest" means the percentage ownership interest
of any Limited Partner in the Partnership determined at any time by dividing a
Limited Partner's current Capital Account by the total outstanding Capital
Accounts of all Limited Partners.
1.18 "Majority of the Limited Partners" means Limited Partners holding a
majority of the total outstanding Limited Partnership Interests as of the first
day of the current calendar month.
1.19 "Mortgage Investment(s)" or "Loans" means the loan(s) and/or an
undivided interest in the loans the Partnership intends to extend to the general
public secured by real property deeds of trust.
1.20 "Net Asset Value" means the Partnership's total assets less its total
liabilities.
1.21 "Partners" means the General Partners and the Limited Partners,
collectively. "Partner" means any one of the Partners.
1.22 "Partnership" means Redwood Mortgage Investors VIII, a California
limited partnership, the limited partnership created pursuant to this Agreement.
1.23 "Partnership Interest" means the percentage ownership interest of each
Partner in the partnership as defined in Section 5.1.
1.24 "Person" means any natural person, partnership, corporation,
unincorporated association or other legal entity.
1.25 "Profits" and "Losses" mean, for each Fiscal Year or any other period,
an amount equal to the Partnership's taxable income or loss for such Fiscal Year
or other given period, determined in accordance with Section 703(a) of the Code
(for this purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(a) Any income of the Partnership that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses pursuant to
this Section 1.24 shall be added to such taxable income or loss;
166
(b) Any expenditures of the Partnership described in Section 705(a)(2)(B)
of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant
to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in computing Profits or Losses pursuant to this Section 1.24, shall
be subtracted from such taxable income or loss.
(c) Gain or loss resulting from any disposition of Partnership property
with respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value;
(d) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account depreciation, amortization or other cost recovery
deductions for such Fiscal Year or other period, computed such that if the Gross
Asset Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of a Fiscal Year or other period, depreciation,
amortization or other cost recovery deductions shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization or other cost recovery deductions for such Fiscal
Year or other period bears to such beginning adjusted tax basis; and
(e) Notwithstanding any other provision of this Section 1.24, any items in
the nature of income or gain or expenses or losses, which are specially
allocated under Section 5.4 (a) or (b), shall not be taken into account in
computing Profits or Losses.
1.26 "Sales Commissions" means the amount of compensation, which may be
paid under one of two options, to be paid to Participating Broker Dealers in
connection with the sale of Units.
1.27 "Second Formation Loan" means the loan to Redwood Mortgage Corp., a
General Partner, in connection with the second offering of $30,000,000 in Units
pursuant to the Prospectus dated December 4, 1996 equal to the amount of the
sales commissions and the amounts payable in connection with unsolicited sales.
Redwood Mortgage Corp. will pay all sales commissions and amounts due in
connection with unsolicited sales from the Second Formation Loan. The Second
Formation Loan will be unsecured, will not bear interest and will be repaid in
annual installments.
1.28 "Third Formation Loan" means the loan to Redwood Mortgage Corp., a
General Partner, in connection with the offering of $30,000,000 in Units
pursuant to the Prospectus dated August 31, 2000 equal to the amount of the
sales commissions and the amounts payable with the unsolicited sales. Redwood
Mortgage Corp. will pay all sales commissions and amounts due in connection with
the unsolicited sales from the Third Formation Loan. The Third Formation Loan
will be unsecured, will not bear interest, and will be repaid in annual
installments.
1.29 "Units" mean the shares of ownership of the Partnership issued to
Limited Partners upon their admission to the Partnership, pursuant to the
Partnership's Prospectuses dated February 2, 1993, December 4, 1996, August 31,
2000, October 30, 2002 and October 7, 2003 and any supplements or amendments
thereto (the "Prospectus").
ARTICLE 2
ORGANIZATION OF THE LIMITED PARTNERSHIP
2.1 Formation. The parties hereto hereby agree to form a limited
partnership, pursuant to the provision of Chapter 3, Title 2, of the California
Corporations Code, as in effect on the date hereof, commonly known as the
California Revised Limited Partnership Act (the "California Act").
2.2 Name. The name of the Partnership is REDWOOD MORTGAGE INVESTORS VIII, a
California limited partnership.
2.3 Place of Business. The principal place of business of the Partnership
shall be located at 900 Veterans Blvd., Suite 500, Redwood City, California
94063, until changed by designation of the General Partners, with notice to all
Limited Partners.
2.4 Purpose. The primary purpose of this Partnership is to engage in
business as a mortgage lender for the primary purpose of making Loans secured by
deeds of trust (the "Loans") on California real estate.
2.5 Substitution of Limited Partner. A Limited Partner may assign all or a
portion of his Partnership Interest and substitute another person in his place
as a Limited Partner only in compliance with the terms and conditions of Section
7.2.
2.6 Certificate of Limited Partnership. The General Partners shall duly
execute and file with the Office of the Secretary of State of the State of
California, a Certificate of Limited Partnership pursuant to the provisions of
Section 15621 of the California Corporations Code. Thereafter, the General
Partners shall execute and cause to be filed Certificates of Amendment of the
Certificate of Limited Partnership whenever required by the California Act or
this Agreement. At the discretion of the General Partners, a certified copy of
167
the Certificate of Limited Partnership may also be filed in the Office of the
Recorder of any county in which the Partnership shall have a place of business
or in which real property to which it holds title shall be situated.
2.7 Term. The Partnership shall be formed and its term shall commence as of
the date on which this Limited Partnership Agreement is executed and the
Certificate of Limited Partnership referred to in Section 2.6 is filed with the
Office of the Secretary of State, and shall continue until December 31, 2032,
unless earlier terminated pursuant to the provisions of this Agreement or by
operation of law.
2.8 Power of Attorney. Each of the Limited Partners irrevocably constitutes
and appoints the General Partners, and each of them, any one of them acting
alone, as his true and lawful attorney-in-fact, with full power and authority
for him, and in his name, place and stead, to execute, acknowledge, publish and
file:
(a) This Agreement, the Certificate of Limited Partnership and any
amendments thereof required under the laws of the State of California;
(b) Any certificates, instruments and documents, including, without
limitation, Fictitious Business Name Statements, as may be required by, or may
be appropriate under, the laws of any state or other jurisdiction in which the
Partnership is doing or intends to do business; and
(c) Any documents which may be required to effect the continuation of the
Partnership, the admission of an additional or substituted Partner, or the
dissolution and termination of the Partnership.
Each Limited Partner hereby agrees to execute and deliver to the General
Partners within five (5) days after receipt of the General Partners' written
request therefore, such other and further statements of interest and holdings,
designations, and further statements of interest and holdings, designations,
powers of attorney and other instruments that the General Partners deem
necessary to comply with any laws, rules or regulations relating to the
Partnership's activities.
2.9 Nature of Power of Attorney. The foregoing grant of authority is a
special power of attorney coupled with an interest, is irrevocable, and survives
the death of the undersigned or the delivery of an assignment by the undersigned
of a Limited Partnership Interest; provided, that where the assignee thereof has
been approved by the General Partners for admission to the Partnership as a
substituted Limited Partner, the Power of Attorney survives the delivery of such
assignment for the sole purpose of enabling the General Partners to execute,
acknowledge and file any instrument necessary to effect such substitution.
ARTICLE 3
THE GENERAL PARTNERS
3.1 Authority of the General Partners. The General Partners shall have all
of the rights and powers of a partner in a general partnership, except as
otherwise provided herein.
3.2 General Management Authority of the General Partners. Except as
expressly provided herein, the General Partners shall have sole and complete
charge of the affairs of the Partnership and shall operate its business for the
benefit of all Partners. Each of the General Partners, acting alone or together,
shall have the authority to act on behalf of the Partnership as to any matter
for which the action or consent of the General Partners is required or
permitted. Without limitation upon the generality of the foregoing, the General
Partners shall have the specific authority:
(a) To expend Partnership funds in furtherance of the business of the
Partnership and to acquire and deal with assets upon such terms as they deem
advisable, from affiliates and other persons;
(b) To determine the terms of the offering of Units, including the right to
increase the size of the offering or offer additional securities, the amount for
discounts allowable or commissions to be paid and the manner of complying with
applicable law;
(c) To employ, at the expense of the Partnership, such agents, employees,
independent contractors, attorneys and accountants as they deem reasonable and
necessary;
(d) To effect necessary insurance for the proper protection of the
Partnership, the General Partners or Limited Partners;
(e) To pay, collect, compromise, arbitrate, or otherwise adjust any and all
claims or demands against the Partnership;
168
(f) To bind the Partnership in all transactions involving the Partnership's
property or business affairs, including the execution of all loan documents and
the sale of notes and to change the Partnership's investment objectives,
notwithstanding any other provision of this Agreement; provided, however, the
General Partners may not, without the consent of a Majority of the Limited
Partners, sell or exchange all or substantially all of the Partnership's assets,
as those terms are defined in Section 9.1;
(g) To amend this Agreement with respect to the matters described in
Subsections 12.4(a) through (k) below;
(h) To determine the accounting method or methods to be used by the
Partnership, which methods may be changed at any time by written notice to all
Limited Partners;
(i) To open accounts in the name of the Partnership in one or more banks,
savings and loan associations or other financial institutions, and to deposit
Partnership funds therein, subject to withdrawal upon the signature of the
General Partners or any person authorized by them;
(j) To borrow funds for the purpose of making Loans, provided that the
amount of borrowed funds does not exceed fifty percent (50%) of the
Partnership's Loan portfolio and in connection with such borrowings, to pledge
or hypothecate all or a portion of the assets of the Partnership as security for
such loans; and
(k) To invest the reserve funds of the Partnership in cash, bank accounts,
certificates of deposits, money market accounts, short-term bankers acceptances,
publicly traded bond funds or any other liquid assets.
3.3 Limitations. Without a written consent of or ratification by all
Limited Partners, the General Partners shall have no authority to do any act
prohibited by law; or to admit a person as a Limited Partner other than in
accordance with the terms of this Agreement.
3.4 No Personal Liability. The General Partners shall have no personal
liability for the original invested capital of any Limited Partner or to repay
the Partnership any portion or all of any negative balance in their capital
accounts, except as otherwise provided in Article 4.
3.5 Compensation to General Partners. The General Partners shall be
entitled to be compensated and reimbursed for expenses incurred in performing
its management functions in accordance with the provisions of Article 10
thereof, and may receive compensation from parties other than the Partnership.
3.6 Fiduciary Duty. The General Partners shall have the fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, and they shall not employ such funds or assets in any manner except
for the exclusive benefit of the Partnership.
3.7 Allocation of Time to Partnership Business. The General Partners shall
not be required to devote full time to the affairs of the Partnership, but shall
devote whatever time, effort and skill they deem to be reasonably necessary for
the conduct of the Partnership's business. The General Partners may engage in
any other businesses or activities, including businesses related to or
competitive with the Partnership.
3.8 Assignment by a General Partner. A General Partner's interest in
income, losses and distributions of the Partnership shall be assignable at the
discretion of a General Partner, which, if made, may be converted, at a General
Partner's option, into a limited partnership interest to the extent of the
assignment.
3.9 Partnership Interest of General Partners. The General Partners shall be
allocated a total of one percent (1%) of all items of Partnership income, gains,
losses, deductions and credits as described in Section 5.1, which shall be
shared equally among them.
3.10 Removal of General Partners. A General Partner may be removed upon the
following conditions:
(a) By written consent of a Majority of the Limited Partners. Limited
Partners may exercise such right by presenting to the General Partner a notice,
with their acknowledged signatures thereon, to the effect that the General
Partner is removed; the notice shall set forth the grounds for removal and the
date on which removal is become effective;
(b) Concurrently with such notice or within thirty (30) days thereafter by
notice similarly given, a Majority of the Limited Partners may also designate a
successor as General Partner;
169
(c) Substitution of a new General Partner, if any, shall be effective upon
written acceptance of the duties and responsibilities of a General Partner by
the new General Partner. Upon effective substitution of a new General Partner,
this Agreement shall remain in full force and effect, except for the change in
the General Partner, and business of the Partnership shall be continued by the
new General Partner. The new General Partner shall thereupon execute, file and
record an amendment to the Certificate of Limited Partnership in the manner
required by law.
Failure of the Limited Partners giving notice of removal to designate a new
General Partner within the time specified herein or failure of the new General
Partner so designated to execute written acceptance of the duties and
responsibilities of a General Partner hereunder within ten (10) days after such
designation shall dissolve and terminate the Partnership, unless the business of
the Partnership is continued by the remaining General Partners, if any.
If all or any one of the initial General Partners is removed as a General
Partner by the vote of a majority of Limited Partners and a successor or
additional General Partner(s) is thereafter designated, and if such successor or
additional General Partner(s) begins using any other loan brokerage firm for the
placement of loans, Redwood Mortgage Corp. will be immediately released from any
further obligation under the Formation Loans (except for a proportionate share
of the principal installment due at the end of that year, prorated according to
the days elapsed.)
In the event that all of the General Partners are removed, no other General
Partners are elected, the Partnership is liquidated and Redwood Mortgage Corp.
is no longer receiving payments for services rendered, the debt on the Formation
Loans shall be forgiven by the Partnership and Redwood Mortgage Corp. will be
immediately released from any further obligation under the Formation Loans.
3.11 Commingling of Funds. The funds of the Partnership shall not be
commingled with funds of any other person or entity.
3.12 Right to Rely on General Partners. Any person dealing with the
Partnership may rely (without duty of further inquiry) upon a certificate signed
by the General Partners as to:
(a) The identity of any General Partner or Limited Partner;
(b) The existence or nonexistence of any fact or facts which constitute a
condition precedent to acts by a General Partner or which are in any further
manner germane to the affairs of the Partnership;
(c) The persons who are authorized to execute and deliver any instrument or
document of the Partnership; or
(d) Any act or failure to act by the Partnership or any other matter
whatsoever involving the Partnership or any Partner.
3.13 Sole and Absolute Discretion. Except as otherwise provided in this
Agreement, all actions which any General Partner may take and all determinations
which any General Partner may take and all determinations which any General
Partners may make pursuant to this Agreement may be taken and made at the sole
and absolute discretion of such General Partner.
3.14 Merger or Reorganization of the General Partners. The following is not
prohibited and will not cause a dissolution of the Partnership: (a) a merger or
reorganization of the General Partners or the transfer of the ownership interest
of the General Partners; and (b) the assumption of the rights and duties of the
General Partners by the transferee of the rights and duties of the General
Partners by the transferee entity so long as such transferee is an Affiliate
under the control of the General Partners.
3.15 Dissenting Limited Partners' Rights. If the Partnership participates
in any acquisition of the Partnership by another entity, any combination of the
Partnership with another entity through a merger or consolidation, or any
conversion of the Partnership into another form of business entity (such as a
corporation) that requires the approval of the outstanding limited partnership
interest, the result of which would cause the other entity to issue securities
to the Limited Partners, then each Limited Partner who does not approve of such
reorganization (the "Dissenting Limited Partner") may require the Partnership to
purchase for cash, at its fair market value, the interest of the Dissenting
Limited Partner in the Partnership in accordance with Section 15679.2 of the
California Corporations Code. The Partnership, however, may itself convert to
another form of business entity (such as a corporation, trust or association) if
the conversion will not result in a significant adverse change in (i) the voting
rights of the Limited Partners, (ii) the termination date of the Partnership
(currently, December 31, 2032, unless terminated earlier in accordance with the
Partnership Agreement), (iii) the compensation payable to the General Partners
or their Affiliates, or (iv) the Partnership's investment objectives.
The General Partners will make the determination as to whether or not any
such conversion will result in a significant adverse change in any of the
provisions listed in the preceding paragraph based on various factors relevant
at the time of the proposed conversion, including an analysis of the historic
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and projected operations of the Partnership; the tax consequences (from the
standpoint of the Limited Partners) of the conversion of the Partnership to
another form of business entity and of an investment in a limited partnership as
compared to an investment in the type of business entity into which the
Partnership would be converted; the historic and projected operating results of
the Partnership's Loans, and the then-current value and marketability of the
Partnership's Loans. In general, the General Partners would consider any
material limitation on the voting rights of the Limited Partners or any
substantial increase in the compensation payable to the General Partners or
their Affiliates to be a significant adverse change in the listed provisions.
3.16 Exculpation and Indemnification. The General Partners shall have no
liability whatsoever to the Partnership or to any Limited Partner, so long as a
General Partner determined in good faith, that the course of conduct which
caused the loss or liability was in the best interests of the Partnership, and
such loss or liability did not result from the gross negligence or gross
misconduct of the General Partner being held harmless. The General Partners or
any Partnership employee or agent shall be entitled to be indemnified by the
Partnership, at the expense of the Partnership, against any loss or liability
(including attorneys' fees, which shall be paid as incurred) resulting from
assertion of any claim or legal proceeding relating to the activities of the
Partnership, including claims, or legal proceedings brought by a third party or
by Limited Partners, on their own behalf or as a Partnership derivative suit, so
long as the party to be indemnified determined in good faith that the course of
conduct which gave rise to such claim or proceeding was in the best interests of
the Partnership and such course of conduct did not constitute gross negligence
or gross misconduct; provided, however, any such indemnification shall only be
recoverable out of the assets of the Partnership and not from Limited Partners.
Nothing herein shall prohibit the Partnership from paying in whole or in part
the premiums or other charge for any type of indemnity insurance by which the
General Partners or other agents or employees of the Partnership are indemnified
or insured against liability or loss arising out of their actual or asserted
misfeasance or nonfeasance in the performance of their duties or out of any
actual or asserted wrongful act against the Partnership including, but not
limited to judgments, fines, settlements and expenses incurred in the defense of
actions, proceedings and appeals therefrom. Notwithstanding the foregoing,
neither the General Partners nor their affiliates shall be indemnified for any
liability imposed by judgment (including costs and attorneys' fees) arising from
or out of a violation of state or federal securities laws associated with the
offer and sale of Units offered hereby. However, indemnification will be allowed
for settlements and related expenses of lawsuits alleging securities law
violations and for expenses incurred in successfully defending such lawsuits
provided that (a) a court either approves indemnification of litigation costs if
the General Partners are successful in defending the action; or (b) the
settlement and indemnification is specifically approved by the court of law
which shall have been advised as to the current position of the Securities and
Exchange Commission (as to any claim involving allegations that the Securities
Act of 1933 was violated) and California Commissioner of Corporations or the
applicable state authority (as to any claim involving allegations that the
applicable state's securities laws were violated).
ARTICLE 4
CAPITAL CONTRIBUTIONS; THE LIMITED PARTNERS
4.1 Capital Contribution by General Partners. The General Partners,
collectively, shall contribute to the Partnership an amount in cash equal to
1/10 of 1% of the aggregate capital contributions of the Limited Partners.
4.2 Other Contributions.
(a) Capital Contribution by Initial Limited Partner. The Initial Limited
Partner made a cash capital contribution to the Partnership of $1,000. Upon the
admission of additional Limited Partners to the Partnership pursuant to Section
4.2(b) of this Agreement, the Partnership promptly refunded to the Initial
Limited Partner its $1,000 capital contribution and upon receipt of such sum the
Initial Limited Partner was withdrawn from the Partnership as its Initial
Limited Partner.
(b) Capital Contributions of Existing Limited Partners. The existing
Limited Partners have contributed in the aggregate to the capital of the
Partnership an amount equal to $115,932,342 as of June 30, 2003.
(c) Capital Contributions of New Limited Partners. The new Limited Partners
shall contribute to the capital of the Partnership an amount equal to one dollar
($1) for each Unit subscribed for by each such New Limited Partners, with a
minimum subscription of two thousand (2000) Units per Limited Partner (including
subscriptions from entities of which such limited partner is the sole beneficial
owner). The total additional capital contributions of the New Limited Partners
will not exceed $75,000,000.
(d) Escrow Account. No escrow account will be established and all proceeds
from the sale of Units will be remitted directly to the Partnership.
Subscription Agreements shall be accepted or rejected within 30 days of
their receipt. All subscription monies deposited by persons whose subscriptions
are rejected shall be returned to such subscribers forthwith after such
rejection without interest. The public offering of Units shall terminate one
year from the effective date of the Prospectus unless fully subscribed at an
earlier date or terminated on an earlier date by the General Partners, or unless
extended by the General Partners for additional one year periods.
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(e) Subscription Account. Subscriptions received after the activation of
the Partnership will be deposited into a subscription account at a federally
insured commercial bank or other depository and invested in short-term
certificates of deposit, a money market or other liquid asset account.
Prospective investors whose subscriptions are accepted will be admitted into the
Partnership only when their subscription funds are required by the Partnership
to fund a Loan, or the Formation Loan, to create appropriate reserves or to pay
organizational expenses or other proper Partnership purposes. During the period
prior to admittance of investors as Limited Partners, proceeds from the sale of
Units are irrevocable, and will be held by the General Partners for the account
of Limited Partners in the subscription account. Investors' funds will be
transferred from the subscription account into the Partnership on a first-in,
first-out basis. Upon admission to the Partnership, subscription funds will be
released to the Partnership and Units will be issued at the rate of $1 per unit
or fraction thereof. Interest earned on subscription funds while in the
subscription account will be returned to the subscriber, or if the subscriber
elects to compound earnings, the amount equal to such interest will be added to
his investment in the Partnership, and the number of Units actually issued shall
be increased accordingly. In the event only a portion of a subscribing Limited
Partner's funds are required, then all funds invested by such subscribing
Limited Partners at the same time shall be transferred. Any subscription funds
remaining in the subscription account after the expiration of one (1) year from
the date any such subscription funds were first received by the General Partners
shall be returned to the subscriber.
(f) Admission of Limited Partners. Subscribers shall be admitted as Limited
Partners when their subscription funds are required by the Partnership to fund a
Loan, or the Formation Loan, to create appropriate reserves or to pay
organizational expenses, as described in the Prospectus. Subscriptions shall be
accepted or rejected by the General Partners on behalf of the Partnership within
30 days of their receipt. Rejected subscriptions and monies shall be returned to
subscribers forthwith.
The Partnership shall amend Schedule A to the Limited Partnership Agreement
from time to time to effect the substitution of substituted Limited Partners in
the case of assignments, where the assignee does not become a substituted
Limited Partner, the Partnership shall recognize the assignment not later than
the last day of the calendar month following acceptance of the assignment by the
General Partners.
No person shall be admitted as a Limited Partner who has not executed and
filed with the Partnership the subscription form specified in the Prospectus
used in connection with the public offering, together with such other documents
and instruments as the General Partners may deem necessary or desirable to
effect such admission, including, but not limited to, the execution,
acknowledgment and delivery to the General Partners of a power of attorney in
form and substance as described in Section 2.8 hereof.
(g) Names, Addresses, Date of Admissions, and Contributions of Limited
Partners. The names, addresses, date of admissions and capital contributions of
the Limited Partners shall be set forth in Schedule A attached hereto, as
amended from time to time, and incorporated herein by reference.
4.3 Election to Receive Monthly, Quarterly or Annual Cash Distributions.
Upon subscription for Units, a subscribing Limited Partner must elect whether to
receive monthly, quarterly or annual cash distributions from the Partnership or
to have earnings retained in his Capital Account that will increase it in lieu
of receiving periodic cash distributions. If the Limited Partner initially
elects to receive monthly, quarterly or annual distributions, such election,
once made, is irrevocable. However, a Limited Partner may change his election
regarding whether he wants to receive such distributions on a monthly, quarterly
or annual basis. If the Limited Partner initially elects to have earnings
retained in his Capital Account in lieu of cash distributions, he may after
three (3) years, change his election and receive monthly, quarterly or annual
cash distributions. Earnings allocable to Limited Partners who elect to have
earnings retained in their Capital Account will have earnings retained by the
Partnership to be used for making further Loans or for other proper Partnership
purposes. The Earnings from such further Loans will be allocated among all
Partners; however, Limited Partners who elect to have earnings retained in their
Capital Account will be credited with an increasingly larger proportionate share
of such Earnings than Limited Partners who receive monthly, quarterly or annual
distributions since Limited Partners' Capital Accounts who elect to have
earnings retained in their Capital Accounts will increase over time. Annual
distributions will be made after the calendar year.
4.4 Interest. No interest shall be paid on, or in respect of, any
contribution to Partnership Capital by any Partner, nor shall any Partner have
the right to demand or receive cash or other property in return for the
Partner's capital contribution.
4.5 Loans. Any Partner or Affiliate of a Partner may, with the written
consent of the General Partners, lend or advance money to the Partnership. If
the General Partners or, with the written consent of the General Partners, any
Limited Partner shall make any loans to the Partnership or advance money on its
behalf, the amount of any such loan or advance shall not be treated as a
contribution to the capital of the Partnership, but shall be a debt due from the
Partnership. The amount of any such loan or advance by a lending Partner or an
Affiliate of a Partner shall be repayable out of the Partnership's cash and
shall bear interest at a rate of not in excess of the greater of (i) the prime
rate established, from time to time, by any major bank selected by the General
Partners for loans to the bank's most creditworthy commercial borrowers, plus 5%
per annum, or (ii) the maximum rate permitted by law. None of the Partners or
their Affiliates shall be obligated to make any loan or advance to the
Partnership.
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4.6 No Participation in Management. Except as expressly provided herein,
the Limited Partners shall take no part in the conduct or control of the
Partnership business and shall have no right or authority to act for or bind the
Partnership.
4.7 Rights and Powers of Limited Partners. In addition to the matters
described in Section 3.10 above, the Limited Partners shall have the right to
vote upon and take any of the following actions upon the approval of a Majority
of the Limited Partners, without the concurrence of the General Partners.
(a) Dissolution and termination of the Partnership prior to the expiration
of the term of the Partnership as stated in Section 2.7 above
(b) Amendment of this Agreement, subject to the limitations set forth in
Section 12.4;
(c) Disapproval of the sale of all or substantially all the assets of the
Partnership (as defined in Subsection 9.1(c) below); or
(d) Removal of the General Partners and election of a successor, in the
manner and subject to the conditions described in Section 3.10 above.
Except as expressly set forth above or otherwise provided for in this
Agreement, the Limited Partners shall have no other rights as set forth in the
California Act.
4.8 Meetings. The General Partners, or Limited Partners representing ten
percent (10%) of the outstanding Limited Partnership Interests, may call a
meeting of the Partnership and, if desired, propose an amendment to this
Agreement to be considered at such meeting. If Limited Partners representing the
requisite Limited Partnership Interests present to the General Partners a
statement requesting a Partnership meeting, the General Partners shall fix a
date for such meeting and shall, within twenty (20) days after receipt of such
statement, notify all of the Limited Partners of the date of such meeting and
the purpose for which it has been called. Unless otherwise specified, all
meetings of the Partnership shall be held at 2:00 P.M. at the office of the
Partnership, upon not less than ten (10) and not more than sixty (60) days
written notice. At any meeting of the Partnership, Limited Partners may vote in
person or by proxy. A majority of the Limited Partners, present in person or by
proxy, shall constitute a quorum at any Partnership meeting. Any question
relating to the Partnership which may be considered and acted upon by the
Limited Partners hereunder may be considered and acted upon by vote at a
Partnership meeting, and any consent required to be in writing shall be deemed
given by a vote by written ballot. Except as expressly provided above,
additional meeting and voting procedures shall be in conformity with Section
15637 of the California Corporations Code, as amended.
4.9 Limited Liability of Limited Partners. Units are non-assessable, and no
Limited Partner shall be personally liable for any of the expenses, liabilities,
or obligations of the Partnership or for any of the losses thereof beyond the
amount of such Limited Partner's capital contribution to the Partnership and
such Limited Partner's share of any undistributed net income and gains of the
Partnership, provided, that any return of capital to Limited Partners (plus
interest at the legal rate on any such amount from the date of its return) will
remain liable for the payment of Partnership debts existing on the date of such
return of capital; and, provided further, that such Limited Partner shall be
obligated upon demand by the General Partners to pay the Partnership cash equal
to the amount of any deficit remaining in his Capital Account upon winding up
and termination of the Partnership.
4.10 Representation of Partnership. Each of the Limited Partners hereby
acknowledges and agrees that the attorneys representing the Partnership and the
General Partners and their Affiliates do not represent and shall not be deemed
under the applicable codes of professional responsibility to have represented or
be representing any or all of the Limited Partners in any respect at any time.
Each of the Limited Partners further acknowledges and agrees that such attorneys
shall have no obligation to furnish the Limited Partners with any information or
documents obtained, received or created in connection with the representation of
the Partnership, the General Partners and/or their Affiliates.
ARTICLE 5
PROFITS AND LOSSES; CASH DISTRIBUTIONS
5.1 Profits and Losses. All Profits and Losses of the Partnership shall be
credited to and charged against the Partners in proportion to their respective
"Partnership Interests", as hereafter defined. The Partnership Interest of the
General Partners shall at all times be a total of one percent (1%), to be shared
equally among them and the Partnership Interest of the Limited Partners
collectively shall be ninety-nine percent (99%), which shall be allocated among
them according to their respective Limited Partnership Interests. Profits and
Losses realized by the Partnership during any month shall be allocated to the
Partners as of the close of business on the last day of each calendar month, in
accordance with their respective Limited Partnership Interests and in proportion
to the number of days during such month that they owned such Limited Partnership
Interests, without regard to Profits and Losses realized with respect to time
periods within such month.
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5.2 Cash Earnings. Earnings as of the close of business on the last day of
each calendar month shall be allocated among the Partners in the same proportion
as Profits and Losses as described in Section 5.1 above. Earnings allocable to
those Limited Partners who elect to receive cash distributions as described
below shall be distributed to them in cash as soon as practicable after the end
of each calendar month. The General Partners' allocable share of Earnings shall
also be distributed concurrently with cash distributions to Limited Partners.
Earnings allocable to those Limited Partners who elected to receive additional
Units shall be retained by the Partnership and credited to their respective
Capital Accounts as of the first day of the succeeding calendar month. Earnings
to Limited Partners shall be distributed only to those Limited Partners who
elect in writing, upon their initial subscription for the purchase of Units or
after three (3) years to receive such distributions during the term of the
Partnership. Each Limited Partner's decision whether to receive such
distributions shall be irrevocable, except as set forth in paragraph 4.3 above.
5.3 Cash Distributions Upon Termination. Upon dissolution and termination
of the Partnership, Cash Available for Distribution shall thereafter be
distributed to Partners in accordance with the provisions of Section 9.3 below.
5.4 Special Allocation Rules.
(a) For purposes of this Agreement, a loss or allocation (or item thereof)
is attributable to non-recourse debt which is secured by Partnership property to
the extent of the excess of the outstanding principal balance of such debt
(excluding any portion of such principal balance which would not be treated as
an amount realized under Internal Revenue Code Section 1001 and Paragraph (a) of
Section 1.1001-2) if such debt were foreclosed upon over the adjusted basis of
such property. This excess is herein defined as "Minimum Gain (whether taxable
as capital gain or as ordinary income) as more explicitly set forth in Treasury
Regulation T.704 l(b)(4)(iv)(c). Notwithstanding any other provision of Article
5, the allocation of loss or deduction or item thereof, attributable to
non-recourse debt which is secured by Partnership property will be allowed only
to the extent that such allocation does not cause the sum of the deficit capital
account balances of the Limited Partners receiving such allocations to exceed
the minimum gain determined at the end of the Partnership able year to which the
allocations relate. The balance of such losses shall be allocated to the General
Partners. Any Limited Partner with a deficit capital account balance resulting
in whole or in part from allocations of loss or deduction (or item thereof)
attributable to non-recourse debt which is secured by Partnership property
shall, to the extent possible, be allocated income or gain (or item thereof) in
an amount not less than the minimum gain at a time no later than the time at
which the minimum gain is reduced below the sum of such deficit capital account
balances. This section is intended and shall be interpreted to comply with the
requirements of Treasury Regulation Section 1.704-2(f).
(b) In the event any Limited Partner receives any adjustments, allocations
or distributions, not covered by Section 75.4(a), so as to result in a deficit
capital account, items of Partnership income and gain shall be specially
allocated to such Limited Partners in an amount and manner sufficient to
eliminate the deficit balances in their Capital Accounts created by such
adjustments, allocations or distributions as quickly as possible. This Section
shall operate a qualified income offset as utilized in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d).
(c) Syndication expenses for any fiscal year or other period shall be
specially allocated to the Limited Partners in proportion to their Units,
provided that if additional Limited Partners are admitted to the Partnership on
different dates, all syndication expenses shall be divided among the Persons who
own Units from time to time so that, to the extent possible, the cumulative
Syndication Expenses allocated with respect to each Unit at any time is the same
amount. In the event the General Partners shall determine that such result is
not likely to be achieved through future allocations of syndication expenses,
the General Partners may allocate a portion of Net Profits or Losses so as to
achieve the same effect on the Capital Accounts of the Limited Partners,
notwithstanding any other provision of this Agreement.
(d) For purposes of determining the Net Profits, Net Losses, or any other
items allocable to any period, Net Profits, Net Losses, and any such other items
shall be determined on a daily, monthly, or other basis, as determined by the
General Partners using any permissible method under Code Section 706 and the
Treasury Regulations thereunder.
(e) Notwithstanding Section 5.1 and 5.2 hereof, (i) Net Losses allocable to
the period prior to the admission of any additional Limited Partners pursuant to
Section 4.2(b) and (e) hereof shall be allocated 99% to the General Partners and
1% to the Initial Limited Partner and Net Profits during that same period, if
any, shall be allocated to the General Partners, and (ii) Profits or Losses
allocable to the period commencing with the admission of any additional such
Limited Partners and all subsequent periods shall be allocated pursuant to
Section 5.1.
(f) Except as otherwise provided in this Agreement, all items of
Partnership profit, gain, loss, deduction, and any other allocations not
otherwise provided for shall be divided among the Partners in the same
proportions as they share Net Profits or Net Losses, as the case may be, for the
year.
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(g) The General Partners may adopt any procedure or convention they deem
reasonable to account for unsolicited investments made by Limited Partners and
the payment of a portion of the Formation Loan to such Partners' Capital
Account.
5.5 704(c) Allocations. In accordance with Code 704(c) and the Treasury
Regulations thereunder income, gain, loss, and deduction with respect to any
property contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and its initial fair market value.
Any elections or other decisions relating to such allocations shall be made
by the General Partners in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 5.5 are solely
for purposes of federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing, any Person's Capital Account or share of
Profits, Losses, other items, or distributions pursuant to any provision of this
Agreement.
5.6 Intent of Allocations. It is the intent of the Partnership that this
Agreement comply with the safe harbor test set out in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(D) and 1.704-l(b)(4)(iv)(D) and the requirements of
those Sections, including the qualified income offset and minimum gain
chargeback, which are hereby incorporated by reference. If, for whatever
reasons, the Partnership is advised by counsel or its accountants that the
allocation provisions of this Agreement are unlikely to be respected for federal
income tax purposes, the General Partners are granted the authority to amend the
allocation provisions of this Agreement, to the minimum extent deemed necessary
by counsel or its accountants to effect the plan of allocations and
distributions provided in this Agreement. The General Partners shall have the
discretion to adopt and revise rules, conventions and procedures as it believes
appropriate with respect to the admission of Limited Partners to reflect
Partners' interests in the Partnership at the close of the years.
ARTICLE 6
BOOKS AND RECORDS, REPORTS AND RETURNS
6.1 Books and Records. The General Partners shall cause the Partnership to
keep the following:
(a) Complete books and records of account in which shall be entered fully
and accurately all transactions and other matters relating to the Partnership.
(b) A current list setting forth the full name and last known business or
residence address of each Partner which shall be listed in alphabetical order
and stating his respective capital contribution to the Partnership and share in
Profits and Losses.
(c) A copy of the Certificate of Limited Partnership and all amendments
thereto.
(d) Copies of the Partnership's federal, state and local income tax returns
and reports, if any, for the six (6) most recent years.
(e) Copies of this Agreement, including all amendments thereto, and the
financial statements of the Partnership for the three (3) most recent years.
All such books and records shall be maintained at the Partnership's
principal place of business and shall be available for inspection and copying
by, and at the sole expense of, any Partner, or any Partner's duly authorized
representatives, during reasonable business hours.
6.2 Annual Statements. The General Partners shall cause to be prepared at
least annually, at Partnership expense, financial statements prepared in
accordance with generally accepted accounting principles and accompanied by a
report thereon containing an opinion of an independent certified public
accounting firm. The financial statements will include a balance sheet,
statements of income or loss, partners' equity, and changes in financial
position. The General Partners shall have prepared at least annually, at
Partnership expense: (i) a statement of cash flow; (ii) Partnership information
necessary in the preparation of the Limited Partners' federal and state income
tax returns; (iii) a report of the business of the Partnership; (iv) a statement
as to the compensation received by the General Partners and their Affiliates,
during the year from the Partnership which shall set forth the services rendered
or to be rendered by the General Partners and their Affiliates and the amount of
fees received; and (v) a report identifying distributions from (a) Earnings of
that year, (b) Earnings of prior years, (c) working capital reserves and other
sources, and (d) a report on the costs reimbursed to the General Partners, which
allocation shall be verified by independent public accountants in accordance
with generally accepted auditing standards. Copies of the financial statements
and reports shall be distributed to each Limited Partner within 120 days after
the close of each taxable year of the Partnership; provided, however, all
Partnership information necessary in the preparation of the Limited Partners'
federal income tax returns shall be distributed to each Limited Partner not
later than 90 days after the close of each fiscal year of the Partnership.
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6.3 Semi-Annual Report. Until the Partnership is registered under Section
12(g) of the Securities Exchange Act of 1934, the General Partners shall have
prepared, at Partnership expense, a semi-annual report covering the first six
months of each fiscal year, commencing with the six-month period ending after
the Initial Closing Date, and containing unaudited financial statements (balance
sheet, statement of income or loss and statement of cash flow) and a statement
of other pertinent information regarding the Partnership and its activities
during the six-month period. Copies of this report shall be distributed to each
Limited Partner within 60 days after the close of the six-month period.
6.4 Quarterly Reports. The General Partners shall cause to be prepared
quarterly, at Partnership expense: (i) a statement of the compensation received
by the General Partners and Affiliates during the quarter from the Partnership,
which statement shall set forth the services rendered by the General Partners
and Affiliates and the amount of fees received, and (ii) other relevant
information. Copies of the statements shall be distributed to each Limited
Partner within 60 days after the end of each quarterly period. The information
required by Form 10-Q (if required to be filed with the Securities and Exchange
Commission) will be supplied to each Limited Partner within 60 days of each
quarterly period. If the Partnership is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, the General Partners shall cause to
be prepared, at Partnership expense, a quarterly report for each of the first
three quarters in each fiscal year containing unaudited financial statements
(consisting of a balance sheet, a statement of income or loss and a statement of
cash flow) and a statement of other pertinent information regarding the
Partnership and its activities during the period covered by the report. Copies
of the statements and other pertinent information shall be distributed to each
Limited Partner within 60 days after the close of the quarter covered by the
report of the Partnership. The quarterly financial statements shall be
accompanied by the report thereon, if any, of the independent accountants
engaged by the Partnership or, if there is no such report, the certificate of
the General Partners that the financial statements were prepared without audit
from the books and records of the Partnership. Copies of the financial
statements, if any, filed with the Securities and Exchange Commission shall be
distributed to each Limited Partner within 60 days after the close of the
quarterly period covered by the report of the Partnership.
6.5 Filings. The General Partners, at Partnership expense, shall cause the
income tax returns for the Partnership to be prepared and timely filed with the
appropriate authorities. The General Partners, at Partnership expense, shall
also cause to be prepared and timely filed, with appropriate federal and state
regulatory and administrative bodies, all reports required to be filed with
those entities under then current applicable laws, rules and regulations. The
reports shall be prepared by the accounting or reporting basis required by the
regulatory bodies. Any Limited Partner shall be provided with a copy of any of
the reports upon request without expense to him. The General Partners, at
Partnership expense, shall file, with the securities administrators for the
various states in which this Partnership is registered, as required by such
states, a copy of each report referred to this Article 6.
6.6 Suitability Requirements. The General Partners, at Partnership expense,
shall maintain for a period of at least four years a record of the information
obtained to indicate that a Limited Partner complies with the suitability
standards set forth in the Prospectus.
6.7 Fiscal Matters.
(a) Fiscal Year. The Partnership shall adopt a fiscal year beginning on the
first day of January of each year and ending on the last day of December;
provided, however, that the General Partners in their sole discretion may,
subject to approval by the Internal Revenue Service and the applicable state
taxing authorities at any time without the approval of the Limited Partners
change the Partnership's fiscal year to a period to be determined by the General
Partners.
(b) Method of Accounting. The accrual method of accounting shall be used
for both income tax purposes and financial reporting purposes.
(c) Adjustment of Tax Basis. Upon the transfer of an interest in the
Partnership, the Partnership may, at the sole discretion of the General
Partners, elect pursuant to Section 754 of the Internal Revenue Code of 1986, as
amended, to adjust the basis of the Partnership property as allowed by Sections
734(b) and 743(b) thereof.
6.8 Tax Matters Partner. In the event the Partnership is subject to
administrative or judicial proceedings for the assessment or collection of
deficiencies for federal taxes for the refund of overpayments of federal taxes
arising out of a Partner's distributive share of profits, Michael R. Burwell,
for so long as he is a General Partner, shall act as the Tax-Matters Partner
("TMP") and shall have all the powers and duties assigned to the TMP under
Sections 6221 through 6232 of the Code and the Treasury Regulations thereunder.
The Partners agree to perform all acts necessary under Section 6231 of the Code
and Treasury Regulations thereunder to designate Michael R. Burwell as the TMP.
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ARTICLE 7
TRANSFER OF PARTNERSHIP INTERESTS
7.1 Interest of General Partners. A successor or additional General Partner
may be admitted to the Partnership as follows:
(a) With the consent of all General Partners and a Majority of the Limited
Partners, any General Partner may at any time designate one or more Persons to
be successors to such General Partner or to be additional General Partners, in
each case with such participation in such General Partner's Partnership Interest
as they may agree upon, provided that the Limited Partnership Interests shall
not affected thereby; provided, however, that the foregoing shall be subject to
the provisions of Section 9.1(d) below, which shall be controlling in any
situation to which such provisions are applicable.
(b) Upon any sale or transfer of a General Partner's Partnership Interest,
the successor General Partner shall succeed to all the powers, rights, duties
and obligations of the assigning General Partner hereunder, and the assigning
General Partner shall thereupon be irrevocably released and discharged from any
further liabilities or obligations of or to the Partnership or the Limited
Partners accruing after the date of such transfer. The sale, assignment or
transfer of all or any portion of the outstanding stock of a corporate General
Partner, or of any interest therein, or an assignment of a General Partner's
Partnership Interest for security purposes only, shall not be deemed to be a
sale or transfer of such General Partner's Partnership Interest subject to the
provisions of this Section 7.1.
(c) In the event that all or any one of the initial General Partners are
removed by the vote of a Majority of Limited Partners and a successor or
additional General Partner(s) is designated pursuant to Section 3.10, prior to a
Person's admission as a successor or additional General Partner pursuant to this
Section 7.1, such Person shall execute in writing (i) acknowledging that Redwood
Mortgage Corp., a General Partner, has been repaying the Formation Loans, which
are discussed in Section 10.9, with the proceeds it receives from loan brokerage
commissions on Loans, fees received from the early withdrawal penalties and fees
for other services paid by the Partnership, and (ii) agreeing that if such
successor or additional General Partner(s) begins using the services of another
mortgage loan broker or loan servicing agent, then Redwood Mortgage Corp. shall
immediately be released from all further obligations under the Formation Loans
(except for a proportionate share of the principal installment due at the end of
that year, prorated according to the days elapsed).
7.2 Transfer of Limited Partnership Interest. No assignee of the whole or
any portion of a Limited Partnership Interest in the Partnership shall have the
right to become a substituted Limited Partner in place of his assignor, unless
the following conditions are first met.
(a) The assignor shall designate such intention in a written instrument of
assignment, which shall be in a form and substance reasonably satisfactory to
the General Partners;
(b) The written consent of the General Partners to such substitution shall
be obtained, which consent shall not be unreasonably withheld, but which, in any
event, shall not be given if the General Partners determine that such sale or
transfer may jeopardize the continued ability of the Partnership to qualify as a
"partnership" for federal income tax purposes or that such sale or transfer may
violate any applicable securities laws (including any investment suitability
standards);
(c) The assignor and assignee named therein shall execute and acknowledge
such other instruments as the General Partners may deem necessary to effectuate
such substitution, including, but not limited to, a power of attorney with
provisions more fully described in Sections 2.8 and 2.9 above;
(d) The assignee shall accept, adopt and approve in writing all of the
terms and provisions of this Agreement as the same may have been amended;
(e) Such assignee shall pay or, at the election of the General Partners,
obligate himself to pay all reasonable expenses connected with such
substitution, including but not limited to reasonable attorneys' fees associated
therewith; and
The Partnership has received, if required by the General Partners, a legal
opinion satisfactory to the General Partners that such transfer will not violate
the registration provisions of the Securities Act of 1933, as amended, which
opinion shall be furnished at the Limited Partner's expense.
7.3 Further Restrictions on Transfers. Notwithstanding any provision to the
contrary contained herein, the following restrictions shall also apply to any
and all proposed sales, assignments and transfer of Limited Partnership
Interests, and any proposed sale, assignment or transfer in violation of same to
void ab initio.
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(a) No Limited Partner shall make any transfer or assignment of all or any
part of his Limited Partnership Interest if said transfer or assignment would,
when considered with all other transfers during the same applicable twelve month
period, cause a termination of the Partnership for federal or California state
income tax purposes.
(b) Instruments evidencing a Limited Partnership Interest shall bear and be
subject to legend conditions in substantially the following forms:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
(c) No Limited Partner shall make any transfer or assignment of all or any
of his Limited Partnership Interest if the General Partners determine such
transfer or assignment would result in the Partnership being classified as a
"publicly traded partnership" with the meaning of Section 7704(b) of the Code or
any regulations or rules promulgated thereunder.
ARTICLE 8
WITHDRAWAL FROM PARTNERSHIP
8.1 Withdrawal by Limited Partners. No Limited Partner shall have the right
to withdraw from the Partnership, receive cash distributions or otherwise obtain
the return of all or any portion of his Capital Account balance for a period of
one year after such Limited Partner's initial purchase of Units, except for
monthly, quarterly or annual distributions of Cash Available for Distribution,
if any, to which such Limited Partner may be entitled pursuant to Section 5.2
above. Withdrawal after a minimum one year holding period and before the five
year holding period as set forth below shall be permitted in accordance with
subsection (a) below. The General Partners shall have the right to liquidate the
capital account of any investor who's capital account balance is less than
$1,000. The Partnership will provide written notice of its intent to liquidate a
capital account no less than 30 days prior to the end of the calendar quarter in
which liquidation shall occur. No penalty will be assessed in connection with a
liquidation of a capital account of less than $1,000 by a General Partner.
Additionally, as set forth below in subsection (g) there shall be a limited
right of withdrawal upon the death of a Limited Partner. If a Limited Partner
elects to withdraw either after the one (1) year holding period or the five (5)
year holding period or his heirs elect to withdraw after his death, he will
continue to receive distributions or have those Earnings compounded depending
upon his initial election, based upon the balance of his capital account during
the withdrawal period. Limited Partners may also withdraw after a five year
holding period in accordance with subsection b(i) and (ii). A Limited Partner
may withdraw or partially withdraw from the Partnership upon the following
terms:
(a) A Limited Partner who desires to withdraw from the Partnership after
the expiration of the above referenced one year period shall give written notice
of withdrawal ("Notice of Withdrawal") to the General Partners, which Notice of
Withdrawal shall state the sum or percentage interests to be withdrawn. Subject
to the provisions of subsections (e) and (f) below, such Limited Partner may
liquidate part or all of his entire Capital Account in four equal quarterly
installments beginning the quarter following the quarter in which the Notice of
Withdrawal is given, provided that such notice was received thirty (30) days
prior to the end of the quarter. An early withdrawal under this subsection (a)
shall be subject to a 10% early withdrawal penalty applicable to the sum
withdrawn as stated in the Notice of Withdrawal. The 10% penalty shall be
subject to and payable upon the terms set forth in subsection (c) below.
(b) A Limited Partner who desires to withdraw from the Partnership after
the expiration of the above referenced five year period shall give written
notice of withdrawal ("Notice of Withdrawal") to the General Partners, and
subject to the provisions of subsections (e) and (f) below such Limited
Partner's Capital Account shall be liquidated as follows:
(i) Except as provided in subsection (b)(ii) below, the Limited Partner's
Capital Account shall be liquidated in twenty (20) equal quarterly installments
each equal to 5% of the total Capital Account beginning the calendar quarter
following the quarter in which the Notice of Withdrawal is given, provided that
such notice is received thirty (30) days prior to the end of the preceding
quarter. Upon approval by the General Partners, the Limited Partner's Capital
Account may be liquidated upon similar terms over a period longer than twenty
(20) equal quarterly installments.
(ii) Notwithstanding subsection (b)(i) above, any Limited Partner may
liquidate part or all of his entire outstanding Capital Account in four equal
quarterly installments beginning of the calendar quarter following the preceding
quarter in which Notice of Withdrawal is given, provided that such notice was
received thirty (30) days prior to the end of the preceding quarter. An early
withdrawal under this subsection 8.1(b)(ii) shall be subject to a 10% early
withdrawal penalty applicable to any sums prior to the time when such sums could
have been withdrawn pursuant to the withdrawal provisions set forth in
subsection (a)(i) above.
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(c) The 10% early withdrawal penalty will be deducted pro rata from the
Limited Partner's Capital Account. The 10% early withdrawal penalty will be
received by the Partnership, and a portion of the sums collected as such early
withdrawal penalty shall be applied by the Partnership toward the next
installment(s) of principal under the Formation Loan owed to the Partnership by
Redwood Mortgage Corp., a General Partner and any successor firm, as described
in Section 10.9 below. This portion shall be determined by the ratio between the
initial amount of the Formation Loan and the total amount of the organizational
and syndication costs incurred by the Partnership in this offering of Units. The
balance of such early withdrawal penalties shall be retained by the Partnership
for its own account. After the Formation Loan has been paid, the 10% early
withdrawal penalty will be used to pay the Continuing Servicing Fee, as set
forth in Section 10.13 below. The balance of such early withdrawal penalties
shall be retained by the Partnership for its own account.
(d) Commencing with the end of the calendar month in which such Notice of
Withdrawal is given, and continuing on or before the twentieth day after the end
of each month thereafter, any Cash Available for Distribution allocable to the
Capital Account (or portion thereof) with respect to which Notice of Withdrawal
has been given shall also be distributed in cash to the withdrawing Limited
Partner in the manner provided in Section 5.2 above.
(e) During the liquidation period described in subsections 8.1(a) and (b),
the Capital Account of a withdrawing Limited Partner shall remain subject to
adjustment as described in Section 1.3 above. Any reduction in said Capital
Account by reason of an allocation of Losses, if any, shall reduce all
subsequent liquidation payments proportionately. In no event shall any Limited
Partner receive cash distributions upon withdrawal from the Partnership if the
effect of such distribution would be to create a deficit in such Limited
Partner's Capital Account.
(f) Payments to withdrawing Limited Partners shall at all times be subject
to the availability of sufficient cash flow generated in the ordinary course of
the Partnership's business, and the Partnership shall not be required to
liquidate outstanding Loans prior to their maturity dates for the purposes of
meeting the withdrawal requests of Limited Partners. For this purpose, cash flow
is considered to be available only after all current Partnership expenses have
been paid (including compensation to the General Partners and Affiliates) and
adequate provision has been made for the payment of all monthly or annual cash
distributions on a pro rata basis which must be paid to Limited Partners who
elected to receive such distributions upon subscription for Units pursuant to
Section 4.3 or who changed their initial election to compound Earnings as set
forth in Section 4.3. Furthermore, no more than 20% of the total Limited
Partners' Capital Accounts outstanding for the beginning of any calendar year
shall be liquidated during any calendar year. If Notices of Withdrawal in excess
of these limitations are received by the General Partners, the priority of
distributions among Limited Partners shall be determined as follows: first, to
those Limited Partners withdrawing Capital Accounts according to the 20 quarter
or longer installment liquidation period described under subsection (b)(i)
above, then to ERISA plan Limited Partners withdrawing Capital Accounts under
subsection (b)(ii) above, then to all other Limited Partners withdrawing Capital
Accounts under subsection (b)(ii) above, then to Administrators withdrawing
Capital Accounts under subsection (g) below, and finally to all other Limited
Partners withdrawing Capital Accounts under subsection (a) above.
(g) Upon the death of a Limited Partner, a Limited Partner's heirs or
executors may, subject to certain conditions as set forth herein, liquidate all
or a part of the deceased Limited Partner's investment without penalty. An
executor, heir or other administrator of the Limited Partner's estate (for ease
of reference the "Administrator") shall give written notice of withdrawal
("Notice of Withdrawal") to the General Partners within 6 months of the Limited
Partner's date of death. The total amount available to be liquidated in any one
year shall be limited to $50,000 per Limited Partner. The liquidation of the
Limited Partner's Capital Account in any one year shall be made in four equal
quarterly installments beginning the calendar quarter following the quarter in
which time the Notice of Withdrawal is received. Due to the complex nature of
administering a decedent's estate, the General Partners reserve the right and
discretion to request any and all information they deem necessary and relevant
in determining the date of death, the name of the beneficiaries and/or any other
matters they deem relevant. The General Partners retain the discretion to refuse
or to delay the liquidation of a deceased Limited Partner's investment unless or
until the General Partners have received all such information they deem
relevant. The liquidation of a Limited Partner's Capital Account pursuant to
this subsection is subject to the provisions of subsections 8.1(d), (e) and (f)
above.
8.2 Retirement by General Partners. Any one or all of the General Partners
may withdraw ("retire") from the Partnership upon not less than six (6) months
written notice of the same to all Limited Partners. Any retiring General Partner
shall not be liable for any debts, obligations or other responsibilities of the
Partnership or this Agreement arising after the effective date of such
retirement.
8.3 Payment to Terminated General Partner. If the business of the
Partnership is continued as provided in Section 9.1(d) or 9.1(e) below upon the
removal, retirement, death, insanity, dissolution, or bankruptcy of a General
Partner, then the Partnership shall pay to such General Partner, or his/its
estate, a sum equal to such General Partner's outstanding Capital Account as of
the date of such removal, retirement, death, insanity, dissolution or
bankruptcy, payable in cash within thirty (30) days after such date. If the
business of the Partnership is not so continued, then such General Partner shall
receive from the Partnership such sums as he may be entitled to receive in the
course of terminating the Partnership and winding up its affairs, as provided in
Section 9.3 below.
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ARTICLE 9
DISSOLUTION OF THIS PARTNERSHIP; MERGER OF THE PARTNERSHIP
9.1 Events Causing Dissolution. The Partnership shall dissolve upon
occurrence of the earlier of the following events:
(a) Expiration of the term of the Partnership as stated in Section 2.7
above.
(b) The affirmative vote of a Majority of the Limited Partners.
(c) The sale of all or substantially all of the Partnership's assets;
provided, for purposes of this Agreement the term "substantially all of the
Partnership's assets" shall mean assets comprising not less than seventy percent
(70%) of the aggregate fair market value of the Partnership's total assets as of
the time of sale.
(d) The retirement, death, insanity, dissolution or bankruptcy of a General
Partner unless, within ninety (90) days after any such event (i) the remaining
General Partners, if any, elect to continue the business of the Partnership, or
(ii) if there are no remaining General Partners, all of the Limited Partners
agree to continue the business of the Partnership and to the appointment of a
successor General Partner who executes a written acceptance of the duties and
responsibilities of a General Partner hereunder.
(e) The removal of a General Partner, unless within ninety (90) days after
the effective date of such removal (i) the remaining General Partners, if any,
elect to continue the business of the Partnership, or (ii) if there are no
remaining General Partners, a successor General Partner is approved by a
majority of the Limited Partners as provided in Section 3.7 above, which
successor executes a written acceptance as provided therein and elects to
continue the business of the Partnership.
(f) Any other event causing the dissolution of the Partnership under the
laws of the State of California.
9.2 Winding Up and Termination. Upon the occurrence of an event of
dissolution, the Partnership shall immediately be terminated, but shall continue
until its affairs have been wound up. Upon dissolution of the Partnership,
unless the business of the Partnership is continued as provided above, the
General Partners will wind up the Partnership's affairs as follows:
(a) No new Loans shall be made or purchased;
(b) Except as may be agreed upon by a Majority of the Limited Partners in
connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7,
the General Partners shall liquidate the assets of the Partnership as promptly
as is consistent with recovering the fair market value thereof, either by sale
to third parties or by servicing the Partnership's outstanding Loans in
accordance with their terms; provided, however, the General Partners shall
liquidate all Partnership assets for the best price reasonably obtainable in
order to completely wind up the Partnership's affairs within five (5) years
after the date of dissolution;
(c) Except as may be agreed upon by a Majority of the Limited Partners in
connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7,
all sums of cash held by the Partnership as of the date of dissolution, together
with all sums of cash received by the Partnership during the winding up process
from any source whatsoever, shall be distributed in accordance with Section 9.3
below.
9.3 Order of Distribution of Assets. In the event of dissolution as
provided in Section 9.1 above, the cash of the Partnership shall be distributed
as follows:
(a) All of the Partnership's debts and liabilities to persons other than
Partners shall be paid and discharged;
(b) All of the Partnership's debts and liabilities to Partners shall be
paid and discharged;
(c) The balance of the cash of the Partnership shall be distributed to the
Partners in proportion to their respective outstanding Capital Accounts.
Upon dissolution, each Limited Partner shall look solely to the assets of
the Partnership for the return of his capital contribution, and if the
Partnership assets remaining after the payment or discharge of the debts and
liabilities of the Partnership is insufficient to return the capital
contribution of each Limited Partner, such Limited Partner shall have no
recourse against the General Partners or any other Limited Partner. The
winding-up of the affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the General Partners. The General Partners are
hereby authorized to do any and all acts and things authorized by law for these
purposes. In the event of insolvency, dissolution, bankruptcy or resignation of
all of the General Partners or removal of the General Partners by the Limited
Partners, the winding up of the affairs of the Partnership and the distribution
of its assets shall be conducted by such person or entity as may be selected by
a vote of a Majority of the Limited Partners, which person or entity is hereby
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authorized to do any and all acts and things authorized by law for such
purposes.
9.4 Compliance With Timing Requirements of Regulations. In the event the
Partnership is "liquidated" within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article 9
(if such liquidation constitutes a dissolution of the Partnership) or Article 5
hereof (if it does not) to the General Partners and Limited Partners who have
positive Capital Accounts in compliance with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(2) and (b) if the General Partners' Capital Accounts have a
deficit balance (after giving effect to all contributions, distributions, and
allocations for all taxable years, including the year during which such
liquidation occurs), such General Partners shall contribute to the capital of
the Partnership the amount necessary to restore such deficit balance to zero in
compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3).
9.5 Merger or Consolidation of the Partnership. The Partnership's business
may be merged or consolidated with one or more limited partnerships that are
Affiliates of the Partnership, provided the approval of the required percentage
in interest of Partners is obtained pursuant to Section 9.6. Any such merger or
consolidation may be effected by way of a sale of the assets of, or units in,
the Partnership or purchase of the assets of, or units in, another limited
partnership(s), or by any other method approved pursuant to Section 9.6. In any
such merger or consolidation, the Partnership may be either a disappearing or
surviving entity.
9.6 Vote Required. The principal terms of any merger or consolidation
described in Section 9.5 must be approved by the General Partners and by the
affirmative vote of a Majority of the Limited Partners.
9.7 Sections Not Exclusive. Sections 9.5 and 9.6 shall not be interpreted
as setting forth the exclusive means of merging or consolidating the Partnership
in the event that the California Revised Limited Partnership Act, or any
successor statute, is amended to provide a statutory method by which the
Partnership may be merged or consolidated.
ARTICLE 10
TRANSACTIONS BETWEEN THE PARTNERSHIP, THE GENERAL PARTNERS AND AFFILIATES
10.1 Loan Brokerage Commissions. The Partnership will enter into Loan
transactions where the borrower has employed and agreed to compensate Redwood
Mortgage Corp. to act as a broker in arranging the loan. The exact amount of the
loan brokerage commissions are negotiated with prospective borrowers on a case
by case basis. It is estimated that such commissions will be approximately three
percent (3%) to six percent (6%) of the principal amount of each Loan made
during that year. The loan brokerage commissions shall be capped at 4% of the
Partnership's total assets per year.
10.2 Loan Servicing Fees. A General Partner or an Affiliate of a General
Partner may act as servicing agent with respect to all Loans, and in
consideration for such collection efforts he/it shall be entitled to receive a
monthly servicing fee up to one-eighth of one percent (.125%) of the total
unpaid principal balance of each Loan serviced, or such higher amount as shall
be customary and reasonable between unrelated Persons in the geographical area
where the property securing the Loan is located. The General Partners or an
Affiliate may lower such fee for any period of time and thereafter raise it up
to the limit set forth above.
10.3 Escrow and Other Loan Processing Fees. The General Partners or an
Affiliate of a General Partner may act as escrow agent for Loans made by the
Partnership, and may also provide certain document preparation, notarial and
credit investigation services, for which services the General Partners shall be
entitled to receive such fees as are permitted by law and as are generally
prevailing in the geographical area where the property securing the Loan is
located.
10.4 Asset Management Fee. The General Partners shall receive a monthly fee
for managing the Partnership's Loan portfolio and general business operations in
an amount up to 1/32 of one percent (.03125%) of the total "net asset value" of
all Partnership assets (as hereafter defined), payable on the first day of each
calendar month until the Partnership is finally wound up and terminated. "Net
asset value" shall mean total Partner's capital, determined in accordance with
generally accepted accounting principles as of the last day of the preceding
calendar month. The General Partners, in their discretion, may lower such fee
for any period of time and thereafter raise it up to the limit set forth above.
10.5 Reconveyance Fees. The General Partners may receive a fee from a
borrower for reconveyance of a property upon full payment of a loan in an amount
as is generally prevailing in the geographical area where the property is
located.
10.6 Assumption Fees. A General Partner or an Affiliate of the General
Partners may receive a fee payable by a borrower for assuming a Loan in an
amount equal to a percentage of the Loan or a set fee.
10.7 Extension Fee. A General Partner or an Affiliate of the General
Partners may receive a fee payable by a borrower for extending the Loan period
in an amount equal to a percentage of the loan.
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10.8 Prepayment and Late Fees. Any prepayment and late fees collected by a
General Partner or an Affiliate of the General Partners in connection with Loans
shall be paid to the Partnership.
10.9 Formation Loans to Redwood Mortgage Corp. The Partnership may lend to
Redwood Mortgage Corp., a sum not to exceed 9% of the total amount of capital
contributions to the Partnership by the Limited Partners, the proceeds of which
shall be used solely for the purpose of paying selling commissions and all
amounts payable in connection with unsolicited orders received by the General
Partners. The Formation Loans shall be unsecured and shall be evidenced by a
non-interest bearing promissory note executed by Redwood Mortgage Corp. in favor
of the Partnership. The First Formation Loan is being repaid in ten (10) equal
annual installments of principal without interest, commencing on December 31,
1996. As of December 31, 2002, the total aggregate amount of the First Formation
Loan equaled $1,074,840 of which $644,964 had been repaid by Redwood Mortgage
Corp. The Second Formation Loan will be repaid as follows: Upon the commencement
of the offering in December, 1996, Redwood Mortgage Corp. made annual
installments of one-tenth of the principal balance of the Formation loan as of
December 31 of each year. Upon completion of the offering in August 2000,
Redwood Mortgage commenced paying ten equal annual installments of principal
only on December 31 of each year. Such payment shall be due and payable by
December 31 of the following year. As of December 31, 2002, the Partnership had
loaned $2,271,916 to Redwood Mortgage Corp. of which $724,412 had been repaid.
The Third Formation will be repaid as follows: Since commencement of the
offering in August, 2000, Redwood Mortgage Corp. has made annual installments of
one-tenth of the principal balance of the Formation Loan as of December 31 of
each year. Such payment shall be due and payable by December 31 of the following
year. Upon completion of the offering in April, 2002, Redwood Mortgage Corp.
commenced paying ten equal annual installments of principal only on December 31
of each year. As of December 31, 2002, the Partnership had loaned $2,217,952 to
Redwood Mortgage Corp. of which $238,584 had been repaid. The Fourth Formation
Loan will be repaid as follows: Upon commencement of the offering in October,
2002, Redwood Mortgage Corp. will make annual installments of one-tenth of the
principal balance of the Formation Loan as of December 31 of each year. Such
payment shall be due and payable by December 31 of the following year. Upon
completion of the offering Redwood Mortgage Corp will commence paying ten equal
annual installments of principal only on December 31 of each year.
The amount of the annual installment payment to be made by Redwood Mortgage
Corp. during the offering stage, will be determined by the principal balance of
the Fifth Formation Loan on December 31 of each year. The Fifth Formation Loan
will be repaid under the same terms and conditions as the Second, Third and
Fourth Formation Loans. With respect to this offering, the formation loan could
range from a minimum of $3,750,000 assuming all investors elected to receive
current cash distributions to a maximum of $6,750,000 assuming all investors
elected to compound their earnings. Redwood Mortgage Corp. at its option may
prepay all or any part of the Formation Loans. Redwood Mortgage Corp. will repay
the Formation Loans principally from loan brokerage commissions earned on Loans,
early withdrawal penalties and other fees paid by the Partnership. Since Redwood
Mortgage Corp. will use the proceeds from loan brokerage commissions on Loans to
repay the Formation Loans and, with respect to the initial offering of 150,000
Units, for the continued payment of the Continuing Servicing Fees, if all or any
one of the initial General Partners is removed as a General Partner by the vote
thereafter designated, and if such successor or additional General Partner(s)
begins using any other loan brokerage firm for the placement of Loans, Redwood
Mortgage Corp. will be immediately released from any further obligation under
the Formation Loans (except for a proportionate share of the principal
installment due at the end of that year, pro rated according to the days elapsed
and for the continued payment of the Continuing Servicing Fees with respect to
the initial offering of 150,000 Units.) In addition, if all of the General
Partners are removed, no successor General Partners are elected, the Partnership
is liquidated and Redwood Mortgage Corp. is no longer receiving any payments for
services rendered, the debt on the Formation Loans shall be forgiven and Redwood
Mortgage Corp. will be immediately released from any further obligations under
the Formation Loans or Continuing Servicing Fees with respect to the initial
offering of 150,000 Units.
10.10 Sale of Loans and Loans Made to General Partners or Affiliates. The
Partnership may sell existing Loans to the General Partners or their Affiliates,
but only so long as the Partnership receives net sales proceeds from such sales
in an amount equal to the total unpaid balance of principal, accrued interest
and other charges owing under such Loan, or the fair market value of such Loan,
whichever is greater. Notwithstanding the foregoing, the General Partners shall
be under no obligation to purchase any Loan from the Partnership or to guarantee
any payments under any Loan. Generally, Loans will not be made to the General
Partners or their Affiliates. However, the Partnership may make the Formation
Loans to Redwood Mortgage Corp. and may in certain limited circumstances, loan
funds to Affiliates to purchase real estate owned by the Partnership as a result
of foreclosure.
10.11 Purchase of Loans from General Partners or Affiliates. The
Partnership may purchase existing Loans from the General Partners or Affiliates,
provided that the following conditions are met:
(a) At the time of purchase the borrower shall not be in default under the
Loan;
(b) No brokerage commissions or other compensation by way of premiums or
discounts shall be paid to the General Partners or their Affiliates by reason of
such purchase; and
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(c) If such Loan was held by the seller for more than 180 days, the seller
shall retain a ten percent (10%) interest in such Loan.
10.12 Interest. Redwood Mortgage Corp. shall be entitled to keep interest
if any, earned on the Loans between the date of deposit of borrower's funds into
Redwood Mortgage Corp.'s trust account and date of payment of such funds by
Redwood Mortgage Corp.
10.13 Sales Commissions.
(a) The Units are being offered to the public on a best efforts basis
through the participating broker-dealers. The participating broker-dealers may
receive commissions as follows: at the rate of either (5%) or (9%) (depending
upon the investor's election to receive cash distributions or to compound
earnings and acquire additional Units in the Partnership) of the gross proceeds
on all of their sales. In no event will the total of all compensation payable to
participating broker dealers, including sales commissions, expense
reimbursements, sales seminars and/or due diligence expenses exceed ten percent
(10%) of the program proceeds received plus an additional (0.5%) for bona fide
due diligence expenses as set forth in Rule 2810 of the NASD Conduct Rules.
Further, in no event shall any individual participating broker dealer receive
total compensation including sales commissions, expense reimbursements, sales
seminar or expense reimbursement exceed (10%) of the gross proceeds of their
sales plus an additional (0.5%) for bona fide due diligence expenses as set
forth in Rule 2810 of the NASD Conduct Rules (the "Compensation Limitation").In
the event the Partnership receives any unsolicited orders directly from an
investor who did not utilize the services of a participating broker dealer,
Redwood Mortgage Corp. through the Formation Loans will pay to the Partnership
an amount equal to the amount of the sales commissions otherwise attributable to
a sale of a Unit through a participating broker dealer. The Partnership will in
turn credit such amounts received from Redwood Mortgage Corp. to the account of
the Investor who placed the unsolicited order. All unsolicited orders will be
handled only by the General Partners.
Sales commissions will not be paid by the Partnership out of the offering
proceeds. All sales commissions will be paid by Redwood Mortgage Corp., which
will also act as the mortgage loan broker for all Loans as set forth in Section
10.1 above. With respect to the initial offering of 150,000 Units, the
Continuing Servicing Fee will be paid by Redwood Mortgage Corp., but will not be
included in the first Formation Loan. The Partnership will loan to Redwood
Mortgage Corp. funds in an amount equal to the sales commissions and all amounts
payable in connection with unsolicited sales by the General Partners, as a
Formation Loan. With respect to the initial offering of 150,000 Units, Redwood
Mortgage Corp. will use the proceeds from loan brokerage commissions on Loans to
pay the Continuing Servicing Fees, and if all or any one of the initial General
Partners is removed as a General Partner by the vote thereafter designated, if
such successor or additional General Partner(s) use any other loan brokerage
firm for the placement of Loans, Redwood Mortgage Corp. will be immediately
released from any further obligation to continue to pay any Continuing Servicing
Fees. In addition, if all of the General Partners are removed, no successor
General Partners are elected, the Partnership is liquidated and Redwood Mortgage
Corp. is no longer receiving any payments for services rendered, Redwood
Mortgage Corp. will be immediately released from any further obligation to
continue to pay any Continuing Servicing Fee in connection with the initial
offering of 150,000 Units. Units may also be offered or sold directly by the
General Partners for which they will receive no sales commissions. The
Partnership shall reimburse Participating Broker-Dealers for bona fide due
diligence expenses in an amount up to (.5%) of the Gross Proceeds.
(b) Sales by Registered Investment Advisors. The General Partners may
accept unsolicited orders received directly from Investors if an investor
utilizes the services of a registered investment advisor. A registered
investment advisor is an investment professional retained by a Limited Partner
to advise him regarding all of his assets, not just an investment in the
Partnership. Registered investment advisors are paid by the investor based upon
the total amount of the investor's assets being managed by the registered
investment advisor.
If an investor utilizes the services of a registered investment advisor,
Redwood Mortgage Corp. will pay to the Partnership an amount equal to the sales
commission otherwise attributable to a sale of Units through a participating
broker dealer. The Partnership will in turn credit such amounts received by
Redwood Mortgage Corp. to the account of the investor who placed the unsolicited
order. If an investor acquires Units directly through the services of a
registered investment advisor, the investor will have the election to authorize
the Partnership to pay the registered investment advisor an estimated quarterly
amount of no more than 2% annually of his capital account that would otherwise
be paid as periodic cash distributors or compounded as earnings. For ease of
reference, these fees are referred to as "Client Fees." The payment of Client
Fees will be paid from those amounts that would otherwise be distributable to a
Limited Partner or compounded in a Limited Partner's capital account. The
payment of Client Fees is noncumulative and subject to the availability of
sufficient earnings in your capital account. In no event will any such Client
Fees be paid to us as sales commissions or other compensation. The Partnership
is merely agreeing as an administrative convenience to pay the registered
investment advisor a portion of those amounts that would be paid to you.
All registered investment advisors will be required to represent and
warrant to the Partnership, that among other things, the investment in the units
is suitable for the Investor, that he has informed the Investor of all pertinent
facts relating to the liquidating and marketability of the units, and that if he
is affiliated with a NASD registered broker or dealer, that all Client Fees
183
received by him in connection with any transactions with the Partnership will be
run through the books and records of the NASD member in compliance with Notice
to Members 96-33 and Rules 3030 and 3040 of the NASD Conduct Rules.
10.14 Reimbursement of Organizational Expenses. The General Partners may be
reimbursed for, or the Partnership may pay directly, all expenses in connection
with the organization or offering of the Units including, without limitation,
attorneys' fees, accounting fees, printing costs and other selling expenses
(other than underwriting commissions) in an amount equal to the lesser of ten
percent (10%) of the gross proceeds of the Offering or $3,000,000. The General
Partners may, at their election, pay any offering and organization expenses in
excess of this amount.
10.15 Reimbursement. The Partnership shall reimburse the General Partners
or their Affiliates for the actual cost to the General Partners or their
Affiliates (or pay directly), the cost of goods and materials used for or by the
Partnership and obtained from entities unaffiliated with the General Partners or
their Affiliates. The Partnership shall also pay or reimburse the General
Partners or their Affiliates for the cost of administrative services necessary
to the prudent operation of the Partnership, provided that such reimbursement
will be at the lower of (A) the actual cost to the General Partners or their
Affiliates of providing such services, or (B) 90% of the amount the Partnership
would be required to pay to non affiliated persons rendering similar services in
the same or comparable geographical location. The cost of administrative
services as used in this subsection shall mean the pro rata cost of personnel,
including an allocation of overhead directly attributable to such personnel,
based on the amount of time such personnel spent on such services, or other
method of allocation acceptable to the program's independent certified public
accountant.
10.16 Non-reimbursable Expenses. The General Partners will pay and will not
be reimbursed by the Partnership for any general or administrative overhead
incurred by the General Partners in connection with the administration of the
Partnership which is not directly attributable to services authorized by
Sections 10.15 or 10.17.
10.17 Operating Expenses. Subject to Sections 10.14 and 10.15 and 10.16 all
expenses of the Partnership shall be billed directly to and paid by the
Partnership which may include, but are not limited to: (i) all salaries,
compensation, travel expenses and fringe benefits of personnel employed by the
Partnership and involved in the business of the Partnership. including persons
who may also be employees of the General Partners or Affiliates of the General
Partners, but excluding control persons of either the General Partners or
Affiliates of the General Partners, (ii) all costs of borrowed money, taxes and
assessments on Partnership properties foreclosed upon and other taxes applicable
to the Partnership, (iii) legal, audit, accounting, and brokerage fees, (iv)
printing, engraving and other expenses and taxes incurred in connection with the
issuance, distribution, transfer, registration and recording of documents
evidencing ownership of an interest in the Partnership or in connection with the
business of the Partnership, (v) fees and expenses paid to leasing agents,
consultants, real estate brokers, insurance brokers, and other agents, (vi)
costs and expenses of foreclosures, insurance premiums, real estate brokerage
and leasing commissions and of maintenance of such property, (vii) the cost of
insurance as required in connection with the business of the Partnership, (viii)
expenses of organizing, revising, amending, modifying or terminating the
Partnership, (ix) expenses in connection with distributions made by the
Partnership, and communications, bookkeeping and clerical work necessary in
maintaining relations with the Limited Partners and outside parties, including
the cost of printing and mailing to such persons certificates for Units and
reports of meetings of the Partnership, and of preparation of proxy statements
and solicitations of proxies in connection therewith, (x) expenses in connection
with preparing and mailing reports required to be furnished to the Limited
Partners for investor, tax reporting or other purposes, or other reports to the
Limited Partners which the General Partners deem to be in the best interests of
the Partnership, (xi) costs of any accounting, statistical or bookkeeping
equipment and services necessary for the maintenance of the books and records of
the Partnership including, but not limited to, computer services and time, (xii)
the cost of preparation and dissemination of the information relating to
potential sale, refinancing or other disposition of Partnership property, (xiii)
costs incurred in connection with any litigation in which the Partnership is
involved, as well as in the examination, investigation or other proceedings
conducted by any regulatory agency with jurisdiction over the Partnership
including legal and accounting fees incurred in connection therewith. (xiv)
costs of any computer services used for or by the Partnership, (xv) expenses of
professionals employed by the Partnership in connection with any of the
foregoing, including attorneys, accountants and appraisers. For the purposes of
Sections 10.17(i), a control person is someone holding a 5% or greater equity
interest in the General Partners or Affiliate or a person having the power to
direct or cause the direction of the General Partners or Affiliate, whether
through the ownership of voting securities, by contract or otherwise.
10.18 Deferral of Fees and Expense Reimbursement. The General Partners may
defer payment of any fee or expense reimbursement provided for herein. The
amount so deferred shall be treated as a non-interest bearing debt of the
Partnership and shall be paid from any source of funds available to the
Partnership, including cash available for Distribution prior to the
distributions to Limited Partners provided for in Article 5.
10.19 Payment upon Termination. Upon the occurrence of a terminating event
specified in Article 9 of the termination of an affiliate's agreement, any
portion of any reimbursement or interest in the Partnership payable according to
the provisions of this Agreement if accrued, but not yet paid, shall be paid by
the Partnership to the General Partners or Affiliates in cash, within thirty
(30) days of the terminating event or termination date set forth in the written
notice of termination.
184
ARTICLE 11
ARBITRATION
11.1 Arbitration. As between the parties hereto, all questions as to rights
and obligations arising under the terms of this Agreement are subject to
arbitration, including any question concerning any right or duty under the
Securities Act of 1933, the Securities Exchange Act of 1934 and the securities
laws of any state in which Units are offered, and such arbitration shall be
governed by the rules of the American Arbitration Association.
11.2 Demand for Arbitration. If a dispute should arise under this
Agreement, any Partner may within 60 days make a demand for arbitration by
filing a demand in writing with the General Partners.
11.3 Appointment of Arbitrators. The parties may agree upon one arbitrator,
but in the event that they cannot agree, there shall be three, one named in
writing by each of the parties within five (5) days after demand for arbitration
is given and a third chosen by the two appointed. Should either party refuse or
neglect to join in the appointment of the arbitrator(s) or to furnish the
arbitrator(s) with any papers or information demanded, the arbitrator(s) are
empowered by both parties to proceed ex parte.
11.4 Hearing. Arbitration shall take place in San Mateo, California, and
the hearing before the arbitrator(s) of the matter to be arbitrated shall be at
the time and place within said city as is selected by the arbitrator(s). The
arbitrator(s) shall select such time and place promptly after his (or their)
appointment and shall give written notice thereof to each party at least sixty
(60) days prior to the date so fixed. At the hearing any relevant evidence may
be presented by either party, and the formal rules of evidence applicable to
judicial proceedings shall not govern. Evidence may be admitted or excluded in
the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and
determine the matter and shall execute and acknowledge their award in writing
and cause a copy thereof to be delivered to each of the parties.
11.5 Arbitration Award. If there is only one arbitrator, his decision shall
be binding and conclusive on the parties, and if there are three arbitrators the
decision of any two shall be binding and conclusive. The submission of a dispute
to the arbitrator(s) and the rendering of his (or their) decision shall be a
condition precedent to any right of legal action on the dispute. A judgment
confirming the award of the arbitrator(s) may be rendered by any Court having
Jurisdiction; or such Court may vacate, modify, or correct the award in
accordance with the prevailing sections of California State Law.
11.6 New Arbitrators. If three arbitrators are selected under the foregoing
procedure but two of the three fail to reach an Agreement in the determination
of the matter in question, the matter shall be decided by three new arbitrators
who shall be appointed and shall proceed in the same manner, and the process
shall be repeated until a decision is finally reached by two of the three
arbitrators selected.
11.7 Costs of Arbitration. The costs of such arbitration shall be borne by
the losing party or in such proportions as the arbitrators shall determine.
ARTICLE 12
MISCELLANEOUS
12.1 Covenant to Sign Documents. Without limiting the power granted by
Sections 2.8 and 2.9, each Partner covenants, for himself and his successors and
assigns, to execute, with acknowledgment or verification, if required, any and
all certificates, documents and other writings which may be necessary or
expedient to form the Partnership and to achieve its purposes, including,
without limitation, the Certificate of Limited Partnership and all amendments
thereto, and all such filings, records or publications necessary or appropriate
laws of any jurisdiction in which the Partnership shall conduct its business.
12.2 Notices. Except as otherwise expressly provided for in this Agreement,
all notices which any Partner may desire or may be required to give any other
Partners shall be in writing and shall be deemed duly given when delivered
personally or when deposited in the United States mail, first-class postage
pre-paid. Notices to Limited Partners shall be addressed to the Limited Partners
at the last address shown on the Partnership records. Notices to the General
Partners or to the Partnership shall be delivered to the Partnership's principal
place of business, as set forth in Section 2.3 above or as hereafter charged as
provided herein. Notice to any General Partner shall constitute notice to all
General Partners.
12.3 Right to Engage in Competing Business. Nothing contained herein shall
preclude any Partner from purchasing or lending money upon the security of any
other property or rights therein, or in any manner investing in, participating
in, developing or managing any other venture of any kind, without notice to the
other Partners, without participation by the other Partners, and without
liability to them or any of them. Each Limited Partner waives any right he may
have against the General Partners for capitalizing on information received as a
consequence of the General Partners management of the affairs of this
Partnership.
185
12.4 Amendment. This Agreement is subject to amendment by the affirmative
vote of a Majority of the Limited Partners in accordance with Section 4.7,
provided, however, that no such amendment shall be permitted if the effect of
such amendment would be to increase the duties or liabilities of any Partner or
materially change any Partner's interest in Profits, Losses, Partnership assets,
distributions, management rights or voting rights, except as agreed by that
Partner. In addition, and notwithstanding anything to the contrary contained in
this Agreement the General Partners shall have the right to amend this
Agreement, without the vote or consent of any of the Limited Partnership, when:
(a) There is a change in the name of the Partnership or the amount of the
contribution of any Limited Partner;
(b) A Person is substituted as a Limited Partner;
(c) An additional Limited Partner is admitted;
(d) A Person is admitted as a successor or additional General Partner in
accordance with the terms of this Agreement;
(e) A General Partner retires, dies, files a petition in bankruptcy,
becomes insane or is removed, and the Partnership business is continued by a
remaining or replacement General Partner;
(f) There is a change in the character of the business of the Partnership;
(g) There is a change in the time as stated in the Agreement for the
dissolution of the Partnership, or the return of a Partnership contribution;
(h) To cure any ambiguity, to correct or supplement any provision which may
be inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under this Agreement which will not be
inconsistent with the provisions of this Agreement;
(i) To delete or add any provision of this Agreement required to be so
deleted or added by the Staff of the Securities and Exchange Commission or by a
State "Blue Sky" Administrator or similar official, which addition or deletion
is deemed by the Administrator or official to be for the benefit or protection
of the Limited Partners;
(j) To elect for the Partnership to be governed by any successor California
statute governing limited partnerships; and
(k) To modify provisions of this Agreement as noted in Sections 1.3 and 5.6
to cause this Agreement to comply with Treasury Regulation Section 1.704-1(b).
The General Partners shall notify the Limited Partners within a reasonable
time of the adoption of any such amendment.
12.5 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and supersedes any and all prior agreements and
representations, either oral or in writing, between the parties hereto with
respect to the subject matter contained herein.
12.6 Waiver. No waiver by any party hereto of any breach of, or default
under, this Agreement by any other party shall be construed or deemed a waiver
of any other breach of or default under this Agreement, and shall not preclude
any party from exercising or asserting any rights under this Agreement with
respect to any other.
12.7 Severability. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
12.8 Application of California law; Venue. This Agreement and the
application or interpretation thereof shall be governed, construed, and enforced
exclusively by its terms and by the law of the State of California and the
appropriate Courts in the County of San Mateo, State of California shall be the
appropriate forum for any litigation arising hereunder.
12.9 Captions. Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit, extend or describe the scope of this Agreement.
12.10 Number and Gender. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders.
186
12.11 Counterparts. This Agreement may be executed in counterparts, any or
all of which may be signed by a General Partner on behalf of the Limited
Partners as their attorney-in-fact.
12.12 Waiver of Action for Partition. Each of the parties hereto
irrevocably waives during the term of the Partnership any right that it may have
to maintain any action for partition with respect to any property of the
Partnership.
12.13 Defined Terms. All terms used in this Agreement which are defined in
the Prospectus of Redwood Mortgage Investors VIII, dated October 7, 2003 shall
have the meanings assigned to them in said Prospectus, unless this Agreement
shall provide for a specific definition in Article 1.
12.14 Assignability. Each and all of the covenants, terms, provisions and
arguments herein contained shall be binding upon and inure to the benefit of the
successors and assigns of the respective parties hereto, subject to the
requirements of Article 7.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hand the day and
year first above written.
GENERAL PARTNERS:
--------------------------------------
Michael R. Burwell
GYMNO CORPORATION
A California Corporation
By:
----------------------------------
Michael R. Burwell, President
REDWOOD MORTGAGE CORP.
A California Corporation
By:
----------------------------------
Michael R. Burwell, President
LIMITED PARTNERS: GYMNO CORPORATION
(General Partner and Attorney-in-Fact)
By:
-----------------------------------
Michael R. Burwell, President
187
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
REDWOOD MORTGAGE INVESTORS VIII
A California Limited Partnership
The undersigned hereby applies to become a limited partner in REDWOOD
MORTGAGE INVESTORS VIII, a California limited partnership (the "partnership"),
and subscribes to purchase the number of units specified herein in accordance
with the terms and conditions of the limited partnership agreement attached as
Exhibit A to the prospectus dated October 7, 2003.
1. Representations and Warranties. The undersigned represents and warrants
to the partnership and its general partners as follows:
(a) I have received, read and understand the prospectus dated October 7,
2003, and in making this investment I am relying only on the information
provided therein. I have not relied on any statements or representations
inconsistent with those contained in the prospectus.
(b) I, or the fiduciary account for which I am purchasing, meet the
applicable suitability standards and financial requirements set forth in the
prospectus under "INVESTOR SUITABILITY STANDARDS" as they pertain to the state
of my primary residence and domicile.
(c) I am aware that this subscription may be rejected in whole or in part
by the general partners in their sole and absolute discretion; that my
investment, if accepted, is subject to certain risks described in part in "RISKS
AND OTHER FACTORS" set forth in the prospectus; and that there will be no public
market for units, and accordingly, it may not be possible for me to readily
liquidate my investment in the partnership.
(d) I have been informed by the participating broker-dealer firm specified
herein, if any, of all pertinent facts relating to the lack of liquidity or
marketability of this investment. I understand that units may not be sold or
otherwise disposed of without the prior written consent of the general partners,
which consent may be granted or withheld in their sole discretion, that any
transfer is subject to numerous other restrictions described in the prospectus
and in the limited partnership agreement, and that if I am a resident of
California or if the transfer occurs in California, any such transfer is also
subject to the prior written consent of the California Commissioner of
Corporations. I have liquid assets sufficient to assure myself that such
purchase will cause me no undue financial difficulties and that I can provide
for my current needs and possible personal contingencies, or if I am the trustee
of a retirement trust, that the limited liquidity of the units will not cause
difficulty in meeting the trust's obligations to make distributions to plan
participants in a timely manner.
(e) I am of the age of majority (as established in the state in which I am
domiciled) if I am an individual, and in any event, I have full power, capacity,
and authority to enter into a contractual relationship with the partnership. If
acting in a representative or fiduciary capacity for a corporation, partnership
or trust, or as a custodian or agent for any person or entity, I have full power
or authority to enter into this subscription agreement in such capacity and on
behalf of such corporation, partnership, trust, person or entity.
(f) By virtue of my own investment acumen and experience or financial
advice from my independent advisors (other than a person receiving commissions
by reason of my purchase of units), I am capable of evaluating the risks and
merits of an investment in the partnership.
(g) I am buying the units solely for my own account, or for the account of
a member or members of my immediate family or in a fiduciary capacity for the
account of another person or entity and not as an agent for another.
(h) I acknowledge and agree that counsel representing the partnership, the
general partners and their affiliates does not represent me and shall not be
deemed under the applicable codes of professional responsibility to have
represented or to be representing me or any of the limited partners in any
respect.
(i) If I am buying the units in a fiduciary capacity or as a custodian for
the account of another person or entity, I have been directed by that person or
entity to purchase the unit(s), and such person or entity is aware of my
purchase of units on their behalf, and consents thereto and is aware of the
merits and risks involved in the investment in the partnership.
188
By making these representations, the subscriber has not waived any right of
action available under applicable federal or state securities laws including but
not limited to the Securities Act of 1933.
2. Power of Attorney. The undersigned hereby irrevocably constitutes and
appoints the general partners, and each of them, either one acting alone, as his
true and lawful attorney-in-fact, with full power and authority for him, and in
his name, place and stead, to execute, acknowledge, publish and file:
(a) The limited partnership agreement and any amendments thereto or
cancellations thereof required under the laws of the State of California;
(b) Any other instruments, and documents as may be required by, or may be
appropriate under, the laws of any state or other jurisdiction in which the
partnership is doing or intends to do business; and
(c) Any documents which may be required to effect the continuation of the
partnership, the admission of an additional or substituted limited partner, or
the dissolution and termination of the partnership.
The power of attorney granted above is a special power of attorney coupled
with an interest, is irrevocable, and shall survive the death or incapacity of
the undersigned or, if the undersigned is a corporation, partnership, trust or
association, the dissolution or termination thereof. The power of attorney shall
also survive the delivery of an assignment of units by a limited partner;
provided, that where the assignee thereof has been approved by the general
partners for admission to the partnership as a substituted limited partner, such
power of attorney shall survive the delivery of such assignment for the sole
purpose of enabling the general partners to execute, acknowledge, file and
record any instrument necessary to effect such substitution.
3. Acceptance. This subscription agreement will be accepted or rejected by
a general partner within thirty (30) days of its receipt by the partnership.
Upon acceptance, this subscription will become irrevocable, and will obligate
the undersigned to purchase the number of units specified herein, for the
purchase price of $1 per unit. The general partners will return a countersigned
copy of this subscription agreement to accepted subscribers, which copy
(together with my canceled check) will be evidence of my purchase of units.
4. Payment of Subscription Price. The full purchase price for units is $1
per unit, payable in cash concurrently with delivery of this subscription
agreement. I understand that my subscription funds will be held by the general
partners until my funds are needed by the partnership to fund a mortgage
investment or for other proper partnership purposes, and only then will I
actually be admitted to the partnership. In the interim, my subscription funds
will earn interest at passbook savings accounts rates. If I elect to receive
monthly, quarterly or annual cash distributions, then such interest will be
returned to me after I am admitted to the partnership. If I elect to allow my
share of partnership income to be paid in the form of additional units that will
be reinvested by the partnership, then such interest will be invested in the
partnership in which case I understand that the number of units I initially
subscribed for will be increased accordingly. If I initially elect to receive
additional units and reinvest my share of partnership income, I may after three
(3) years change my election and receive monthly, quarterly or annual cash
distributions. I understand that if I initially elect to receive monthly,
quarterly or annual cash distributions, my election to receive cash
distributions is irrevocable. However, I understand that I may change whether I
receive such distributions on a monthly, quarterly or annual basis.
5. THE UNDERSIGNED AGREES TO INDEMNIFY AND HOLD REDWOOD MORTGAGE INVESTORS
VIII, A CALIFORNIA LIMITED PARTNERSHIP, AND ITS GENERAL PARTNERS AND OTHER
AGENTS AND EMPLOYEES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LIABILITIES, AND DAMAGES, INCLUDING, WITHOUT LIMITATION, ALL ATTORNEYS' FEES
WHICH SHALL BE PAID AS INCURRED) WHICH ANY OF THEM MAY INCUR, IN ANY MANNER OR
TO ANY PERSON, BY REASON OF THE FALSITY, INCOMPLETENESS OR MISREPRESENTATION OF
ANY INFORMATION FURNISHED BY THE UNDERSIGNED HEREIN OR IN ANY DOCUMENT SUBMITTED
HEREWITH.
189
6. Signature. The undersigned represents that: (a) I have read the
foregoing and that all the information provided by me is accurate and complete;
and (b) I will notify the general partners immediately of any material adverse
change in any of the information set forth herein which occurs prior to the
acceptance of my subscription.
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VIII
SUBSCRIPTION AGREEMENT
PLEASE READ THIS AGREEMENT BEFORE SIGNING
Type Of Ownership: (check one)
[ ] INDIVIDUAL * [ ] SEP/IRA
(Investor and Custodian
[ ] TRUST (Trustee signature required) must sign)
(Title page and signature pages
of the Trust Agreement MUST be [ ] PENSION PLAN (Trustee
enclosed) signature required)
* [ ] JOINT TENANTS WITH RIGHT OF [ ] PROFIT SHARING PLAN
SURVIVORSHIP (Trustee signature
(All parties must sign) required)
* [ ] COMMUNITY PROPERTY [ ] KEOGH (H.R.10)
(Custodian signature
* [ ] TENANTS IN COMMON required)
(All parties must sign)
[ ] CUSTODIAL/UGMA (circle one)
* [ ] IRA (INDIVIDUAL RETIREMENT (Custodian signature
ACCOUNT) required)
(Investor and Custodian must sign)
[ ] TOD - Transfer On Death
* [ ] ROTH IRA (must be titled as an
(Investor and Custodian must sign) Individual or as Joint
Tenants only - special form
required)
[ ] OTHER (Please describe)
--------------------------------
--------------------------------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable.
- --------------------------------------------------------------------------------
190
1. INVESTOR NAME Type or print your name(s) exactly as the title
AND ADDRESS should appear in the account records of the
partnership. Complete this section for all
trusts other than IRA/Keogh or other qualified
plans. If IRA/Keogh or qualified plan, Section 2
must also be completed. All checks and
correspondence will go to this address unless
another address is listed in Sections 2 or 5 below.
---------------------------------------------------
Name as it will appear on the account (How title
should be held)
---------------------------------------------------
(Additional Name(s) if held in joint tenancy,
community property, tenants-in-common)
---------------------------------------------------
Street Address
---------------------------------------------------
City State Zip Code
------------------- ---------------------------
Home Phone Number Social Security#/TaxpayerID#
A social security number or taxpayer identification number is required for
each individual investor. (For IRAs, Keoghs (HR10) and qualified plans, the
taxpayer identification number is your plan or account tax or employer
identification number. For most individual taxpayers, it is your social security
number. NOTE: If the units are to be held in more than one name, only one number
will be used and will be that of the first person listed).
2. CUSTODIAN/TRUST
COMPANY REGISTRATION Name of Custodian/Trust Company or
Plan Administrator:
-----------------------------------
Please print here the exact name of
Custodian/Trust Company or Plan
Administrator
-----------------------------------------------
Address
-----------------------------------------------
City State Zip Code
-----------------------------------------------
Taxpayer ID# Client Account Number
SIGNATURE:
----------------------------------------
(X) (Custodian/Trust Company or
Plan Administrator)
191
3. INVESTMENT Number of units to be purchased ---------
Minimum subscription is 2,000
units at $1 per unit ($2,000, Amount of payment enclosed ---------
with additional investments
of any amount with minimum of
1,000 units ($1,000) for
existing limited partners.
Please make check payable to "Redwood Mortgage Investors VIII"
If the investor has elected to compound his share of monthly, quarterly or
annual income (see 4. below), then the interest earned on subscription funds
until admission to the partnership will be invested in additional units on
behalf of the investor; therefore, the actual number of units to be issued to
the investor upon admission to the partnership will be increased.
Check one: [ ] Initial Investment [ ] Additional Investment*
*A completed Subscription Agreement is required for each initial and
additional investment
4. DISTRIBUTIONS Does the investor wish to have his income compounded or
distributed?
Check One: [ ] Compounded or [ ] Distributed
If income is to be distributed:
Check One: [ ] Monthly [ ] Quarterly [ ] **Annually
(**payable only on 12/31)
The election to compound income may only be changed after three (3) years.
5. SPECIAL ADDRESS FOR
CASH DISTRIBUTIONS -----------------------------------------------
(If the same as in 2, Name Client Account #
please disregard)
-----------------------------------------------
Address
-----------------------------------------------
City State Zip Code
If cash distributions are to be sent to a money market or other account at
an address other than that listed, please enter that account number and address
here. All other communications will be mailed to the investor's registered
address of record under Sections 1 or 2, or to the alternate address listed in
Section 5 above. In no event will the partnership or its affiliates be
responsible for any adverse consequences of direct deposits.
DIRECT DEPOSIT Check one: Checking: [ ] Savings: [ ]
Account # ABA (Routing) #
------------ -----------------
(Must attach original voided check for checking account deposits, deposit
slip for savings account deposits)
6. SIGNATURES IN WITNESS WHEREOF, the undersigned has executed
below this day of , 20 , at
-------- ----------- ----
(City)
---------------------------------
Investor's primary residence is in
(State)
--------------------------
(X)
------------------------------------------------------
(Investor Signature and Title)
(X)
------------------------------------------------------
(Investor Signature and Title)
192
7. BROKER-DEALER DATA The undersigned broker-dealer hereby certifies
(To be completed by that (i) a copy of the prospectus, as amended
selling broker-dealer) and/or supplemented to date, has been delivered
to the above investor; and (ii) that the
appropriate suitability determination as set
forth in the prospectus has been made and that
the appropriate records are being maintained.
(X)
-----------------------------------------------
Broker-Dealer Authorized Signature (Required on
all orders)
Broker-Dealer Name: --------------------------------
Street Address: --------------------------------
City, State, Zip Code: --------------------------------
Registered Representative
Name (Last, First): --------------------------------
Street Address: --------------------------------
City, State, Zip Code --------------------------------
Phone No.: --------------------------------
The registered representative, by signing below, certifies
that he has reasonable grounds to believe, on the basis of
information obtained from the investor concerning his
investment objectives, other investments, financial situa-
tion and needs and any other information known by the
selling broker-dealer, that investment in the units is
suitable for the investor and that suitability records are
being maintained; and that he has informed the investor of
all pertinent facts relating to the liquidity and market-
ability of the units.
Registered Representative's Signature:
(X)
----------------------------------------------------
8. ACCEPTANCE This subscription accepted
This subscription will not be
an effective agreement until REDWOOD MORTGAGE INVESTORS VIII,
it or a facsimile is signed by A California Limited Partnership
a general partner of Red- wood P.O. Box 5096
Mortgage Investors VIII, a Redwood City, California 94063
California limited partnership
(650) 365-5341
By:
----------------------------------
(Office Use Only)
Partner #: Date Entered:
--------- ----------
Check Amount: $ Check Date:
--------- ----------
Check Number:
---------
193
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
COMMISSIONER'S RULE 260.141.11
260.141.11 Restriction on Transfer
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a
copy of this section to be delivered to each issuee or transferee of such
security.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the Code
or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferor's ancestors,
descendants or spouse; or to a transferee by a trustee or custodian for the
account of the transferee or the transferee's ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as
such or as a finder) to a resident of a foreign state, territory or country who
is neither domiciled in this state to the knowledge of the broker-dealer, nor
actually present in this state if the sale of such securities is not in
violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule is not required;
(10) by way of a sale qualified under Sections 25111, 25112, or 25113, or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or Subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or
by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or 25113
of the Code, provided that no order under Section 25140 or Subdivision (a) of
Section 25148 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state, if, in either
such case, such person (i) discloses to potential purchasers at the sale that
transfer of the securities is restricted under this rule, (ii) delivers to each
purchaser a copy of this rule, and (iii) advises the Commissioner of the name of
each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities, provided that
any such transfer is on the condition that any certificate evidencing the
security issued to such transferee shall contain the legend required by this
section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
194
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VIII
------------------------------------------------------
$75,000,000 Units of Limited Partnership Interest
------------------------------------------------------
General Partners:
Michael R. Burwell
Gymno Corporation
Redwood Mortgage Corp.
Dated: October 7, 2003
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in the
prospectus, and, if given or made, such information and representations must not
be relied upon. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
state or to any person to whom it is unlawful to make such offer. Neither the
delivery of this prospectus not any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the partnership since the respective dates at which information is
given herein, or the dates thereof: however, if any material change occurs while
this prospectus is required by law to be delivered, this prospectus will be
amended or supplemented accordingly.
UNTIL _________________, 200_ ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
195
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. Other Expenses of Issuance and Distribution.
-------------------------------------------
The expenses payable in connection with the issuance and distribution of
the securities being registered are estimated on the maximum offering amount of
$75,000,000 to be as follows:
Maximum of
$ 75,000,000
---------------------
SEC Registration Fee $6,067.50
NASD Registration Fee 0.00
California Registration Fee 2,500.00
Printing and Engraving Expenses 250,000.00
Accounting Fees and Expenses 200,000.00
Legal Fees and Expenses 400,000.00
Other Blue Sky Filing Fees and Expenses 150,000.00
Postage 150,000.00
Advertising and Sales 315,000.00
Sales Literature 275,000.00
Due Diligence 300,000.00
Sales Seminars 750,000.00
Miscellaneous 200,000.00
---------------------
Total $2,998,567.50
=====================
ITEM 32 Sales to Special Parties.
------------------------
Inapplicable
ITEM 33. Recent Sales of Unregistered Securities.
None
ITEM 34 Indemnification of Directors and Officers
-----------------------------------------
Section 3.16 of the Limited Partnership Agreement provides that the General
Partners and their Affiliates shall be indemnified by the Partnership for
liability and related expenses (including attorneys fees) incurred in dealing
with third parties, excluding matters arising under the Securities Act of 1933,
as amended, provided the General Partners or their Affiliates acted in good
faith, and provided that the conduct did not constitute gross negligence or
gross misconduct. The effect on this provision that the partnership will pay any
liabilities or expenses arising as a result of the actions of the general
partners and their affiliates with third parties provided the general partners
acted in good faith and their actions did not constitute gross negligence or
gross misconduct.
Section 5 of the subscription agreement provides that the investor agrees
to indemnify and hold harmless, the partnership, its general partners, agents
and employees, against any claims, demands or liabilities they may incur as a
result of the falsity, incompleteness or misrepresentation of any information or
any documents submitted in connection with such investor's subscription. The
effect of this provision is that if an investor represents to the partnership or
the general partners, information that is not correct or complete or provides
documentation which is not correct or complete, he will be required to pay any
expenses or claims of the partnership and/or general partners resulting in such
conduct.
ITEM 35. Treatment of Proceeds from Stock Being Registered
Inapplicable.
196
ITEM 36. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements Included in the Prospectus:
1. Redwood Mortgage Investors VIII:
Independent Auditors' Report
Financial Statements, December 31, 2002, 2001 and 2000
Interim Financial Statements, as of March 31, 2003 (unaudited)
2. Gymno Corporation:
Independent Auditors' Report
Balance Sheet, as of December 31, 2002
Interim Balance Sheet, as of March 31, 2003 (unaudited)
3. Redwood Mortgage Corp.:
Independent Auditors' Report
Balance Sheet, as of September 30, 2002
Interim Balance Sheet, as of March 31, 2003 (unaudited)
(b) Exhibits:
Exhibit Number
1.1 Form of Participating Dealer Agreement
1.2 Form of Advisory Agreement
3.1 Fifth Amended and Restated Limited Partnership Agreement
3.2 Special Notice for California Residents
3.3 Certificate of Limited Partnership
5.1 Opinion of Counsel as to the Legality of the Securities Being Registered
5.2 Opinion of Counsel as to ERISA Matters
8.1 Opinion of Counsel on Certain Tax Matters
10.2 Loan Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust for Construction Loans which
provides for interest only payments
(b) Form of Note secured by Deed of Trust for Commercial Loans
which provides for interest only payments
(c) Form of Note secured by Deed of Trust for Commercial Loans
which provides for principal and interest payments
(d) Form of Note secured by Deed of Trust for Residential Loans
which provides for interest only payments
(e) Form of Note secured by Deed of Trust for Residential Loans
which provides for interest and principal prepayments
10.4 (a) Construction Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing to accompany Exhibit 10.3(a)
(b) Deed of Trust, Assignment of Leases and Rents, and Security
Agreement and Fixture Filing to accompany Exhibits 10.3(b)
and 10.3(c)
(c) Deed of Trust, Assignment of Leases and Rents, and Security
Agreement and Fixture Filing to accompany Exhibit 10.3(d)
197
10.6 Agreement to Seek a Lender
10.7 Formation Loan - Promissory Note
10.8 Line of Credit - Credit and Security Agreement
23.1 Consent of the Law Offices Cox Castle & Nicholson LLP
23.2 Consent of Armanino McKenna, LLP
99.1 Table VI - Description of Open Loans of Prior Limited Partnerships
ITEM 37. Undertaking.
-----------
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES:
1. To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. That each such post-effective amendment will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
4. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the terminating of the
offering.
5. To provide the Underwriters at the closing specified in the underwriting
agreements certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
6. To send to each limited partner at least on an annual basis a detailed
statement of any transactions with the general partners or its affiliates, and
of fees, commissions, compensation and other benefits paid, or accrued to the
general partners or its affiliates for the fiscal year completed, showing the
amount paid or accrued to each recipient and the services performed.
7. To provide to the limited partners the financial statements
required by Form 10-K for the first full fiscal year of operations of the
partnership.
8. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expense
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
for such issue.
198
The General Partners also undertake to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and any additional information required by Rule 3-14 of Regulation
S-X, to reflect each commitment (i.e., the signing of a binding purchase
agreement) made after the end of the distribution period involving the use of
ten percent (10%) or more (cumulative basis) of the net proceeds of the offering
and to provide the information contained in such report to the Limited Partners
at least once each quarter after the distribution period of the offering has
ended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this post effective
amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Redwood City, State of California, on
April 21, 2004.
REDWOOD MORTGAGE INVESTORS VIII
---------------------------------
A California Limited Partnership
By:/s/Michael R. Burwell
---------------------------------
Michael R. Burwell, General Partner
BY: GYMNO CORPORATION
---------------------------------
General Partner
By:/s/Michael R. Burwell
---------------------------------
Michael R. Burwell, President and Chief
Financial Officer
BY: REDWOOD MORTGAGE CORP.
---------------------------------
General Partner
By:/s/Michael R. Burwell
---------------------------------
Michael R. Burwell, President
199
Pursuant to the requirements of the Securities Act of 1933, this post
effective amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Michael R. Burwell President and Chief Financial
- ---------------------- Officer of Gymno Corporation; -------------------
Michael R. Burwell Director of Gymno Corporation; April 21, 2004
President of Redwood Mortgage
Corp.
/s/ Michael R. Burwell General Partner
- ---------------------- -------------------
Michael R. Burwell April 21, 2004
200
Exhibit 1-1
75,000,000 Limited Partnership Units
($1 per Unit)
REDWOOD MORTGAGE INVESTORS VIII
PARTICIPATING BROKER DEALER AGREEMENT
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
Gentlemen:
Michael R. Burwell, Gymno Corporation, a California corporation and Redwood
Mortgage Corp., a California corporation are the General Partners of Redwood
Mortgage Investors VIII, a California Limited partnership (the "Partnership")
engaged in business as a mortgage lender. The Partnership will loan Redwood
Mortgage Corp., a California corporation, funds (the "Formation Loan") out of
which Redwood Mortgage Corp. will pay sales commissions under this Agreement.
The General Partners, on behalf of the Partnership, propose to offer and sell to
qualified investors, upon the terms and subject to the conditions set forth in
the Prospectus dated July 9, 2003 (the "Prospectus"), limited partnership
interests ("Units") of the Partnership at an offering price of $1 per Unit, with
a minimum investment of two (2) thousand (2,000) Units per purchaser for initial
investments and one (1) thousand Units (1,000) for additional investments for
existing limited partners. The offering is for a maximum of 75,000,000 Units
($75,000,000).
1. Sale of Units. The General Partners hereby appoint you to effect sales
of Units, on a best efforts basis, for the account of the Partnership. This
appointment shall commence on the date hereof. Subject to the terms and
conditions of this Agreement and upon the basis of the representations and
warranties herein set forth, you accept such appointment and agree to use your
best efforts to find purchasers of Units. Offers and sales of Units may only be
made in accordance with the terms of the offering thereof as set forth in the
Prospectus.
2. Eligible Purchasers of Units. You agree not to offer or sell Units to
any person who does not meet the suitability standards set forth in the
Prospectus. Each prospective purchaser must complete and execute a Subscription
Agreement, and return it to the undersigned together with such other documents,
instruments or information as the General Partners may request together with a
check in the full amount of the purchase price for the number of Units
subscribed for. As this is not the first offering of Units in the Partnership,
no escrow will be established and all funds shall be immediately available to
the Partnership. A purchaser's check shall be made payable to "Redwood Mortgage
Investors VIII" and remitted directly to Redwood Mortgage Investors VIII, 900
Veterans Blvd., Suite 500, Redwood City, California 94063, Attention: Michael
Burwell, together with the above referenced documents by noon of the next
business day after your receipt. You shall ascertain that each Subscription
Agreement sent in by a prospective purchaser of Units has been fully completed
and properly executed by such prospective purchaser.
The General Partners, no later than thirty (30) days after such receipt of
such Subscription Agreement, shall determine whether they wish to accept the
proposed purchaser as a limited partner in the Partnership. It is understood
that the General Partners reserve the right to reject the tender of any
Subscription Agreement or any reason whatsoever. Should the General Partners
determine to accept the tender of a Subscription Agreement the General Partners
will promptly advise you of such action. Should the General Partners determine
to reject such tender, they will notify you of such determination within this
thirty (30) day period and will return to you the tendered Subscription
Agreement. If the funds are being held by the Partnership, the General Partners
will return to you a check made payable to the proposed purchaser in the same
amount as the proposed purchaser's initial check. You agree to return this
Subscription Agreement and check to the prospective purchaser by noon of the
next business day. You shall not be entitled to any commissions with respect to
subscription offers which are rejected.
3. Compensation. In consideration of your services in soliciting and
obtaining purchasers of Units, Redwood Mortgage Corp. agrees to pay out of the
Formation Loan to you, a sales commission in accordance with the following
number of Units sold:
(a) You shall be paid a sales commission of either (i) five percent (5%) of
the gross proceeds from the sale of Units, if the investor elects to receive
monthly, quarterly or annual cash distributions of his allocable share of
Partnership income or (ii) nine percent (9%) of the gross proceeds from the sale
of such Units, if the investor elects to retain his or her earnings in the
partnership. Except as otherwise set forth in this Agreement or any supplements
thereto, in no event shall you be entitled to receive any commission with
respect an investor's election to retain his or her earnings in the partnership.
201
In addition, you may be paid, in the discretion of the General Partners, up
to one-half of one percent (.5%) of the gross proceeds of the Offering for bona
fide accountable expenses as set forth in NASD Notice to Members 82-51 incurred
by you, in connection with the performance of your due diligence services under
this Agreement, including by way of illustration (i) the cost of independent
auditors, accountants and legal counsel; and (ii) the costs to supervise, review
and exercise due diligence activities with respect to the Partnership,
including, without limitation, telephone calls and travel.
An investor's written election to receive monthly, quarterly or annual cash
distributions as indicated on his Subscription Agreement shall be final and
binding on all parties. However, such investor may change his initial decision
regarding whether he wants the cash distributions paid to him on a monthly,
quarterly or annual basis. After three (3) years an investor who initially
elected to receive additional Units in lieu of Periodic Cash Distributions may
elect to receive monthly, quarterly or annual cash distributions. The decision
of an investor to receive cash distributions after three (3) years will not
effect the payment of sales commissions.
You may also be paid, in the discretion of the General Partners, for
certain expense reimbursements and sales seminar expenses.
Commissions, expense reimbursements and sales seminar expenses (and due
diligence expenses if specified above) shall be paid within 30 days after the
Partnership's acceptance of a prospective investor's proper tender of a
completed Subscription Agreement.
Total compensation, including commissions, expense reimbursements and sales
seminars expenses, to be paid by Redwood Mortgage Corp. and the Partnership for
the sale of Units shall not exceed a maximum of ten percent (10%) of the gross
proceeds of the offering received plus a maximum of one-half of one percent
(.5%) of gross proceeds of the offering received for bona fide due diligence
expense reimbursements on an accountable basis as set forth in NASD Notice to
Members 82-51 or that amount allowable under NASD Notice to Members 89-16.
4. Further Agreements of Broker-Dealer.
(a) You represent that you are a corporation duly organized, validly
existing and in good standing under the laws of the Jurisdiction in which you
are incorporated, with all requisite power and authority to enter into this
Agreement and to carry out your obligations hereunder.
(b) You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc., and shall maintain such registration
and qualification throughout the term of this Agreement.
(c) You covenant and agree to comply with any applicable requirements of
the Securities Exchange Act of 1934, the Securities Act of 1933, the California
Corporations Code, the laws of the state in which you are registered and sell
Units, the published rules and regulations of the Securities and Exchange
Commission, the By-Laws and the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD"). Furthermore, you specifically covenant and
agree not to deliver the Partnership's sales literature, if any, to any person
unless such sales literature is accompanied or preceded by a copy of the
Prospectus.
(d) You will not give any information or make any representations or
warranties in connection with the offering of Units other than, or inconsistent
with, those contained in the Prospectus and any sales material approved in
writing by the General Partners of the Partnership. You will deliver a copy of
the Prospectus to each investor to whom an offer is made prior to or
simultaneously with the first solicitation of any offer to sell the Units to an
investor. You agree to deliver or send any supplements and any amended
Prospectus to any investor you have previously sent to or given a Prospectus
prior to or simultaneously with the first solicitation of an offer to sell the
Units to an investor. You will not deliver the approved sales material to any
person unless such sales material is accompanied or preceded by the Prospectus.
You expressly agree not to prepare or use any sales literature, advertisements
or other materials in connection with the offering or sale of the Units without
our prior written consent. You agree that to the extent information is provided
to you marked "For Broker-Dealer Use Only", you will not provide such
information to prospective investors.
(e) You will solicit only eligible purchasers of Units as described in the
Prospectus under "INVESTOR SUITABILITY STANDARDS - Minimum Unit Purchase."
(f) You agree to make diligent inquiries and maintain a record thereof for
a period of at least six years of all prospective purchasers of the Units, in
order to ascertain whether the purchase of Units represents a suitable
investment for such purchaser, and whether the purchaser is otherwise eligible
to purchase Units in accordance with the terms of the offering. Such inquiry
shall also be made with respect to any resales or transfers of Units.
Accordingly, you shall satisfy the following requirements:
202
(i) In recommending to a prospective investor the purchase of Units, you
shall have reasonable grounds to believe, on the basis of information obtained
from the investor concerning his investment objectives, other investments,
financial situation and needs, and any other information known by you or your
representatives, that the investor (or, if the investor is acting as trustee or
custodian of a trust or other entity, that such other trust or entity) is or
will be in a financial position to realize to a significant extent the benefits
described in the Prospectus, that such investor has a fair market net worth
sufficient to sustain the risks inherent in the purchase of Units, including
loss of investment and lack of liquidity, and that Units are otherwise suitable
as an investment.
(ii) You shall also maintain in your files documents disclosing the basis
upon which your determination of suitability was reached as to each investor.
(iii) Notwithstanding the foregoing, you shall not execute any transaction
for the purchase or sale of Units in a discretionary account, without prior
written approval of the transaction by your customer.
(iv) Prior to executing any transaction for the purchase or sale of Units,
and any resale or transfer of Units as permitted, you (or one of your associated
persons) shall fully inform the prospective investor of all pertinent facts
relating to the liquidity and marketability of Units during the term of the
Partnership.
(g) In connection with offering and selling Units, you agree to comply with
all of the applicable requirements under the Securities Act of 1933, as amended
(hereinafter referred to as the "Act"), the Securities Exchange Act of 1934, as
amended, the "Securities Exchange Act"), including without limitation, the
provisions of Rule 10b-6, Rule 10b-9, Rule 15c2-4 and Rule l5c2-8 under the
Securities Exchange Act, the Conduct Rules of the NASD, and state blue sky or
securities laws. You agree that you will not rely exclusively on us to satisfy
your duty of due diligence and, in particular, you agree to obtain from us and
from other sources such information as you deem necessary to comply with Rule
2810 of NASD Conduct Rules. You further agree to supply the Partnership with
such written reports of your activities relating to the offer and sale of Units
as the Partnership may request from time to time.
(h) You agree to diligently make inquiries as required by law of all
prospective purchasers of Units in order to ascertain whether a purchase of
Units is suitable for each such purchaser, and not rely solely on information
supplied by each purchaser. You also agree to promptly transmit to the
Partnership all fully completed and duly executed Subscription Agreements. You
shall retain all records relating to investor suitability as to each purchaser
for a period of six years from the date of sale of the Units to each purchaser.
Upon reasonable notice to you, the General Partners, or their designated agents,
shall have the right to inspect such records.
(i) By executing this Agreement, you represent and warrant that you have
reasonable grounds to believe (based on information made available to you by the
General Partners of the Partnership through the Prospectus and other materials,
or otherwise obtained as a result of inquiries conducted by you or other NASD
member firms) that all material facts concerning the Partnership are adequately
and accurately disclosed and provide a basis for evaluating the Partnership,
including facts relating to items of compensation, physical properties, tax
aspects, financial stability and experience of the sponsor, conflicts of
interest and risk factors, and appraisals or other reports.
(j) For purposes of 4(i) above, you may rely upon the results of an inquiry
conducted by another member broker dealer, provided that:
(i) You have reasonable grounds to believe that such inquiry was conducted
with due care;
(ii) The results of the inquiry were provided to you with the consent of
the member broker dealer conducting or directing the inquiry;
(iii) No broker dealer that participated in the inquiry is the Sponsor or
affiliate of the Sponsor.
5. Termination. Either party may terminate this Agreement at any time,
effective immediately, by giving written notice to other party. In the event of
termination, you shall not be entitled to any commissions or any restitution for
the value of your services rendered prior to or subsequent to the effective date
of such termination, excepting only such commissions as may have been earned
with respect to Units already sold by you and accepted by the Partnership prior
to the termination date.
203
6. Expenses. You shall bear all your own expenses incurred in connection
with the offer and sale of Units, and you shall not be entitled to any
reimbursement for such expenses by the Partnership except to the extent that any
due diligence expenses are specified in Section 3 of this Agreement.
7. Indemnification.
(a) The Partnership and the General Partners agree to indemnify you and
your officers, directors, representatives and controlling persons against
losses, claims, damages or liabilities (including reasonable attorneys' fees) to
which you or such other persons may become subject, under federal or state
securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement of a material fact contained in the Prospectus or the omission
to state therein, material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading. The foregoing indemnity shall include reimbursement of any
legal or other expenses reasonably incurred in connection with investigation or
defending any such loss, claim, damage, liability or action, and shall be paid
by you as such expenses are incurred.
(b) You agree to indemnify and hold harmless the Partnership, its General
Partners and all other dealers participating in the offering of Units, and each
officer, director and controlling person of such persons, against any losses,
claims, damages or liabilities (including reasonable attorneys' fees) to which
any of such persons may become subject, under federal or state securities laws
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any statements, actions or
omissions by you or any person controlled by you or acting on your behalf, which
statement, action or omission is untrue or is inconsistent with or in violation
of any provision of federal or state securities laws, the rules and regulations
of the Securities and Exchange Commission, or the NASD Conduct Rules. The
foregoing indemnity shall include reimbursement of any legal or other expenses
reasonably incurred in connection with investigation or defending any such loss,
claim, damage, liability or action, and shall be paid by you as such expenses
are incurred.
(c) In order to provide for just and equitable contribution in any case in
which (i) a claim is made for indemnification pursuant to this Section 7 but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that express provisions of this Section 7 provide
for indemnification in such case or (ii) contribution may be required on the
part of a party thereto, then the General Partners, the Partnership, and
Participating Dealers shall contribute to the aggregate losses, claims, damages,
or liabilities to which they may be subject (which shall, for all purposes of
this Agreement include, without limitation, all costs of defense and
investigation and ail attorneys fees) in either such case (after contribution
from others) in such proportions that the Participating Dealers are responsible
in the aggregate for that portion of such losses, claims, damages or liabilities
represented by the percentage that the aggregate amounts received by the
Participating Dealers pursuant to Section 3 of this agreement bear to the
aggregate of the offering price of the Units, and the General Partners and the
Partnership shall be responsible for the balance; provided, however, that the
contribution of each such Participating Dealer shall not be in excess of their
proportionate share (based upon the ratio of the aggregate purchase price of the
Units sold by such Participating Dealer to the aggregate purchase price of the
Units sold) of the portion of such losses, claims, damages or liabilities for
which the Participating Dealer is responsible. No person guilty of a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. If the full amount of the
contribution specified in this subsection (c) of Section 7 is not permitted by
law, then each Participating Dealer and each person who controls each
Participating Dealer shall be entitled to contribution from the General Partners
and the Partnership and controlling persons to the full extent permitted by law.
8. Arbitration.
(a) As between the parties hereto, all questions as to rights and
obligations arising under the terms of this Agreement are subject to
arbitration, including any question concerning any right or duty under the
Securities Act of 1933, the Securities Exchange Act of 1934, and the securities
laws of any state in which Units are offered, and the Conduct Rules of the NASD
and such arbitration shall be governed by the rules of the American Arbitration
Association.
(b) If a dispute should arise under this Agreement, any Party may within 60
days make a demand for arbitration by filing a demand in writing for the other.
(c) The parties may agree upon one arbitrator, but in the event that they
cannot agree, there shall be three, one named in writing by each of the parties
within five (5) days after demand for arbitration is given and a third chosen by
the two appointed. Should either party refuse or neglect to join in the
appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers
or information demanded, the arbitrator(s) are empowered by both parties to
proceed ex parte.
204
(d) Arbitration shall take place in San Mateo, California, and the hearing
before the arbitrator(s) of the matter to be arbitrated shall be at the time and
place within said city as is selected by the arbitrator(s). The arbitrator(s)
shall select such time and place promptly after his (or their) appointment and
shall give written notice thereof to each party at least sixty (60) days prior
to the date so fixed. At the hearing any relevant evidence may be presented by
either party, and the formal rules of evidence applicable to judicial
proceedings shall not govern. Evidence may be admitted or excluded in the sole
discretion of the arbitrator(s). Said arbitrator(s) shall hear and determine the
matter and shall execute and acknowledge their award in writing and cause a copy
thereof to be delivered to each of the parties.
(e) If there is only one arbitrator, his decision shall be binding and
conclusive on the parties, and if there are three arbitrators the decision of
any two shall be binding and conclusive. The submission of a dispute to the
arbitrator(s) and the rendering of his (or their) decision shall be a condition
precedent to any right of legal action on the dispute. A judgment confirming the
award of the arbitrator(s) may be rendered by any Court having jurisdiction; or
such Court may vacate, modify, or correct the award in accordance with the
prevailing sections of California State Law.
(f) If three arbitrators are selected under the foregoing procedure but two
of the three fail to reach an Agreement in the determination of the matter in
question, the matter shall be decided by three new arbitrators who shall be
appointed and shall proceed in the same manner, and the process shall be
repeated until a decision is finally reached by two of the three arbitrators
selected.
(g) The costs of such arbitration shall be borne by the losing party or in
such proportions as the arbitrator(s) shall determine.
9. Authority. It is understood that your relationship with the Partnership
is as an independent contractor and that nothing herein shall be construed and
creating a relationship of partnership, joint venturers, employer and employee
or any other agency relationship between you and the Partnership.
10. Survival of Indemnities, Warranties and Representations. The indemnity
agreements and the representations and warranties of the parties as set forth
herein shall remain operative and in full force and effect, regardless of any
termination or cancellation of this Agreement, and shall survive the delivery of
any payment for Units.
11. Notices. All communications hereunder shall be in writing and shall be
mailed, hand delivered or telegraphed, all charges prepaid, to the respective
parties at the addresses set forth herein. The address of the Partnership and
its General Partners is 900 Veterans Blvd., Suite 500, Redwood City, California
94063 (telephone: (415) 365-5341), until changed by written notice.
12. Successors and Assigns. This Agreement and the terms and provisions
hereof shall inure to the benefit of and shall be binding upon the successors
and assigns of the parties hereto; provided, however, that in no in event shall
the term "successors and assigns" as used herein include any purchaser, as such,
of any Units. In addition, and without limiting the generality of the foregoing,
the indemnity agreements contained herein shall inure to the benefit of the
successors and assigns of the parties hereto, and shall be valid irrespective of
any investigation made or not made by or on behalf of any party hereto.
13. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California and the appropriate courts
in the County of San Mateo, California should be the forum for any litigation
arising hereunder. Please confirm your Agreement with the General Partners and
Redwood Mortgage Corp. to the terms contained herein and your acceptance of this
appointment by dating and signing below and return a fully executed copy of this
Participating Dealer Agreement to us.
205
REDWOOD MORTGAGE CORP.
By:
------------------------------
Michael R. Burwell, President
BROKER-DEALER ACCEPTANCE
ACCEPTED this day of , 2003
------ ---------
By:
-------------------------------
(Print Name)
- -----------------------------------
(Signature)
- -----------------------------------
Title
- -----------------------------------
Taxpayer 1. D. No.
- -----------------------------------
(Telephone Number)
- -----------------------------------
Type of Entity:
(corporation, partnership or proprietorship)
206
Exhibit 1.2
75,000,000 Limited Partnership Units
($1 per Unit)
REDWOOD MORTGAGE INVESTORS VIII
ADVISORY AGREEMENT
- --------------------------
- --------------------------
- --------------------------
- --------------------------
Gentlemen:
Michael R. Burwell, Gymno Corporation, a California corporation, and
Redwood Mortgage Corp. , a California corporation, are the General Partners of
Redwood Mortgage Investor VIII, a California Limited partnership (the
"Partnership") engaged in business as a mortgage lender. The General Partners,
on behalf of the Partnership, propose to offer and sell to qualified investors,
upon the terms and subject to the conditions set forth in the Prospectus dated
July 9, 2003 (the "Prospectus"), limited partnership interests ("Units") of the
Partnership at an offering price of $1 per Unit, with a minimum investment of
two (2) thousand (2,000) Units per purchaser for initial investments and one (1)
thousand Units (1,000) for additional investments for existing limited partners.
The offering is for a maximum of 75,000,000 Units ($75,000,000).
1. Advisory Relationship. You are in the business of advising clients with
respect to certain investments including investments in the Partnership (the
"Advisor"). As an Advisor you do not receive any sales commissions or other
compensation from the Partnership, but instead receive your fees directly from
your client. You do not act as a broker dealer and investments in the
Partnership are made directly by the Investor.
2. Eligible Purchasers of Units. You agree not to advise to any client to
invest in Units who does not meet the suitability standards set forth in the
Prospectus. You agree that you will deliver and cause each prospective purchaser
to complete and execute a Subscription Agreement, and return it to the
undersigned together with such other documents, instruments or information as
the General Partners may request together with a check in the full amount of the
purchase price for the number of Units subscribed for. You agree to inform
purchasers that a purchaser's check shall be made payable to "Redwood Mortgage
Investors VIII" and remitted directly to Redwood Mortgage Investors VIII, 900
Veterans Blvd., Suite 500, Redwood City, California 94063, Attention: Michael
Burwell. You shall ascertain that each Subscription Agreement sent in by a
prospective purchaser of Units has been fully completed and properly executed by
such prospective purchaser.
3. No Compensation. As an Advisor to the Investor you will receive no
compensation from the Partnership in connection with any Units purchased by a
client who you have advised to invest in the Partnership.
4. Further Agreements of Advisor.
(a) You covenant and agree to comply with any applicable requirements of
the Securities Exchange Act of 1934, the Securities Act of 1933, the California
Corporations Code, the laws of the state in which you are advising clients, the
published rules and regulations of the Securities and Exchange Commission, and
any other applicable agency. Furthermore, you specifically covenant and agree
not to deliver the Partnership's sales literature, if any, to any person unless
such sales literature is accompanied or preceded by a copy of the Prospectus.
5. Further Agreements of Advisor.
(a) You covenant and agree to comply with any applicable requirements of
the Securities Exchange Act of 1934, the Securities Act of 1933, the California
Corporations Code, the laws of the state in which you are advising clients, the
published rules and regulations of the Securities and Exchange Commission, and
any other applicable agency. Furthermore, you specifically covenant and agree
not to deliver the Partnership's sales literature, if any, to any person unless
such sales literature is accompanied or preceded by a copy of the Prospectus.
207
(b) You will not give any information or make any representations or
warranties in connection with the offering of Units other than, or inconsistent
with, those contained in the Prospectus and any sales material approved in
writing by the General Partners of the Partnership. You will deliver a copy of
the Prospectus to each investor to whom you are advising. You will not deliver
the approved sales material to any person unless such sales material is
accompanied or preceded by the Prospectus. You expressly agree not to prepare or
use any sales literature, advertisements or other materials in connection with
your advisory services. You agree that to the extent information is provided to
you marked "For Broker-Dealer and/or Advisor Use Only", you will not provide
such information to prospective investors.
(c) You will only advise eligible purchasers of Units to invest in the
Partnership as described in the Prospectus under "INVESTOR SUITABILITY STANDARDS
- - Minimum Unit Purchase."
(d) You agree to make diligent inquiries and maintain a record thereof for
a period of at least six years of all clients who you advise to purchase Units
in, in order to ascertain whether the purchase of Units represents a suitable
investment for such purchaser, and whether the purchaser is otherwise eligible
to purchase Units in accordance with the terms of the offering. Accordingly, you
shall satisfy the following requirements:
(i) In recommending to a prospective investor the purchase of Units, you
shall have reasonable grounds to believe, on the basis of information obtained
from the investor concerning his investment objectives, other investments,
financial situation and needs, and any other information known by you or your
representatives, that the investor (or, if the investor is acting as trustee or
custodian of a trust or other entity, that such other trust or entity) is or
will be in a financial position to realize to a significant extent the benefits
described in the Prospectus, that such investor has a fair market net worth
sufficient to sustain the risks inherent in the purchase of Units, including
loss of investment and lack of liquidity, and that Units are otherwise suitable
as an investment.
(ii) You shall also maintain in your files documents disclosing the basis
upon which your determination of suitability was reached as to each investor.
(e) In connection with your advisory activity, you agree to comply with all
of the applicable requirements under the Securities Act of 1933, as amended
(hereinafter referred to as the "Act"), the Securities Exchange Act of 1934, as
amended, the "Securities Exchange Act"). We have no due diligence obligation to
you.
(f) You agree to diligently make inquiries as required by law of all
clients who you recommend to purchase Units in order to ascertain whether an
investment in Units is suitable for each such purchaser, and not rely solely on
information supplied by each purchaser. You shall retain all records relating to
investor suitability as to each purchaser for a period of six years. Upon
reasonable notice to you, the General Partners, or their designated agents,
shall have the right to inspect such records.
(g) By executing this Agreement, you represent and warrant that you have
reasonable grounds to believe (based on information made available to you by the
General Partners of the Partnership through the Prospectus and other materials,
or otherwise obtained as a result of inquiries conducted by you) that all
material facts concerning the Partnership are adequately and accurately
disclosed and provide a basis for evaluating the Partnership, including facts
relating to items of compensation, physical properties, tax aspects, financial
stability and experience of the sponsor, conflicts of interest and risk factors,
and appraisals or other reports.
5. Termination. Either party may terminate this Agreement at any time,
effective immediately, by giving written notice to other party. 6. Expenses. You
shall bear all your own expenses incurred in connection with your advisory
activities and shall not be entitled to any reimbursement.
208
7. Indemnification.
(a) The Partnership and the General Partners agree to indemnify against
losses, claims, damages or liabilities (including reasonable attorneys' fees) to
which you or such other persons may become subject, under federal or state
securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement of a material fact contained in the Prospectus or the omission
to state therein, material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading. The foregoing indemnity shall include reimbursement of any
legal or other expenses reasonably incurred in connection with investigation or
defending any such loss, claim, damage, liability or action, and shall be paid
by you as such expenses are incurred.
(b) You agree to indemnify and hold harmless the Partnership, its General
Partners, their affiliated mortgage company (Redwood Mortgage), against any
losses, claims, damages or liabilities (including reasonable attorneys' fees) to
which any of such persons may become subject, under federal or state securities
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any statements,
actions or omissions by you or any person controlled by you or acting on your
behalf, which statement, action or omission is untrue or is inconsistent with or
in violation of any provision of federal or state securities laws, the rules and
regulations of the Securities and Exchange Commission, or other applicable
agency. The foregoing indemnity shall include reimbursement of any legal or
other expenses reasonably incurred in connection with investigation or defending
any such loss, claim, damage, liability or action, and shall be paid by you as
such expenses are incurred.
8. Arbitration.
(a) As between the parties hereto, all questions as to rights and
obligations arising under the terms of this Agreement are subject to
arbitration, including any question concerning any right or duty under the
Securities Act of 1933, the Securities Exchange Act of 1934, and the securities
laws of any state in which Units are offered, and such arbitration shall be
governed by the rules of the American Arbitration Association.
(b) If a dispute should arise under this Agreement, any Party may within 60
days make a demand for arbitration by filing a demand in writing for the other.
(c) The parties may agree upon one arbitrator, but in the event that they
cannot agree, there shall be three, one named in writing by each of the parties
within five (5) days after demand for arbitration is given and a third chosen by
the two appointed. Should either party refuse or neglect to join in the
appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers
or information demanded, the arbitrator(s) are empowered by both parties to
proceed ex parte.
(d) Arbitration shall take place in San Mateo, California, and the hearing
before the arbitrator(s) of the matter to be arbitrated shall be at the time and
place within said city as is selected by the arbitrator(s). The arbitrator(s)
shall select such time and place promptly after his (or their) appointment and
shall give written notice thereof to each party at least sixty (60) days prior
to the date so fixed. At the hearing any relevant evidence may be presented by
either party, and the formal rules of evidence applicable to judicial
proceedings shall not govern. Evidence may be admitted or excluded in the sole
discretion of the arbitrator(s). Said arbitrator(s) shall hear and determine the
matter and shall execute and acknowledge their award in writing and cause a copy
thereof to be delivered to each of the parties.
(e) If there is only one arbitrator, his decision shall be binding and
conclusive on the parties, and if there are three arbitrators the decision of
any two shall be binding and conclusive. The submission of a dispute to the
arbitrator(s) and the rendering of his (or their) decision shall be a condition
precedent to any right of legal action on the dispute. A judgment confirming the
award of the arbitrator(s) may be rendered by any Court having jurisdiction; or
such Court may vacate, modify, or correct the award in accordance with the
prevailing sections of California State Law.
(f) If three arbitrators are selected under the foregoing procedure but two
of the three fail to reach an Agreement in the determination of the matter in
question, the matter shall be decided by three new arbitrators who shall be
appointed and shall proceed in the same manner, and the process shall be
repeated until a decision is finally reached by two of the three arbitrators
selected.
209
(g) The costs of such arbitration shall be borne by the losing party or in
such proportions as the arbitrator(s) shall determine.
9. Authority. It is understood that your relationship with the Partnership
is as an independent contractor and that nothing herein shall be construed and
creating a relationship of partnership, joint ventures, employer and employee or
any other agency relationship between you and the Partnership.
10. Survival of Indemnities, Warranties and Representations. The indemnity
agreements and the representations and warranties of the parties as set forth
herein shall remain operative and in full force and effect, regardless of any
termination or cancellation of this Agreement, and shall survive the delivery of
any payment for Units.
11. Notices. All communications hereunder shall be in writing and shall be
mailed, hand delivered or telegraphed, all charges prepaid, to the respective
parties at the addresses set forth herein. The address of the Partnership and
its General Partners is 900 Veterans Blvd., Suite 500, Redwood City, California
94063 (telephone: (650) 365-5341), until changed by written notice.
12. Successors and Assigns. This Agreement and the terms and provisions
hereof shall inure to the benefit of and shall be binding upon the successors
and assigns of the parties hereto; provided, however, that in no in event shall
the term "successors and assigns" as used herein include any purchaser, as such,
of any Units. In addition, and without limiting the generality of the foregoing,
the indemnity agreements contained herein shall inure to the benefit of the
successors and assigns of the parties hereto, and shall be valid irrespective of
any investigation made or not made by or on behalf of any party hereto.
13. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California and the appropriate courts
in the County of San Mateo, California should be the forum for any litigation
arising hereunder.
Please confirm your Agreement with the General Partners to the terms
contained herein and return a fully executed copy of this Advisory Agreement to
us.
--------------------------------
Michael Burwell, General Partner
BROKER-DEALER ACCEPTANCE
ACCEPTED this day of , 2003
------ --------
By:
-----------------------------------
(Print Name)
- ---------------------------------------
(Signature)
- ---------------------------------------
Title
- ---------------------------------------
Taxpayer 1. D. No.
- ---------------------------------------
(Telephone Number)
- ---------------------------------------
Type of Entity:
(corporation, partnership or proprietorship)
210
FIFTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
REDWOOD MORTGAGE INVESTORS VIII
A California Limited Partnership
THIS FIFTH AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT was made and
entered into as of the 9th day of July, 2003, by and among MICHAEL R. BURWELL,
an individual, GYMNO CORPORATION, a California corporation and REDWOOD MORTGAGE
CORP., a California corporation (collectively, the "General Partners") and such
other persons who have become Limited Partners ("Existing Limited Partners") and
as may be added pursuant to the terms hereof (the "New Limited Partners")
(collectively the "Limited Partners").
RECITALS
A. On or about October 1993, the General Partners and the Limited Partners
entered into an agreement of limited partnership for the Partnership. The
Partnership offered $15,000,000 Units of limited partnership interest ("Units")
and $14,932,017 were acquired by investors. The Offering closed on October 31,
1996.
B. In order to increase the Partnership's capital base and permit the
Partnership to further diversify its portfolio, in September, 1996, the General
Partners elected to offer an additional 30,000,000 Units of limited partnership
interest ("Units") and $29,992,574 were acquired by investors. The second
offering closed on August 31, 2000.
C. In January 2000, the General Partners elected to revise their prospectus
in order to meet the "Plain English" rules promulgated by the Securities and
Exchange Commission ("SEC").
D. In order to increase the Partnership's capital base and permit the
Partnership to further diversify its portfolio, on August 31, 2000, the General
Partners elected to offer an additional $30,000,000 of Units of limited
partnership interest ("Units") and $29,998,622 were acquired by investors. The
third offering closed April, 2002.
E. In order to further increase the Partnership's capital base and permit
the Partnership to further diversify its portfolio, on October 30, 2002, the
General Partners elected to offer an additional $50,000,000 of Units. The fourth
offering closed in October, 2003.
F. In order to further increase the Partnership's capital base and permit
the Partnership to further diversify its portfolio, on July 9, 2003, the General
Partners elected to offer an additional $75,000,000.00 of Units.
G. In connection with the additional offering of $75,000,000 of Units, the
General Partners have elected to amend and restate the agreement of limited
partnership (the "Agreement").
ARTICLE 1
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article I shall, for
all purposes of this Agreement, have the meanings as defined herein:
1.1 "Affiliate" means (a) any person directly or indirectly controlling,
controlled by or under common control with another person, (b) any person owning
or controlling ten percent (10%) or more of the outstanding voting securities of
such other person, (c) any officer, director or partner of such person, or (d)
if such other person is an officer, director or partner, any company for which
such person acts in any such capacity.
1.2 "Agreement" means this Limited Partnership Agreement, as amended from
time to time.
1.3 "Capital Account" means, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
a) To each Partner's Capital Account there shall be credited, in the event
such Partner utilized the services of a Participating Broker Dealer, such
Partner's capital contribution, or if such Partner acquired his Units through an
unsolicited sale, such Partner's capital contribution plus the amount of the
sales commissions otherwise payable is paid, such Partner's distributive share
of Profits and any items in the nature of income or gain (from unexpected
adjustments, allocations or distributions) that are specially allocated to a
Partner and the amount of any Partnership liabilities that are assumed by such
Partner or that are secured by any Partnership property distributed to such
Partner.
211
b) To each Partner's Capital Account there shall be debited the amount of
cash and the Gross Asset Value of any Partnership property distributed to such
Partner pursuant to any provision of this Agreement, such Partner's distributive
share of Losses, and any items in the nature of expenses or losses that are
specially allocated to a Partner and the amount of any liabilities of such
Partner that are assumed by the Partnership or that are secured by any property
contributed by such Partner to the Partnership.
In the event any interest in the Partnership is transferred in accordance
with Section 7.2 of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred interest.
In the event the Gross Asset Values of the Partnership assets are adjusted
pursuant to Section 1.14, the Capital Accounts of all Partners shall be adjusted
simultaneously to reflect the aggregate net adjustment as if the Partnership
recognized gain or loss equal to the amount of such aggregate net adjustment.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in
a manner consistent with such Regulation. In the event the General Partners
shall determine that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto, are computed in order to comply with
the then existing Treasury Regulation, the General Partners may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Article IX hereof upon the
dissolution of the Partnership. The General Partners shall adjust the amounts
debited or credited to Capital Accounts with respect to (a) any property
contributed to the Partnership or distributed to the Partners, and (b) any
liabilities that are secured by such contributed or distributed property or that
are assumed by the Partnership or the Partners, in the event the General
Partners shall determine such adjustments are necessary or appropriate pursuant
to Treasury Regulation Section 1.704-l(b)(2)(iv) as provided for in Section 5.4.
The General Partners shall make any appropriate modification in the event
unanticipated events might otherwise cause this Agreement not to comply with
Treasury Regulation Section 1.704-l(b) as provided for in Sections 5.6 and
12.4(k).
1.4 "Cash Available for Distribution" means an amount of cash equal to the
excess of accrued income from operations and investment of, or the sale or
refinancing or other disposition of, Partnership assets during any calendar
month over the accrued operating expenses of the Partnership during such month,
including any adjustments for bad debt reserves or deductions as the General
Partners may deem appropriate, all determined in accordance with generally
accepted accounting principles; provided, that such operating expenses shall not
include any general overhead expenses of the General Partners not specifically
related to, billed to or reimbursable by the Partnership as specified in
Sections 10.13 through 10.15.
1.5 "Code" means the Internal Revenue Code of 1986 and corresponding
provisions of subsequent revenue laws.
1.6 "Continuing Servicing Fee" means an amount equal to approximately
(0.25%) of the Limited Partnership's capital account which amount shall be paid
to certain participating Broker Dealers payable only in connection with the
initial offering of 150,000 Units pursuant to the Prospectus dated May 19, 1993.
1.7 "Deed of Trust" means the lien or liens created on the real property or
properties of the borrower securing the borrower's obligation to the Partnership
to repay the Mortgage Investment.
1.8 "Earnings" means all revenues earned by the Partnership less all
expenses incurred by the Partnership.
1.9 "Fiscal Year" means a year ending December 31st.
1.10 "Fifth Formation Loan" means a loan to Redwood Mortgage Corp., an
affiliate of the General Partners, in connection with the offering of
$75,000,000 Units pursuant to the Prospectus dated July 9, 2003 equal to the
amount of the sales commissions and the amounts payable in connection with
unsolicited sales. Redwood Mortgage Corp. will pay all sales commissions and
amounts due in connection with unsolicited sales from the Fifth Formation Loan.
The Fifth Formation Loan will be unsecured, not bear interest and will be repaid
in annual installments.
1.11 "First Formation Loan" means a loan to Redwood Mortgage Corp., an
affiliate of the General Partners, in connection with the initial offering of
15,000,000 Units pursuant to the Prospectus dated May 19, 1993, equal to the
amount of the sales commissions (excluding any Continuing Servicing Fees) and
all amounts payable in connection with any unsolicited sales. Redwood Mortgage
Corp. will pay all sales commissions (excluding any Continuing Servicing Fees)
and all amounts payable in connection with any unsolicited sales from the First
Formation Loan. The First Formation Loan will be unsecured, and will be repaid
in ten (10) equal annual installments of principal, without interest commencing
on December 31 of the year in which the initial offering terminates.
1.12 "Fourth Formation Loan" means the loan to Redwood Mortgage Corp., a
General Partner, in connection with the offering of 50,000,000 Units pursuant to
the Prospectus dated October 30, 2002 equal to the amount of the sales
commissions and the amounts payable in connection with the unsolicited sales.
Redwood Mortgage Corp. will pay all sales commissions and amounts due in
connection with the unsolicited sales from the Fourth Formation Loan. The Fourth
Formation Loan will be unsecured, not bear interest, and will be repaid in
annual installments.
212
1.13 "Formation Loans" means collectively the First, Second, Third, Fourth
and Fifth Formation Loans.
1.14 "General Partners" means Michael R. Burwell, Gymno Corporation, a
California corporation, and Redwood Mortgage Corp., a California corporation or
any Person substituted in place thereof pursuant to this Agreement. "General
Partner" means any one of the General Partners.
1.15 "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a Partner to
the Partnership shall be the gross fair market value of such asset, as
determined by the contributing Partner and the Partnership;
(b) The Gross Asset Values of all Partnership assets shall be adjusted to
equal their respective gross fair market values, as determined by the General
Partners, as of the following times: (a) the acquisition of an additional
interest in the Partnership (other than pursuant to Section 4.2) by any new or
existing Partner in exchange for more than a de minimis capital contribution;
(b) the distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership property other than money, unless all Partners receive
simultaneous distributions of undivided interests in the distributed property in
proportion to their Interests in the Partnership; and (c) the termination of the
Partnership for federal income tax purposes pursuant to Section 708(b)(1)(B) of
the Code; and
(c) If the Gross Asset Value of an asset has been determined or adjusted
pursuant to clause (a) or (b) above, such Gross Asset Value shall thereafter be
adjusted by the depreciation, amortization or other cost recovery deduction
allowable which is taken into account with respect to such asset for purposes of
computing Profits and Losses.
1.16 "Limited Partners" means the Initial Limited Partner until it shall
withdraw as such, and the purchasers of Units in Redwood Mortgage Investors
VIII, who are admitted thereto and whose names are included on the Certificate
and Agreement of Limited Partnership of Redwood Mortgage Investors VIII.
Reference to a "Limited Partner" shall be to any one of them.
1.17 "Limited Partnership Interest" means the percentage ownership interest
of any Limited Partner in the Partnership determined at any time by dividing a
Limited Partner's current Capital Account by the total outstanding Capital
Accounts of all Limited Partners.
1.18 "Majority of the Limited Partners" means Limited Partners holding a
majority of the total outstanding Limited Partnership Interests as of the first
day of the current calendar month.
1.19 "Mortgage Investment(s)" or "Loans" means the loan(s) and/or an
undivided interest in the loans the Partnership intends to extend to the general
public secured by real property deeds of trust.
1.20 "Net Asset Value" means the Partnership's total assets less its total
liabilities.
1.21 "Partners" means the General Partners and the Limited Partners,
collectively. "Partner" means any one of the Partners.
1.22 "Partnership" means Redwood Mortgage Investors VIII, a California
limited partnership, the limited partnership created pursuant to this Agreement.
1.23 "Partnership Interest" means the percentage ownership interest of each
Partner in the partnership as defined in Section 5.1.
1.24 "Person" means any natural person, partnership, corporation,
unincorporated association or other legal entity.
1.25 "Profits" and "Losses" mean, for each Fiscal Year or any other period,
an amount equal to the Partnership's taxable income or loss for such Fiscal Year
or other given period, determined in accordance with Section 703(a) of the Code
(for this purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
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(a) Any income of the Partnership that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses pursuant to
this Section 1.24 shall be added to such taxable income or loss;
(b) Any expenditures of the Partnership described in Section 705(a)(2)(B)
of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant
to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in computing Profits or Losses pursuant to this Section 1.24, shall
be subtracted from such taxable income or loss.
(c) Gain or loss resulting from any disposition of Partnership property
with respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value;
(d) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account depreciation, amortization or other cost recovery
deductions for such Fiscal Year or other period, computed such that if the Gross
Asset Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of a Fiscal Year or other period, depreciation,
amortization or other cost recovery deductions shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization or other cost recovery deductions for such Fiscal
Year or other period bears to such beginning adjusted tax basis; and
(e) Notwithstanding any other provision of this Section 1.24, any items in
the nature of income or gain or expenses or losses, which are specially
allocated under Section 5.4 (a) or (b), shall not be taken into account in
computing Profits or Losses.
1.26 "Sales Commissions" means the amount of compensation, which may be
paid under one of two options, to be paid to Participating Broker Dealers in
connection with the sale of Units.
1.27 "Second Formation Loan" means the loan to Redwood Mortgage Corp., a
General Partner, in connection with the second offering of $30,000,000 in Units
pursuant to the Prospectus dated December 4, 1996 equal to the amount of the
sales commissions and the amounts payable in connection with unsolicited sales.
Redwood Mortgage Corp. will pay all sales commissions and amounts due in
connection with unsolicited sales from the Second Formation Loan. The Second
Formation Loan will be unsecured, will not bear interest and will be repaid in
annual installments.
1.28 "Third Formation Loan" means the loan to Redwood Mortgage Corp., a
General Partner, in connection with the offering of $30,000,000 in Units
pursuant to the Prospectus dated August 31, 2000 equal to the amount of the
sales commissions and the amounts payable with the unsolicited sales. Redwood
Mortgage Corp. will pay all sales commissions and amounts due in connection with
the unsolicited sales from the Third Formation Loan. The Third Formation Loan
will be unsecured, will not bear interest, and will be repaid in annual
installments.
1.29 "Units" mean the shares of ownership of the Partnership issued to
Limited Partners upon their admission to the Partnership, pursuant to the
Partnership's Prospectuses dated February 2, 1993, December 4, 1996, August 31,
2000, October 30, 2002 and July 9, 2003 and any supplements or amendments
thereto (the "Prospectus").
ARTICLE 2
ORGANIZATION OF THE LIMITED PARTNERSHIP
2.1 Formation. The parties hereto hereby agree to form a limited
partnership, pursuant to the provision of Chapter 3, Title 2, of the California
Corporations Code, as in effect on the date hereof, commonly known as the
California Revised Limited Partnership Act (the "California Act").
2.2 Name. The name of the Partnership is REDWOOD MORTGAGE INVESTORS VIII, a
California limited partnership.
2.3 Place of Business. The principal place of business of the Partnership
shall be located at 900 Veterans Blvd., Suite 500, Redwood City, California
94063, until changed by designation of the General Partners, with notice to all
Limited Partners.
2.4 Purpose. The primary purpose of this Partnership is to engage in
business as a mortgage lender for the primary purpose of making Loans secured by
deeds of trust (the "Loans") on California real estate.
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2.5 Substitution of Limited Partner. A Limited Partner may assign all or a
portion of his Partnership Interest and substitute another person in his place
as a Limited Partner only in compliance with the terms and conditions of Section
7.2.
2.6 Certificate of Limited Partnership. The General Partners shall duly
execute and file with the Office of the Secretary of State of the State of
California, a Certificate of Limited Partnership pursuant to the provisions of
Section 15621 of the California Corporations Code. Thereafter, the General
Partners shall execute and cause to be filed Certificates of Amendment of the
Certificate of Limited Partnership whenever required by the California Act or
this Agreement. At the discretion of the General Partners, a certified copy of
the Certificate of Limited Partnership may also be filed in the Office of the
Recorder of any county in which the Partnership shall have a place of business
or in which real property to which it holds title shall be situated.
2.7 Term. The Partnership shall be formed and its term shall commence as of
the date on which this Limited Partnership Agreement is executed and the
Certificate of Limited Partnership referred to in Section 2.6 is filed with the
Office of the Secretary of State, and shall continue until December 31, 2032,
unless earlier terminated pursuant to the provisions of this Agreement or by
operation of law.
2.8 Power of Attorney. Each of the Limited Partners irrevocably constitutes
and appoints the General Partners, and each of them, any one of them acting
alone, as his true and lawful attorney-in-fact, with full power and authority
for him, and in his name, place and stead, to execute, acknowledge, publish and
file:
(a) This Agreement, the Certificate of Limited Partnership and any
amendments thereof required under the laws of the State of California;
(b) Any certificates, instruments and documents, including, without
limitation, Fictitious Business Name Statements, as may be required by, or may
be appropriate under, the laws of any state or other jurisdiction in which the
Partnership is doing or intends to do business; and
(c) Any documents which may be required to effect the continuation of the
Partnership, the admission of an additional or substituted Partner, or the
dissolution and termination of the Partnership.
Each Limited Partner hereby agrees to execute and deliver to the General
Partners within five (5) days after receipt of the General Partners' written
request therefore, such other and further statements of interest and holdings,
designations, and further statements of interest and holdings, designations,
powers of attorney and other instruments that the General Partners deem
necessary to comply with any laws, rules or regulations relating to the
Partnership's activities.
2.9 Nature of Power of Attorney. The foregoing grant of authority is a
special power of attorney coupled with an interest, is irrevocable, and survives
the death of the undersigned or the delivery of an assignment by the undersigned
of a Limited Partnership Interest; provided, that where the assignee thereof has
been approved by the General Partners for admission to the Partnership as a
substituted Limited Partner, the Power of Attorney survives the delivery of such
assignment for the sole purpose of enabling the General Partners to execute,
acknowledge and file any instrument necessary to effect such substitution.
ARTICLE 3
THE GENERAL PARTNERS
3.1 Authority of the General Partners. The General Partners shall have all
of the rights and powers of a partner in a general partnership, except as
otherwise provided herein.
3.2 General Management Authority of the General Partners. Except as
expressly provided herein, the General Partners shall have sole and complete
charge of the affairs of the Partnership and shall operate its business for the
benefit of all Partners. Each of the General Partners, acting alone or together,
shall have the authority to act on behalf of the Partnership as to any matter
for which the action or consent of the General Partners is required or
permitted. Without limitation upon the generality of the foregoing, the General
Partners shall have the specific authority:
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(a) To expend Partnership funds in furtherance of the business of the
Partnership and to acquire and deal with assets upon such terms as they deem
advisable, from affiliates and other persons;
(b) To determine the terms of the offering of Units, including the right to
increase the size of the offering or offer additional securities, the amount for
discounts allowable or commissions to be paid and the manner of complying with
applicable law;
(c) To employ, at the expense of the Partnership, such agents, employees,
independent contractors, attorneys and accountants as they deem reasonable and
necessary;
(d) To effect necessary insurance for the proper protection of the
Partnership, the General Partners or Limited Partners;
(e) To pay, collect, compromise, arbitrate, or otherwise adjust any and all
claims or demands against the Partnership;
(f) To bind the Partnership in all transactions involving the Partnership's
property or business affairs, including the execution of all loan documents and
the sale of notes and to change the Partnership's investment objectives,
notwithstanding any other provision of this Agreement; provided, however, the
General Partners may not, without the consent of a Majority of the Limited
Partners, sell or exchange all or substantially all of the Partnership's assets,
as those terms are defined in Section 9.1;
(g) To amend this Agreement with respect to the matters described in
Subsections 12.4(a) through (k) below;
(h) To determine the accounting method or methods to be used by the
Partnership, which methods may be changed at any time by written notice to all
Limited Partners;
(i) To open accounts in the name of the Partnership in one or more banks,
savings and loan associations or other financial institutions, and to deposit
Partnership funds therein, subject to withdrawal upon the signature of the
General Partners or any person authorized by them;
(j) To borrow funds for the purpose of making Loans, provided that the
amount of borrowed funds does not exceed fifty percent (50%) of the
Partnership's Loan portfolio and in connection with such borrowings, to pledge
or hypothecate all or a portion of the assets of the Partnership as security for
such loans; and
(k) To invest the reserve funds of the Partnership in cash, bank accounts,
certificates of deposits, money market accounts, short-term bankers acceptances,
publicly traded bond funds or any other liquid assets.
3.3 Limitations. Without a written consent of or ratification by all
Limited Partners, the General Partners shall have no authority to do any act
prohibited by law; or to admit a person as a Limited Partner other than in
accordance with the terms of this Agreement.
3.4 No Personal Liability. The General Partners shall have no personal
liability for the original invested capital of any Limited Partner or to repay
the Partnership any portion or all of any negative balance in their capital
accounts, except as otherwise provided in Article 4.
3.5 Compensation to General Partners. The General Partners shall be
entitled to be compensated and reimbursed for expenses incurred in performing
its management functions in accordance with the provisions of Article 10
thereof, and may receive compensation from parties other than the Partnership.
3.6 Fiduciary Duty. The General Partners shall have the fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, and they shall not employ such funds or assets in any manner except
for the exclusive benefit of the Partnership.
3.7 Allocation of Time to Partnership Business. The General Partners shall
not be required to devote full time to the affairs of the Partnership, but shall
devote whatever time, effort and skill they deem to be reasonably necessary for
the conduct of the Partnership's business. The General Partners may engage in
any other businesses or activities, including businesses related to or
competitive with the Partnership.
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3.8 Assignment by a General Partner. A General Partner's interest in
income, losses and distributions of the Partnership shall be assignable at the
discretion of a General Partner, which, if made, may be converted, at a General
Partner's option, into a limited partnership interest to the extent of the
assignment.
3.9 Partnership Interest of General Partners. The General Partners shall be
allocated a total of one percent (1%) of all items of Partnership income, gains,
losses, deductions and credits as described in Section 5.1, which shall be
shared equally among them.
3.10 Removal of General Partners. A General Partner may be removed upon the
following conditions:
(a) By written consent of a Majority of the Limited Partners. Limited
Partners may exercise such right by presenting to the General Partner a notice,
with their acknowledged signatures thereon, to the effect that the General
Partner is removed; the notice shall set forth the grounds for removal and the
date on which removal is become effective;
(b) Concurrently with such notice or within thirty (30) days thereafter by
notice similarly given, a Majority of the Limited Partners may also designate a
successor as General Partner;
(c) Substitution of a new General Partner, if any, shall be effective upon
written acceptance of the duties and responsibilities of a General Partner by
the new General Partner. Upon effective substitution of a new General Partner,
this Agreement shall remain in full force and effect, except for the change in
the General Partner, and business of the Partnership shall be continued by the
new General Partner. The new General Partner shall thereupon execute, file and
record an amendment to the Certificate of Limited Partnership in the manner
required by law.
Failure of the Limited Partners giving notice of removal to designate a new
General Partner within the time specified herein or failure of the new General
Partner so designated to execute written acceptance of the duties and
responsibilities of a General Partner hereunder within ten (10) days after such
designation shall dissolve and terminate the Partnership, unless the business of
the Partnership is continued by the remaining General Partners, if any.
If all or any one of the initial General Partners is removed as a General
Partner by the vote of a majority of Limited Partners and a successor or
additional General Partner(s) is thereafter designated, and if such successor or
additional General Partner(s) begins using any other loan brokerage firm for the
placement of loans, Redwood Mortgage Corp. will be immediately released from any
further obligation under the Formation Loans (except for a proportionate share
of the principal installment due at the end of that year, prorated according to
the days elapsed.)
In the event that all of the General Partners are removed, no other General
Partners are elected, the Partnership is liquidated and Redwood Mortgage Corp.
is no longer receiving payments for services rendered, the debt on the Formation
Loans shall be forgiven by the Partnership and Redwood Mortgage Corp. will be
immediately released from any further obligation under the Formation Loans.
3.11 Commingling of Funds. The funds of the Partnership shall not be
commingled with funds of any other person or entity.
3.12 Right to Rely on General Partners. Any person dealing with the
Partnership may rely (without duty of further inquiry) upon a certificate signed
by the General Partners as to:
(a) The identity of any General Partner or Limited Partner;
(b) The existence or nonexistence of any fact or facts which constitute a
condition precedent to acts by a General Partner or which are in any further
manner germane to the affairs of the Partnership;
(c) The persons who are authorized to execute and deliver any instrument or
document of the Partnership; or
(d) Any act or failure to act by the Partnership or any other matter
whatsoever involving the Partnership or any Partner.
3.13 Sole and Absolute Discretion. Except as otherwise provided in this
Agreement, all actions which any General Partner may take and all determinations
which any General Partner may take and all determinations which any General
Partners may make pursuant to this Agreement may be taken and made at the sole
and absolute discretion of such General Partner.
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3.14 Merger or Reorganization of the General Partners. The following is not
prohibited and will not cause a dissolution of the Partnership: (a) a merger or
reorganization of the General Partners or the transfer of the ownership interest
of the General Partners; and (b) the assumption of the rights and duties of the
General Partners by the transferee of the rights and duties of the General
Partners by the transferee entity so long as such transferee is an Affiliate
under the control of the General Partners.
3.15 Dissenting Limited Partners' Rights. If the Partnership participates
in any acquisition of the Partnership by another entity, any combination of the
Partnership with another entity through a merger or consolidation, or any
conversion of the Partnership into another form of business entity (such as a
corporation) that requires the approval of the outstanding limited partnership
interest, the result of which would cause the other entity to issue securities
to the Limited Partners, then each Limited Partner who does not approve of such
reorganization (the "Dissenting Limited Partner") may require the Partnership to
purchase for cash, at its fair market value, the interest of the Dissenting
Limited Partner in the Partnership in accordance with Section 15679.2 of the
California Corporations Code. The Partnership, however, may itself convert to
another form of business entity (such as a corporation, trust or association) if
the conversion will not result in a significant adverse change in (i) the voting
rights of the Limited Partners, (ii) the termination date of the Partnership
(currently, December 31, 2032, unless terminated earlier in accordance with the
Partnership Agreement), (iii) the compensation payable to the General Partners
or their Affiliates, or (iv) the Partnership's investment objectives.
The General Partners will make the determination as to whether or not any
such conversion will result in a significant adverse change in any of the
provisions listed in the preceding paragraph based on various factors relevant
at the time of the proposed conversion, including an analysis of the historic
and projected operations of the Partnership; the tax consequences (from the
standpoint of the Limited Partners) of the conversion of the Partnership to
another form of business entity and of an investment in a limited partnership as
compared to an investment in the type of business entity into which the
Partnership would be converted; the historic and projected operating results of
the Partnership's Loans, and the then-current value and marketability of the
Partnership's Loans. In general, the General Partners would consider any
material limitation on the voting rights of the Limited Partners or any
substantial increase in the compensation payable to the General Partners or
their Affiliates to be a significant adverse change in the listed provisions.
3.16 Exculpation and Indemnification. The General Partners shall have no
liability whatsoever to the Partnership or to any Limited Partner, so long as a
General Partner determined in good faith, that the course of conduct which
caused the loss or liability was in the best interests of the Partnership, and
such loss or liability did not result from the gross negligence or gross
misconduct of the General Partner being held harmless. The General Partners or
any Partnership employee or agent shall be entitled to be indemnified by the
Partnership, at the expense of the Partnership, against any loss or liability
(including attorneys' fees, which shall be paid as incurred) resulting from
assertion of any claim or legal proceeding relating to the activities of the
Partnership, including claims, or legal proceedings brought by a third party or
by Limited Partners, on their own behalf or as a Partnership derivative suit, so
long as the party to be indemnified determined in good faith that the course of
conduct which gave rise to such claim or proceeding was in the best interests of
the Partnership and such course of conduct did not constitute gross negligence
or gross misconduct; provided, however, any such indemnification shall only be
recoverable out of the assets of the Partnership and not from Limited Partners.
Nothing herein shall prohibit the Partnership from paying in whole or in part
the premiums or other charge for any type of indemnity insurance by which the
General Partners or other agents or employees of the Partnership are indemnified
or insured against liability or loss arising out of their actual or asserted
misfeasance or nonfeasance in the performance of their duties or out of any
actual or asserted wrongful act against the Partnership including, but not
limited to judgments, fines, settlements and expenses incurred in the defense of
actions, proceedings and appeals therefrom. Notwithstanding the foregoing,
neither the General Partners nor their affiliates shall be indemnified for any
liability imposed by judgment (including costs and attorneys' fees) arising from
or out of a violation of state or federal securities laws associated with the
offer and sale of Units offered hereby. However, indemnification will be allowed
for settlements and related expenses of lawsuits alleging securities law
violations and for expenses incurred in successfully defending such lawsuits
provided that (a) a court either approves indemnification of litigation costs if
the General Partners are successful in defending the action; or (b) the
settlement and indemnification is specifically approved by the court of law
which shall have been advised as to the current position of the Securities and
Exchange Commission (as to any claim involving allegations that the Securities
Act of 1933 was violated) and California Commissioner of Corporations or the
applicable state authority (as to any claim involving allegations that the
applicable state's securities laws were violated).
ARTICLE 4
CAPITAL CONTRIBUTIONS; THE LIMITED PARTNERS
4.1 Capital Contribution by General Partners. The General Partners,
collectively, shall contribute to the Partnership an amount in cash equal to
1/10 of 1% of the aggregate capital contributions of the Limited Partners.
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4.2 Other Contributions.
(a) Capital Contribution by Initial Limited Partner. The Initial Limited
Partner made a cash capital contribution to the Partnership of $1,000. Upon the
admission of additional Limited Partners to the Partnership pursuant to Section
4.2(b) of this Agreement, the Partnership promptly refunded to the Initial
Limited Partner its $1,000 capital contribution and upon receipt of such sum the
Initial Limited Partner was withdrawn from the Partnership as its Initial
Limited Partner.
(b) Capital Contributions of Existing Limited Partners. The existing
Limited Partners have contributed in the aggregate to the capital of the
Partnership an amount equal to $111,996,259 as of June 1, 2003.
(c) Capital Contributions of New Limited Partners. The new Limited Partners
shall contribute to the capital of the Partnership an amount equal to one dollar
($1) for each Unit subscribed for by each such New Limited Partners, with a
minimum subscription of two thousand (2000) Units per Limited Partner (including
subscriptions from entities of which such limited partner is the sole beneficial
owner). The total additional capital contributions of the New Limited Partners
will not exceed $75,000,000.
(d) Escrow Account. No escrow account will be established and all proceeds
from the sale of Units will be remitted directly to the Partnership.
Subscription Agreements shall be accepted or rejected within 30 days of
their receipt. All subscription monies deposited by persons whose subscriptions
are rejected shall be returned to such subscribers forthwith after such
rejection without interest. The public offering of Units shall terminate one
year from the effective date of the Prospectus unless fully subscribed at an
earlier date or terminated on an earlier date by the General Partners, or unless
extended by the General Partners for additional one year periods.
(e) Subscription Account. Subscriptions received after the activation of
the Partnership will be deposited into a subscription account at a federally
insured commercial bank or other depository and invested in short-term
certificates of deposit, a money market or other liquid asset account.
Prospective investors whose subscriptions are accepted will be admitted into the
Partnership only when their subscription funds are required by the Partnership
to fund a Loan, or the Formation Loan, to create appropriate reserves or to pay
organizational expenses or other proper Partnership purposes. During the period
prior to admittance of investors as Limited Partners, proceeds from the sale of
Units are irrevocable, and will be held by the General Partners for the account
of Limited Partners in the subscription account. Investors' funds will be
transferred from the subscription account into the Partnership on a first-in,
first-out basis. Upon admission to the Partnership, subscription funds will be
released to the Partnership and Units will be issued at the rate of $1 per unit
or fraction thereof. Interest earned on subscription funds while in the
subscription account will be returned to the subscriber, or if the subscriber
elects to compound earnings, the amount equal to such interest will be added to
his investment in the Partnership, and the number of Units actually issued shall
be increased accordingly. In the event only a portion of a subscribing Limited
Partner's funds are required, then all funds invested by such subscribing
Limited Partners at the same time shall be transferred. Any subscription funds
remaining in the subscription account after the expiration of one (1) year from
the date any such subscription funds were first received by the General Partners
shall be returned to the subscriber.
(f) Admission of Limited Partners. Subscribers shall be admitted as Limited
Partners when their subscription funds are required by the Partnership to fund a
Loan, or the Formation Loan, to create appropriate reserves or to pay
organizational expenses, as described in the Prospectus. Subscriptions shall be
accepted or rejected by the General Partners on behalf of the Partnership within
30 days of their receipt. Rejected subscriptions and monies shall be returned to
subscribers forthwith.
The Partnership shall amend Schedule A to the Limited Partnership Agreement
from time to time to effect the substitution of substituted Limited Partners in
the case of assignments, where the assignee does not become a substituted
Limited Partner, the Partnership shall recognize the assignment not later than
the last day of the calendar month following acceptance of the assignment by the
General Partners.
No person shall be admitted as a Limited Partner who has not executed and
filed with the Partnership the subscription form specified in the Prospectus
used in connection with the public offering, together with such other documents
and instruments as the General Partners may deem necessary or desirable to
effect such admission, including, but not limited to, the execution,
acknowledgment and delivery to the General Partners of a power of attorney in
form and substance as described in Section 2.8 hereof.
(g) Names, Addresses, Date of Admissions, and Contributions of Limited
Partners. The names, addresses, date of admissions and capital contributions of
the Limited Partners shall be set forth in Schedule A attached hereto, as
amended from time to time, and incorporated herein by reference.
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4.3 Election to Receive Monthly, Quarterly or Annual Cash Distributions.
Upon subscription for Units, a subscribing Limited Partner must elect whether to
receive monthly, quarterly or annual cash distributions from the Partnership or
to have earnings retained in his Capital Account that will increase it in lieu
of receiving periodic cash distributions. If the Limited Partner initially
elects to receive monthly, quarterly or annual distributions, such election,
once made, is irrevocable. However, a Limited Partner may change his election
regarding whether he wants to receive such distributions on a monthly, quarterly
or annual basis. If the Limited Partner initially elects to have earnings
retained in his Capital Account in lieu of cash distributions, he may after
three (3) years, change his election and receive monthly, quarterly or annual
cash distributions. Earnings allocable to Limited Partners who elect to have
earnings retained in their Capital Account will have earnings retained by the
Partnership to be used for making further Loans or for other proper Partnership
purposes. The Earnings from such further Loans will be allocated among all
Partners; however, Limited Partners who elect to have earnings retained in their
Capital Account will be credited with an increasingly larger proportionate share
of such Earnings than Limited Partners who receive monthly, quarterly or annual
distributions since Limited Partners' Capital Accounts who elect to have
earnings retained in their Capital Accounts will increase over time. Annual
distributions will be made after the calendar year.
4.4 Interest. No interest shall be paid on, or in respect of, any
contribution to Partnership Capital by any Partner, nor shall any Partner have
the right to demand or receive cash or other property in return for the
Partner's capital contribution.
4.5 Loans. Any Partner or Affiliate of a Partner may, with the written
consent of the General Partners, lend or advance money to the Partnership. If
the General Partners or, with the written consent of the General Partners, any
Limited Partner shall make any loans to the Partnership or advance money on its
behalf, the amount of any such loan or advance shall not be treated as a
contribution to the capital of the Partnership, but shall be a debt due from the
Partnership. The amount of any such loan or advance by a lending Partner or an
Affiliate of a Partner shall be repayable out of the Partnership's cash and
shall bear interest at a rate of not in excess of the greater of (i) the prime
rate established, from time to time, by any major bank selected by the General
Partners for loans to the bank's most creditworthy commercial borrowers, plus 5%
per annum, or (ii) the maximum rate permitted by law. None of the Partners or
their Affiliates shall be obligated to make any loan or advance to the
Partnership.
4.6 No Participation in Management. Except as expressly provided herein,
the Limited Partners shall take no part in the conduct or control of the
Partnership business and shall have no right or authority to act for or bind the
Partnership.
4.7 Rights and Powers of Limited Partners. In addition to the matters
described in Section 3.10 above, the Limited Partners shall have the right to
vote upon and take any of the following actions upon the approval of a Majority
of the Limited Partners, without the concurrence of the General Partners.
(a) Dissolution and termination of the Partnership prior to the expiration
of the term of the Partnership as stated in Section 2.7 above
(b) Amendment of this Agreement, subject to the limitations set forth in
Section 12.4;
(c) Disapproval of the sale of all or substantially all the assets of the
Partnership (as defined in Subsection 9.1(c) below); or
(d) Removal of the General Partners and election of a successor, in the
manner and subject to the conditions described in Section 3.10 above.
Except as expressly set forth above or otherwise provided for in this
Agreement, the Limited Partners shall have no other rights as set forth in the
California Act.
4.8 Meetings. The General Partners, or Limited Partners representing ten
percent (10%) of the outstanding Limited Partnership Interests, may call a
meeting of the Partnership and, if desired, propose an amendment to this
Agreement to be considered at such meeting. If Limited Partners representing the
requisite Limited Partnership Interests present to the General Partners a
statement requesting a Partnership meeting, the General Partners shall fix a
date for such meeting and shall, within twenty (20) days after receipt of such
statement, notify all of the Limited Partners of the date of such meeting and
the purpose for which it has been called. Unless otherwise specified, all
meetings of the Partnership shall be held at 2:00 P.M. at the office of the
Partnership, upon not less than ten (10) and not more than sixty (60) days
written notice. At any meeting of the Partnership, Limited Partners may vote in
person or by proxy. A majority of the Limited Partners, present in person or by
proxy, shall constitute a quorum at any Partnership meeting. Any question
relating to the Partnership which may be considered and acted upon by the
Limited Partners hereunder may be considered and acted upon by vote at a
Partnership meeting, and any consent required to be in writing shall be deemed
given by a vote by written ballot. Except as expressly provided above,
additional meeting and voting procedures shall be in conformity with Section
15637 of the California Corporations Code, as amended.
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4.9 Limited Liability of Limited Partners. Units are non-assessable, and no
Limited Partner shall be personally liable for any of the expenses, liabilities,
or obligations of the Partnership or for any of the losses thereof beyond the
amount of such Limited Partner's capital contribution to the Partnership and
such Limited Partner's share of any undistributed net income and gains of the
Partnership, provided, that any return of capital to Limited Partners (plus
interest at the legal rate on any such amount from the date of its return) will
remain liable for the payment of Partnership debts existing on the date of such
return of capital; and, provided further, that such Limited Partner shall be
obligated upon demand by the General Partners to pay the Partnership cash equal
to the amount of any deficit remaining in his Capital Account upon winding up
and termination of the Partnership.
4.10 Representation of Partnership. Each of the Limited Partners hereby
acknowledges and agrees that the attorneys representing the Partnership and the
General Partners and their Affiliates do not represent and shall not be deemed
under the applicable codes of professional responsibility to have represented or
be representing any or all of the Limited Partners in any respect at any time.
Each of the Limited Partners further acknowledges and agrees that such attorneys
shall have no obligation to furnish the Limited Partners with any information or
documents obtained, received or created in connection with the representation of
the Partnership, the General Partners and/or their Affiliates.
ARTICLE 5
PROFITS AND LOSSES; CASH DISTRIBUTIONS
5.1 Profits and Losses. All Profits and Losses of the Partnership shall be
credited to and charged against the Partners in proportion to their respective
"Partnership Interests", as hereafter defined. The Partnership Interest of the
General Partners shall at all times be a total of one percent (1%), to be shared
equally among them and the Partnership Interest of the Limited Partners
collectively shall be ninety-nine percent (99%), which shall be allocated among
them according to their respective Limited Partnership Interests. Profits and
Losses realized by the Partnership during any month shall be allocated to the
Partners as of the close of business on the last day of each calendar month, in
accordance with their respective Limited Partnership Interests and in proportion
to the number of days during such month that they owned such Limited Partnership
Interests, without regard to Profits and Losses realized with respect to time
periods within such month.
5.2 Cash Earnings. Earnings as of the close of business on the last day of
each calendar month shall be allocated among the Partners in the same proportion
as Profits and Losses as described in Section 5.1 above. Earnings allocable to
those Limited Partners who elect to receive cash distributions as described
below shall be distributed to them in cash as soon as practicable after the end
of each calendar month. The General Partners' allocable share of Earnings shall
also be distributed concurrently with cash distributions to Limited Partners.
Earnings allocable to those Limited Partners who elected to receive additional
Units shall be retained by the Partnership and credited to their respective
Capital Accounts as of the first day of the succeeding calendar month. Earnings
to Limited Partners shall be distributed only to those Limited Partners who
elect in writing, upon their initial subscription for the purchase of Units or
after three (3) years to receive such distributions during the term of the
Partnership. Each Limited Partner's decision whether to receive such
distributions shall be irrevocable, except as set forth in paragraph 4.3 above.
5.3 Cash Distributions Upon Termination. Upon dissolution and termination
of the Partnership, Cash Available for Distribution shall thereafter be
distributed to Partners in accordance with the provisions of Section 9.3 below.
5.4 Special Allocation Rules.
(a) For purposes of this Agreement, a loss or allocation (or item thereof)
is attributable to non-recourse debt which is secured by Partnership property to
the extent of the excess of the outstanding principal balance of such debt
(excluding any portion of such principal balance which would not be treated as
an amount realized under Internal Revenue Code Section 1001 and Paragraph (a) of
Section 1.1001-2) if such debt were foreclosed upon over the adjusted basis of
such property. This excess is herein defined as "Minimum Gain (whether taxable
as capital gain or as ordinary income) as more explicitly set forth in Treasury
Regulation T.704 l(b)(4)(iv)(c). Notwithstanding any other provision of Article
5, the allocation of loss or deduction or item thereof, attributable to
non-recourse debt which is secured by Partnership property will be allowed only
to the extent that such allocation does not cause the sum of the deficit capital
account balances of the Limited Partners receiving such allocations to exceed
the minimum gain determined at the end of the Partnership able year to which the
allocations relate. The balance of such losses shall be allocated to the General
Partners. Any Limited Partner with a deficit capital account balance resulting
in whole or in part from allocations of loss or deduction (or item thereof)
attributable to non-recourse debt which is secured by Partnership property
shall, to the extent possible, be allocated income or gain (or item thereof) in
an amount not less than the minimum gain at a time no later than the time at
which the minimum gain is reduced below the sum of such deficit capital account
balances. This section is intended and shall be interpreted to comply with the
requirements of Treasury Regulation Section 1.704-2(f).
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(b) In the event any Limited Partner receives any adjustments, allocations
or distributions, not covered by Section 75.4(a), so as to result in a deficit
capital account, items of Partnership income and gain shall be specially
allocated to such Limited Partners in an amount and manner sufficient to
eliminate the deficit balances in their Capital Accounts created by such
adjustments, allocations or distributions as quickly as possible. This Section
shall operate a qualified income offset as utilized in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d).
(c) Syndication expenses for any fiscal year or other period shall be
specially allocated to the Limited Partners in proportion to their Units,
provided that if additional Limited Partners are admitted to the Partnership on
different dates, all syndication expenses shall be divided among the Persons who
own Units from time to time so that, to the extent possible, the cumulative
Syndication Expenses allocated with respect to each Unit at any time is the same
amount. In the event the General Partners shall determine that such result is
not likely to be achieved through future allocations of syndication expenses,
the General Partners may allocate a portion of Net Profits or Losses so as to
achieve the same effect on the Capital Accounts of the Limited Partners,
notwithstanding any other provision of this Agreement.
(d) For purposes of determining the Net Profits, Net Losses, or any other
items allocable to any period, Net Profits, Net Losses, and any such other items
shall be determined on a daily, monthly, or other basis, as determined by the
General Partners using any permissible method under Code Section 706 and the
Treasury Regulations thereunder.
(e) Notwithstanding Section 5.1 and 5.2 hereof, (i) Net Losses allocable to
the period prior to the admission of any additional Limited Partners pursuant to
Section 4.2(b) and (e) hereof shall be allocated 99% to the General Partners and
1% to the Initial Limited Partner and Net Profits during that same period, if
any, shall be allocated to the General Partners, and (ii) Profits or Losses
allocable to the period commencing with the admission of any additional such
Limited Partners and all subsequent periods shall be allocated pursuant to
Section 5.1.
(f) Except as otherwise provided in this Agreement, all items of
Partnership profit, gain, loss, deduction, and any other allocations not
otherwise provided for shall be divided among the Partners in the same
proportions as they share Net Profits or Net Losses, as the case may be, for the
year.
(g) The General Partners may adopt any procedure or convention they deem
reasonable to account for unsolicited investments made by Limited Partners and
the payment of a portion of the Formation Loan to such Partners' Capital
Account.
5.5 704(c) Allocations. In accordance with Code 704(c) and the Treasury
Regulations thereunder income, gain, loss, and deduction with respect to any
property contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and its initial fair market value.
Any elections or other decisions relating to such allocations shall be made
by the General Partners in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 5.5 are solely
for purposes of federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing, any Person's Capital Account or share of
Profits, Losses, other items, or distributions pursuant to any provision of this
Agreement.
5.6 Intent of Allocations. It is the intent of the Partnership that this
Agreement comply with the safe harbor test set out in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(D) and 1.704-l(b)(4)(iv)(D) and the requirements of
those Sections, including the qualified income offset and minimum gain
chargeback, which are hereby incorporated by reference. If, for whatever
reasons, the Partnership is advised by counsel or its accountants that the
allocation provisions of this Agreement are unlikely to be respected for federal
income tax purposes, the General Partners are granted the authority to amend the
allocation provisions of this Agreement, to the minimum extent deemed necessary
by counsel or its accountants to effect the plan of allocations and
distributions provided in this Agreement. The General Partners shall have the
discretion to adopt and revise rules, conventions and procedures as it believes
appropriate with respect to the admission of Limited Partners to reflect
Partners' interests in the Partnership at the close of the years.
ARTICLE 6
BOOKS AND RECORDS, REPORTS AND RETURNS
6.1 Books and Records. The General Partners shall cause the Partnership to
keep the following:
(a) Complete books and records of account in which shall be entered fully
and accurately all transactions and other matters relating to the Partnership.
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(b) A current list setting forth the full name and last known business or
residence address of each Partner which shall be listed in alphabetical order
and stating his respective capital contribution to the Partnership and share in
Profits and Losses.
(c) A copy of the Certificate of Limited Partnership and all amendments
thereto.
(d) Copies of the Partnership's federal, state and local income tax returns
and reports, if any, for the six (6) most recent years.
(e) Copies of this Agreement, including all amendments thereto, and the
financial statements of the Partnership for the three (3) most recent years.
All such books and records shall be maintained at the Partnership's
principal place of business and shall be available for inspection and copying
by, and at the sole expense of, any Partner, or any Partner's duly authorized
representatives, during reasonable business hours.
6.2 Annual Statements. The General Partners shall cause to be prepared at
least annually, at Partnership expense, financial statements prepared in
accordance with generally accepted accounting principles and accompanied by a
report thereon containing an opinion of an independent certified public
accounting firm. The financial statements will include a balance sheet,
statements of income or loss, partners' equity, and changes in financial
position. The General Partners shall have prepared at least annually, at
Partnership expense: (i) a statement of cash flow; (ii) Partnership information
necessary in the preparation of the Limited Partners' federal and state income
tax returns; (iii) a report of the business of the Partnership; (iv) a statement
as to the compensation received by the General Partners and their Affiliates,
during the year from the Partnership which shall set forth the services rendered
or to be rendered by the General Partners and their Affiliates and the amount of
fees received; and (v) a report identifying distributions from (a) Earnings of
that year, (b) Earnings of prior years, (c) working capital reserves and other
sources, and (d) a report on the costs reimbursed to the General Partners, which
allocation shall be verified by independent public accountants in accordance
with generally accepted auditing standards. Copies of the financial statements
and reports shall be distributed to each Limited Partner within 120 days after
the close of each taxable year of the Partnership; provided, however, all
Partnership information necessary in the preparation of the Limited Partners'
federal income tax returns shall be distributed to each Limited Partner not
later than 90 days after the close of each fiscal year of the Partnership.
6.3 Semi-Annual Report. Until the Partnership is registered under Section
12(g) of the Securities Exchange Act of 1934, the General Partners shall have
prepared, at Partnership expense, a semi-annual report covering the first six
months of each fiscal year, commencing with the six-month period ending after
the Initial Closing Date, and containing unaudited financial statements (balance
sheet, statement of income or loss and statement of cash flow) and a statement
of other pertinent information regarding the Partnership and its activities
during the six-month period. Copies of this report shall be distributed to each
Limited Partner within 60 days after the close of the six-month period.
6.4 Quarterly Reports. The General Partners shall cause to be prepared
quarterly, at Partnership expense: (i) a statement of the compensation received
by the General Partners and Affiliates during the quarter from the Partnership,
which statement shall set forth the services rendered by the General Partners
and Affiliates and the amount of fees received, and (ii) other relevant
information. Copies of the statements shall be distributed to each Limited
Partner within 60 days after the end of each quarterly period. The information
required by Form 10-Q (if required to be filed with the Securities and Exchange
Commission) will be supplied to each Limited Partner within 60 days of each
quarterly period. If the Partnership is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, the General Partners shall cause to
be prepared, at Partnership expense, a quarterly report for each of the first
three quarters in each fiscal year containing unaudited financial statements
(consisting of a balance sheet, a statement of income or loss and a statement of
cash flow) and a statement of other pertinent information regarding the
Partnership and its activities during the period covered by the report. Copies
of the statements and other pertinent information shall be distributed to each
Limited Partner within 60 days after the close of the quarter covered by the
report of the Partnership. The quarterly financial statements shall be
accompanied by the report thereon, if any, of the independent accountants
engaged by the Partnership or, if there is no such report, the certificate of
the General Partners that the financial statements were prepared without audit
from the books and records of the Partnership. Copies of the financial
statements, if any, filed with the Securities and Exchange Commission shall be
distributed to each Limited Partner within 60 days after the close of the
quarterly period covered by the report of the Partnership.
6.5 Filings. The General Partners, at Partnership expense, shall cause the
income tax returns for the Partnership to be prepared and timely filed with the
appropriate authorities. The General Partners, at Partnership expense, shall
also cause to be prepared and timely filed, with appropriate federal and state
regulatory and administrative bodies, all reports required to be filed with
those entities under then current applicable laws, rules and regulations. The
reports shall be prepared by the accounting or reporting basis required by the
regulatory bodies. Any Limited Partner shall be provided with a copy of any of
the reports upon request without expense to him. The General Partners, at
Partnership expense, shall file, with the securities administrators for the
various states in which this Partnership is registered, as required by such
states, a copy of each report referred to this Article 6.
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6.6 Suitability Requirements. The General Partners, at Partnership expense,
shall maintain for a period of at least four years a record of the information
obtained to indicate that a Limited Partner complies with the suitability
standards set forth in the Prospectus.
6.7 Fiscal Matters.
(a) Fiscal Year. The Partnership shall adopt a fiscal year beginning on the
first day of January of each year and ending on the last day of December;
provided, however, that the General Partners in their sole discretion may,
subject to approval by the Internal Revenue Service and the applicable state
taxing authorities at any time without the approval of the Limited Partners
change the Partnership's fiscal year to a period to be determined by the General
Partners.
(b) Method of Accounting. The accrual method of accounting shall be used
for both income tax purposes and financial reporting purposes.
(c) Adjustment of Tax Basis. Upon the transfer of an interest in the
Partnership, the Partnership may, at the sole discretion of the General
Partners, elect pursuant to Section 754 of the Internal Revenue Code of 1986, as
amended, to adjust the basis of the Partnership property as allowed by Sections
734(b) and 743(b) thereof.
6.8 Tax Matters Partner. In the event the Partnership is subject to
administrative or judicial proceedings for the assessment or collection of
deficiencies for federal taxes for the refund of overpayments of federal taxes
arising out of a Partner's distributive share of profits, Michael R. Burwell,
for so long as he is a General Partner, shall act as the Tax-Matters Partner
("TMP") and shall have all the powers and duties assigned to the TMP under
Sections 6221 through 6232 of the Code and the Treasury Regulations thereunder.
The Partners agree to perform all acts necessary under Section 6231 of the Code
and Treasury Regulations thereunder to designate Michael R. Burwell as the TMP.
ARTICLE 7
TRANSFER OF PARTNERSHIP INTERESTS
7.1 Interest of General Partners. A successor or additional General Partner
may be admitted to the Partnership as follows:
(a) With the consent of all General Partners and a Majority of the Limited
Partners, any General Partner may at any time designate one or more Persons to
be successors to such General Partner or to be additional General Partners, in
each case with such participation in such General Partner's Partnership Interest
as they may agree upon, provided that the Limited Partnership Interests shall
not affected thereby; provided, however, that the foregoing shall be subject to
the provisions of Section 9.1(d) below, which shall be controlling in any
situation to which such provisions are applicable.
(b) Upon any sale or transfer of a General Partner's Partnership Interest,
the successor General Partner shall succeed to all the powers, rights, duties
and obligations of the assigning General Partner hereunder, and the assigning
General Partner shall thereupon be irrevocably released and discharged from any
further liabilities or obligations of or to the Partnership or the Limited
Partners accruing after the date of such transfer. The sale, assignment or
transfer of all or any portion of the outstanding stock of a corporate General
Partner, or of any interest therein, or an assignment of a General Partner's
Partnership Interest for security purposes only, shall not be deemed to be a
sale or transfer of such General Partner's Partnership Interest subject to the
provisions of this Section 7.1.
(c) In the event that all or any one of the initial General Partners are
removed by the vote of a Majority of Limited Partners and a successor or
additional General Partner(s) is designated pursuant to Section 3.10, prior to a
Person's admission as a successor or additional General Partner pursuant to this
Section 7.1, such Person shall execute in writing (i) acknowledging that Redwood
Mortgage Corp., a General Partner, has been repaying the Formation Loans, which
are discussed in Section 10.9, with the proceeds it receives from loan brokerage
commissions on Loans, fees received from the early withdrawal penalties and fees
for other services paid by the Partnership, and (ii) agreeing that if such
successor or additional General Partner(s) begins using the services of another
mortgage loan broker or loan servicing agent, then Redwood Mortgage Corp. shall
immediately be released from all further obligations under the Formation Loans
(except for a proportionate share of the principal installment due at the end of
that year, prorated according to the days elapsed).
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7.2 Transfer of Limited Partnership Interest. No assignee of the whole or
any portion of a Limited Partnership Interest in the Partnership shall have the
right to become a substituted Limited Partner in place of his assignor, unless
the following conditions are first met.
(a) The assignor shall designate such intention in a written instrument of
assignment, which shall be in a form and substance reasonably satisfactory to
the General Partners;
(b) The written consent of the General Partners to such substitution shall
be obtained, which consent shall not be unreasonably withheld, but which, in any
event, shall not be given if the General Partners determine that such sale or
transfer may jeopardize the continued ability of the Partnership to qualify as a
"partnership" for federal income tax purposes or that such sale or transfer may
violate any applicable securities laws (including any investment suitability
standards);
(c) The assignor and assignee named therein shall execute and acknowledge
such other instruments as the General Partners may deem necessary to effectuate
such substitution, including, but not limited to, a power of attorney with
provisions more fully described in Sections 2.8 and 2.9 above;
(d) The assignee shall accept, adopt and approve in writing all of the
terms and provisions of this Agreement as the same may have been amended;
(e) Such assignee shall pay or, at the election of the General Partners,
obligate himself to pay all reasonable expenses connected with such
substitution, including but not limited to reasonable attorneys' fees associated
therewith; and
The Partnership has received, if required by the General Partners, a legal
opinion satisfactory to the General Partners that such transfer will not violate
the registration provisions of the Securities Act of 1933, as amended, which
opinion shall be furnished at the Limited Partner's expense.
7.3 Further Restrictions on Transfers. Notwithstanding any provision to the
contrary contained herein, the following restrictions shall also apply to any
and all proposed sales, assignments and transfer of Limited Partnership
Interests, and any proposed sale, assignment or transfer in violation of same to
void ab initio.
(a) No Limited Partner shall make any transfer or assignment of all or any
part of his Limited Partnership Interest if said transfer or assignment would,
when considered with all other transfers during the same applicable twelve month
period, cause a termination of the Partnership for federal or California state
income tax purposes.
(b) Instruments evidencing a Limited Partnership Interest shall bear and be
subject to legend conditions in substantially the following forms:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
(c) No Limited Partner shall make any transfer or assignment of all or any
of his Limited Partnership Interest if the General Partners determine such
transfer or assignment would result in the Partnership being classified as a
"publicly traded partnership" with the meaning of Section 7704(b) of the Code or
any regulations or rules promulgated thereunder.
ARTICLE 8
WITHDRAWAL FROM PARTNERSHIP
8.1 Withdrawal by Limited Partners. No Limited Partner shall have the right
to withdraw from the Partnership, receive cash distributions or otherwise obtain
the return of all or any portion of his Capital Account balance for a period of
one year after such Limited Partner's initial purchase of Units, except for
monthly, quarterly or annual distributions of Cash Available for Distribution,
if any, to which such Limited Partner may be entitled pursuant to Section 5.2
above. Withdrawal after a minimum one year holding period and before the five
year holding period as set forth below shall be permitted in accordance with
subsection (a) below. The General Partners shall have the right to liquidate the
capital account of any investor who's capital account balance is less than
$1,000. The Partnership will provide written notice of its intent to liquidate a
capital account no less than 30 days prior to the end of the calendar quarter in
which liquidation shall occur. No penalty will be assessed in connection with a
liquidation of a capital account of less than $1,000 by a General Partner.
Additionally, as set forth below in subsection (g) there shall be a limited
right of withdrawal upon the death of a Limited Partner. If a Limited Partner
elects to withdraw either after the one (1) year holding period or the five (5)
year holding period or his heirs elect to withdraw after his death, he will
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continue to receive distributions or have those Earnings compounded depending
upon his initial election, based upon the balance of his capital account during
the withdrawal period. Limited Partners may also withdraw after a five year
holding period in accordance with subsection b(i) and (ii). A Limited Partner
may withdraw or partially withdraw from the Partnership upon the following
terms:
(a) A Limited Partner who desires to withdraw from the Partnership after
the expiration of the above referenced one year period shall give written notice
of withdrawal ("Notice of Withdrawal") to the General Partners, which Notice of
Withdrawal shall state the sum or percentage interests to be withdrawn. Subject
to the provisions of subsections (e) and (f) below, such Limited Partner may
liquidate part or all of his entire Capital Account in four equal quarterly
installments beginning the quarter following the quarter in which the Notice of
Withdrawal is given, provided that such notice was received thirty (30) days
prior to the end of the quarter. An early withdrawal under this subsection (a)
shall be subject to a 10% early withdrawal penalty applicable to the sum
withdrawn as stated in the Notice of Withdrawal. The 10% penalty shall be
subject to and payable upon the terms set forth in subsection (c) below.
(b) A Limited Partner who desires to withdraw from the Partnership after
the expiration of the above referenced five year period shall give written
notice of withdrawal ("Notice of Withdrawal") to the General Partners, and
subject to the provisions of subsections (e) and (f) below such Limited
Partner's Capital Account shall be liquidated as follows:
(i) Except as provided in subsection (b)(ii) below, the Limited Partner's
Capital Account shall be liquidated in twenty (20) equal quarterly installments
each equal to 5% of the total Capital Account beginning the calendar quarter
following the quarter in which the Notice of Withdrawal is given, provided that
such notice is received thirty (30) days prior to the end of the preceding
quarter. Upon approval by the General Partners, the Limited Partner's Capital
Account may be liquidated upon similar terms over a period longer than twenty
(20) equal quarterly installments.
(ii) Notwithstanding subsection (b)(i) above, any Limited Partner may
liquidate part or all of his entire outstanding Capital Account in four equal
quarterly installments beginning of the calendar quarter following the preceding
quarter in which Notice of Withdrawal is given, provided that such notice was
received thirty (30) days prior to the end of the preceding quarter. An early
withdrawal under this subsection 8.1(b)(ii) shall be subject to a 10% early
withdrawal penalty applicable to any sums prior to the time when such sums could
have been withdrawn pursuant to the withdrawal provisions set forth in
subsection (a)(i) above.
(c) The 10% early withdrawal penalty will be deducted pro rata from the
Limited Partner's Capital Account. The 10% early withdrawal penalty will be
received by the Partnership, and a portion of the sums collected as such early
withdrawal penalty shall be applied by the Partnership toward the next
installment(s) of principal under the Formation Loan owed to the Partnership by
Redwood Mortgage Corp., a General Partner and any successor firm, as described
in Section 10.9 below. This portion shall be determined by the ratio between the
initial amount of the Formation Loan and the total amount of the organizational
and syndication costs incurred by the Partnership in this offering of Units. The
balance of such early withdrawal penalties shall be retained by the Partnership
for its own account. After the Formation Loan has been paid, the 10% early
withdrawal penalty will be used to pay the Continuing Servicing Fee, as set
forth in Section 10.13 below. The balance of such early withdrawal penalties
shall be retained by the Partnership for its own account.
(d) Commencing with the end of the calendar month in which such Notice of
Withdrawal is given, and continuing on or before the twentieth day after the end
of each month thereafter, any Cash Available for Distribution allocable to the
Capital Account (or portion thereof) with respect to which Notice of Withdrawal
has been given shall also be distributed in cash to the withdrawing Limited
Partner in the manner provided in Section 5.2 above.
(e) During the liquidation period described in subsections 8.1(a) and (b),
the Capital Account of a withdrawing Limited Partner shall remain subject to
adjustment as described in Section 1.3 above. Any reduction in said Capital
Account by reason of an allocation of Losses, if any, shall reduce all
subsequent liquidation payments proportionately. In no event shall any Limited
Partner receive cash distributions upon withdrawal from the Partnership if the
effect of such distribution would be to create a deficit in such Limited
Partner's Capital Account.
(f) Payments to withdrawing Limited Partners shall at all times be subject
to the availability of sufficient cash flow generated in the ordinary course of
the Partnership's business, and the Partnership shall not be required to
liquidate outstanding Loans prior to their maturity dates for the purposes of
meeting the withdrawal requests of Limited Partners. For this purpose, cash flow
is considered to be available only after all current Partnership expenses have
been paid (including compensation to the General Partners and Affiliates) and
adequate provision has been made for the payment of all monthly or annual cash
distributions on a pro rata basis which must be paid to Limited Partners who
elected to receive such distributions upon subscription for Units pursuant to
Section 4.3 or who changed their initial election to compound Earnings as set
forth in Section 4.3. Furthermore, no more than 20% of the total Limited
Partners' Capital Accounts outstanding for the beginning of any calendar year
shall be liquidated during any calendar year. If Notices of Withdrawal in excess
of these limitations are received by the General Partners, the priority of
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distributions among Limited Partners shall be determined as follows: first, to
those Limited Partners withdrawing Capital Accounts according to the 20 quarter
or longer installment liquidation period described under subsection (b)(i)
above, then to ERISA plan Limited Partners withdrawing Capital Accounts under
subsection (b)(ii) above, then to all other Limited Partners withdrawing Capital
Accounts under subsection (b)(ii) above, then to Administrators withdrawing
Capital Accounts under subsection (g) below, and finally to all other Limited
Partners withdrawing Capital Accounts under subsection (a) above.
(g) Upon the death of a Limited Partner, a Limited Partner's heirs or
executors may, subject to certain conditions as set forth herein, liquidate all
or a part of the deceased Limited Partner's investment without penalty. An
executor, heir or other administrator of the Limited Partner's estate (for ease
of reference the "Administrator") shall give written notice of withdrawal
("Notice of Withdrawal") to the General Partners within 6 months of the Limited
Partner's date of death. The total amount available to be liquidated in any one
year shall be limited to $50,000 per Limited Partner. The liquidation of the
Limited Partner's Capital Account in any one year shall be made in four equal
quarterly installments beginning the calendar quarter following the quarter in
which time the Notice of Withdrawal is received. Due to the complex nature of
administering a decedent's estate, the General Partners reserve the right and
discretion to request any and all information they deem necessary and relevant
in determining the date of death, the name of the beneficiaries and/or any other
matters they deem relevant. The General Partners retain the discretion to refuse
or to delay the liquidation of a deceased Limited Partner's investment unless or
until the General Partners have received all such information they deem
relevant. The liquidation of a Limited Partner's Capital Account pursuant to
this subsection is subject to the provisions of subsections 8.1(d), (e) and (f)
above.
8.2 Retirement by General Partners. Any one or all of the General Partners
may withdraw ("retire") from the Partnership upon not less than six (6) months
written notice of the same to all Limited Partners. Any retiring General Partner
shall not be liable for any debts, obligations or other responsibilities of the
Partnership or this Agreement arising after the effective date of such
retirement.
8.3 Payment to Terminated General Partner. If the business of the
Partnership is continued as provided in Section 9.1(d) or 9.1(e) below upon the
removal, retirement, death, insanity, dissolution, or bankruptcy of a General
Partner, then the Partnership shall pay to such General Partner, or his/its
estate, a sum equal to such General Partner's outstanding Capital Account as of
the date of such removal, retirement, death, insanity, dissolution or
bankruptcy, payable in cash within thirty (30) days after such date. If the
business of the Partnership is not so continued, then such General Partner shall
receive from the Partnership such sums as he may be entitled to receive in the
course of terminating the Partnership and winding up its affairs, as provided in
Section 9.3 below.
ARTICLE 9
DISSOLUTION OF THIS PARTNERSHIP; MERGER OF THE PARTNERSHIP
9.1 Events Causing Dissolution. The Partnership shall dissolve upon
occurrence of the earlier of the following events:
(a) Expiration of the term of the Partnership as stated in Section 2.7
above.
(b) The affirmative vote of a Majority of the Limited Partners.
(c) The sale of all or substantially all of the Partnership's assets;
provided, for purposes of this Agreement the term "substantially all of the
Partnership's assets" shall mean assets comprising not less than seventy percent
(70%) of the aggregate fair market value of the Partnership's total assets as of
the time of sale.
(d) The retirement, death, insanity, dissolution or bankruptcy of a General
Partner unless, within ninety (90) days after any such event (i) the remaining
General Partners, if any, elect to continue the business of the Partnership, or
(ii) if there are no remaining General Partners, all of the Limited Partners
agree to continue the business of the Partnership and to the appointment of a
successor General Partner who executes a written acceptance of the duties and
responsibilities of a General Partner hereunder.
(e) The removal of a General Partner, unless within ninety (90) days after
the effective date of such removal (i) the remaining General Partners, if any,
elect to continue the business of the Partnership, or (ii) if there are no
remaining General Partners, a successor General Partner is approved by a
majority of the Limited Partners as provided in Section 3.7 above, which
successor executes a written acceptance as provided therein and elects to
continue the business of the Partnership.
(f) Any other event causing the dissolution of the Partnership under the
laws of the State of California.
9.2 Winding Up and Termination. Upon the occurrence of an event of
dissolution, the Partnership shall immediately be terminated, but shall continue
until its affairs have been wound up. Upon dissolution of the Partnership,
unless the business of the Partnership is continued as provided above, the
General Partners will wind up the Partnership's affairs as follows:
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(a) No new Loans shall be made or purchased;
(b) Except as may be agreed upon by a Majority of the Limited Partners in
connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7,
the General Partners shall liquidate the assets of the Partnership as promptly
as is consistent with recovering the fair market value thereof, either by sale
to third parties or by servicing the Partnership's outstanding Loans in
accordance with their terms; provided, however, the General Partners shall
liquidate all Partnership assets for the best price reasonably obtainable in
order to completely wind up the Partnership's affairs within five (5) years
after the date of dissolution;
(c) Except as may be agreed upon by a Majority of the Limited Partners in
connection with a merger or consolidation described in Sections 9.5, 9.6 or 9.7,
all sums of cash held by the Partnership as of the date of dissolution, together
with all sums of cash received by the Partnership during the winding up process
from any source whatsoever, shall be distributed in accordance with Section 9.3
below.
9.3 Order of Distribution of Assets. In the event of dissolution as
provided in Section 9.1 above, the cash of the Partnership shall be distributed
as follows:
(a) All of the Partnership's debts and liabilities to persons other than
Partners shall be paid and discharged;
(b) All of the Partnership's debts and liabilities to Partners shall be
paid and discharged;
(c) The balance of the cash of the Partnership shall be distributed to the
Partners in proportion to their respective outstanding Capital Accounts.
Upon dissolution, each Limited Partner shall look solely to the assets of
the Partnership for the return of his capital contribution, and if the
Partnership assets remaining after the payment or discharge of the debts and
liabilities of the Partnership is insufficient to return the capital
contribution of each Limited Partner, such Limited Partner shall have no
recourse against the General Partners or any other Limited Partner. The
winding-up of the affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the General Partners. The General Partners are
hereby authorized to do any and all acts and things authorized by law for these
purposes. In the event of insolvency, dissolution, bankruptcy or resignation of
all of the General Partners or removal of the General Partners by the Limited
Partners, the winding up of the affairs of the Partnership and the distribution
of its assets shall be conducted by such person or entity as may be selected by
a vote of a Majority of the Limited Partners, which person or entity is hereby
authorized to do any and all acts and things authorized by law for such
purposes.
9.4 Compliance With Timing Requirements of Regulations. In the event the
Partnership is "liquidated" within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article 9
(if such liquidation constitutes a dissolution of the Partnership) or Article 5
hereof (if it does not) to the General Partners and Limited Partners who have
positive Capital Accounts in compliance with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(2) and (b) if the General Partners' Capital Accounts have a
deficit balance (after giving effect to all contributions, distributions, and
allocations for all taxable years, including the year during which such
liquidation occurs), such General Partners shall contribute to the capital of
the Partnership the amount necessary to restore such deficit balance to zero in
compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3).
9.5 Merger or Consolidation of the Partnership. The Partnership's business
may be merged or consolidated with one or more limited partnerships that are
Affiliates of the Partnership, provided the approval of the required percentage
in interest of Partners is obtained pursuant to Section 9.6. Any such merger or
consolidation may be effected by way of a sale of the assets of, or units in,
the Partnership or purchase of the assets of, or units in, another limited
partnership(s), or by any other method approved pursuant to Section 9.6. In any
such merger or consolidation, the Partnership may be either a disappearing or
surviving entity.
9.6 Vote Required. The principal terms of any merger or consolidation
described in Section 9.5 must be approved by the General Partners and by the
affirmative vote of a Majority of the Limited Partners.
9.7 Sections Not Exclusive. Sections 9.5 and 9.6 shall not be interpreted
as setting forth the exclusive means of merging or consolidating the Partnership
in the event that the California Revised Limited Partnership Act, or any
successor statute, is amended to provide a statutory method by which the
Partnership may be merged or consolidated.
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ARTICLE 10
TRANSACTIONS BETWEEN THE PARTNERSHIP, THE GENERAL PARTNERS AND AFFILIATES
10.1 Loan Brokerage Commissions. The Partnership will enter into Loan
transactions where the borrower has employed and agreed to compensate Redwood
Mortgage Corp. to act as a broker in arranging the loan. The exact amount of the
loan brokerage commissions are negotiated with prospective borrowers on a case
by case basis. It is estimated that such commissions will be approximately three
percent (3%) to six percent (6%) of the principal amount of each Loan made
during that year. The loan brokerage commissions shall be capped at 4% of the
Partnership's total assets per year.
10.2 Loan Servicing Fees. A General Partner or an Affiliate of a General
Partner may act as servicing agent with respect to all Loans, and in
consideration for such collection efforts he/it shall be entitled to receive a
monthly servicing fee up to one-eighth of one percent (.125%) of the total
unpaid principal balance of each Loan serviced, or such higher amount as shall
be customary and reasonable between unrelated Persons in the geographical area
where the property securing the Loan is located. The General Partners or an
Affiliate may lower such fee for any period of time and thereafter raise it up
to the limit set forth above.
10.3 Escrow and Other Loan Processing Fees. The General Partners or an
Affiliate of a General Partner may act as escrow agent for Loans made by the
Partnership, and may also provide certain document preparation, notarial and
credit investigation services, for which services the General Partners shall be
entitled to receive such fees as are permitted by law and as are generally
prevailing in the geographical area where the property securing the Loan is
located.
10.4 Asset Management Fee. The General Partners shall receive a monthly fee
for managing the Partnership's Loan portfolio and general business operations in
an amount up to 1/32 of one percent (.03125%) of the total "net asset value" of
all Partnership assets (as hereafter defined), payable on the first day of each
calendar month until the Partnership is finally wound up and terminated. "Net
asset value" shall mean total Partner's capital, determined in accordance with
generally accepted accounting principles as of the last day of the preceding
calendar month. The General Partners, in their discretion, may lower such fee
for any period of time and thereafter raise it up to the limit set forth above.
10.5 Reconveyance Fees. The General Partners may receive a fee from a
borrower for reconveyance of a property upon full payment of a loan in an amount
as is generally prevailing in the geographical area where the property is
located.
10.6 Assumption Fees. A General Partner or an Affiliate of the General
Partners may receive a fee payable by a borrower for assuming a Loan in an
amount equal to a percentage of the Loan or a set fee.
10.7 Extension Fee. A General Partner or an Affiliate of the General
Partners may receive a fee payable by a borrower for extending the Loan period
in an amount equal to a percentage of the loan.
10.8 Prepayment and Late Fees. Any prepayment and late fees collected by a
General Partner or an Affiliate of the General Partners in connection with Loans
shall be paid to the Partnership.
10.9 Formation Loans to Redwood Mortgage Corp. The Partnership may lend to
Redwood Mortgage Corp., a sum not to exceed 9% of the total amount of capital
contributions to the Partnership by the Limited Partners, the proceeds of which
shall be used solely for the purpose of paying selling commissions and all
amounts payable in connection with unsolicited orders received by the General
Partners. The Formation Loans shall be unsecured and shall be evidenced by a
non-interest bearing promissory note executed by Redwood Mortgage Corp. in favor
of the Partnership. The First Formation Loan is being repaid in ten (10) equal
annual installments of principal without interest, commencing on December 31,
1996. As of December 31, 2002, the total aggregate amount of the First Formation
Loan equaled $1,074,840 of which $644,964 had been repaid by Redwood Mortgage
Corp. The Second Formation Loan will be repaid as follows: Upon the commencement
of the offering in December, 1996, Redwood Mortgage Corp. made annual
installments of one-tenth of the principal balance of the Formation loan as of
December 31 of each year. Upon completion of the offering in August 2000,
Redwood Mortgage commenced paying ten equal annual installments of principal
only on December 31 of each year. Such payment shall be due and payable by
December 31 of the following year. As of December 31, 2002, the Partnership had
loaned $2,271,916 to Redwood Mortgage Corp. of which $724,412 had been repaid.
The Third Formation will be repaid as follows: Since commencement of the
offering in August, 2000, Redwood Mortgage Corp. has made annual installments of
one-tenth of the principal balance of the Formation Loan as of December 31 of
each year. Such payment shall be due and payable by December 31 of the following
year. Upon completion of the offering in April, 2002, Redwood Mortgage Corp.
commenced paying ten equal annual installments of principal only on December 31
of each year. As of December 31, 2002, the Partnership had loaned $2,217,952 to
Redwood Mortgage Corp. of which $238,584 had been repaid. The Fourth Formation
Loan will be repaid as follows: Upon commencement of the offering in October,
2002, Redwood Mortgage Corp. will make annual installments of one-tenth of the
principal balance of the Formation Loan as of December 31 of each year. Such
payment shall be due and payable by December 31 of the following year. Upon
completion of the offering in October, 2003, Redwood Mortgage Corp will commence
paying ten equal annual installments of principal only on December 31 of each
year.
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The amount of the annual installment payment to be made by Redwood Mortgage
Corp. during the offering stage, will be determined by the principal balance of
the Fifth Formation Loan on December 31 of each year. The Fifth Formation Loan
will be repaid under the same terms and conditions as the Second, Third and
Fourth Formation Loans. With respect to this offering, the formation loan could
range from a minimum of $3,750,000 assuming all investors elected to receive
current cash distributions to a maximum of $6,750,000 assuming all investors
elected to compound their earnings. Redwood Mortgage Corp. at its option may
prepay all or any part of the Formation Loans. Redwood Mortgage Corp. will repay
the Formation Loans principally from loan brokerage commissions earned on Loans,
early withdrawal penalties and other fees paid by the Partnership. Since Redwood
Mortgage Corp. will use the proceeds from loan brokerage commissions on Loans to
repay the Formation Loans and, with respect to the initial offering of 150,000
Units, for the continued payment of the Continuing Servicing Fees, if all or any
one of the initial General Partners is removed as a General Partner by the vote
thereafter designated, and if such successor or additional General Partner(s)
begins using any other loan brokerage firm for the placement of Loans, Redwood
Mortgage Corp. will be immediately released from any further obligation under
the Formation Loans (except for a proportionate share of the principal
installment due at the end of that year, pro rated according to the days elapsed
and for the continued payment of the Continuing Servicing Fees with respect to
the initial offering of 150,000 Units.) In addition, if all of the General
Partners are removed, no successor General Partners are elected, the Partnership
is liquidated and Redwood Mortgage Corp. is no longer receiving any payments for
services rendered, the debt on the Formation Loans shall be forgiven and Redwood
Mortgage Corp. will be immediately released from any further obligations under
the Formation Loans or Continuing Servicing Fees with respect to the initial
offering of 150,000 Units.
10.10 Sale of Loans and Loans Made to General Partners or Affiliates. The
Partnership may sell existing Loans to the General Partners or their Affiliates,
but only so long as the Partnership receives net sales proceeds from such sales
in an amount equal to the total unpaid balance of principal, accrued interest
and other charges owing under such Loan, or the fair market value of such Loan,
whichever is greater. Notwithstanding the foregoing, the General Partners shall
be under no obligation to purchase any Loan from the Partnership or to guarantee
any payments under any Loan. Generally, Loans will not be made to the General
Partners or their Affiliates. However, the Partnership may make the Formation
Loans to Redwood Mortgage Corp. and may in certain limited circumstances, loan
funds to Affiliates to purchase real estate owned by the Partnership as a result
of foreclosure.
10.11 Purchase of Loans from General Partners or Affiliates. The
Partnership may purchase existing Loans from the General Partners or Affiliates,
provided that the following conditions are met:
(a) At the time of purchase the borrower shall not be in default under the
Loan;
(b) No brokerage commissions or other compensation by way of premiums or
discounts shall be paid to the General Partners or their Affiliates by reason of
such purchase; and
(c) If such Loan was held by the seller for more than 180 days, the seller
shall retain a ten percent (10%) interest in such Loan.
10.12 Interest. Redwood Mortgage Corp. shall be entitled to keep interest
if any, earned on the Loans between the date of deposit of borrower's funds into
Redwood Mortgage Corp.'s trust account and date of payment of such funds by
Redwood Mortgage Corp.
10.13 Sales Commissions.
(a) The Units are being offered to the public on a best efforts basis
through the participating broker-dealers. The participating broker-dealers may
receive commissions as follows: at the rate of either (5%) or (9%) (depending
upon the investor's election to receive cash distributions or to compound
earnings and acquire additional Units in the Partnership) of the gross proceeds
on all of their sales. In no event will the total of all compensation payable to
participating broker dealers, including sales commissions, expense
reimbursements, sales seminars and/or due diligence expenses exceed ten percent
(10%) of the program proceeds received plus an additional (0.5%) for bona fide
due diligence expenses as set forth in Rule 2810 of the NASD Conduct Rules.
Further, in no event shall any individual participating broker dealer receive
total compensation including sales commissions, expense reimbursements, sales
seminar or expense reimbursement exceed (10%) of the gross proceeds of their
sales plus an additional (0.5%) for bona fide due diligence expenses as set
forth in Rule 2810 of the NASD Conduct Rules (the "Compensation Limitation").In
the event the Partnership receives any unsolicited orders directly from an
investor who did not utilize the services of a participating broker dealer,
Redwood Mortgage Corp. through the Formation Loans will pay to the Partnership
an amount equal to the amount of the sales commissions otherwise attributable to
a sale of a Unit through a participating broker dealer. The Partnership will in
turn credit such amounts received from Redwood Mortgage Corp. to the account of
the Investor who placed the unsolicited order. All unsolicited orders will be
handled only by the General Partners.
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Sales commissions will not be paid by the Partnership out of the offering
proceeds. All sales commissions will be paid by Redwood Mortgage Corp., which
will also act as the mortgage loan broker for all Loans as set forth in Section
10.1 above. With respect to the initial offering of 150,000 Units, the
Continuing Servicing Fee will be paid by Redwood Mortgage Corp., but will not be
included in the first Formation Loan. The Partnership will loan to Redwood
Mortgage Corp. funds in an amount equal to the sales commissions and all amounts
payable in connection with unsolicited sales by the General Partners, as a
Formation Loan. With respect to the initial offering of 150,000 Units, Redwood
Mortgage Corp. will use the proceeds from loan brokerage commissions on Loans to
pay the Continuing Servicing Fees, and if all or any one of the initial General
Partners is removed as a General Partner by the vote thereafter designated, if
such successor or additional General Partner(s) use any other loan brokerage
firm for the placement of Loans, Redwood Mortgage Corp. will be immediately
released from any further obligation to continue to pay any Continuing Servicing
Fees. In addition, if all of the General Partners are removed, no successor
General Partners are elected, the Partnership is liquidated and Redwood Mortgage
Corp. is no longer receiving any payments for services rendered, Redwood
Mortgage Corp. will be immediately released from any further obligation to
continue to pay any Continuing Servicing Fee in connection with the initial
offering of 150,000 Units. Units may also be offered or sold directly by the
General Partners for which they will receive no sales commissions. The
Partnership shall reimburse Participating Broker-Dealers for bona fide due
diligence expenses in an amount up to (.5%) of the Gross Proceeds.
(b) Sales by Registered Investment Advisors. The General Partners may
accept unsolicited orders received directly from Investors if an investor
utilizes the services of a registered investment advisor. A registered
investment advisor is an investment professional retained by a Limited Partner
to advise him regarding all of his assets, not just an investment in the
Partnership. Registered investment advisors are paid by the investor based upon
the total amount of the investor's assets being managed by the registered
investment advisor.
If an investor utilizes the services of a registered investment advisor,
Redwood Mortgage Corp. will pay to the Partnership an amount equal to the sales
commission otherwise attributable to a sale of Units through a participating
broker dealer. The Partnership will in turn credit such amounts received by
Redwood Mortgage Corp. to the account of the investor who placed the unsolicited
order. If an investor acquires Units directly through the services of a
registered investment advisor, the investor will have the election to authorize
the Partnership to pay the registered investment advisor an estimated quarterly
amount of no more than 2% annually of his capital account that would otherwise
be paid as periodic cash distributors or compounded as earnings. For ease of
reference, these fees are referred to as "Client Fees." The payment of Client
Fees will be paid from those amounts that would otherwise be distributable to a
Limited Partner or compounded in a Limited Partner's capital account. The
payment of Client Fees is noncumulative and subject to the availability of
sufficient earnings in your capital account. In no event will any such Client
Fees be paid to us as sales commissions or other compensation. The Partnership
is merely agreeing as an administrative convenience to pay the registered
investment advisor a portion of those amounts that would be paid to you.
All registered investment advisors will be required to represent and
warrant to the Partnership, that among other things, the investment in the units
is suitable for the Investor, that he has informed the Investor of all pertinent
facts relating to the liquidating and marketability of the units, and that if he
is affiliated with a NASD registered broker or dealer, that all Client Fees
received by him in connection with any transactions with the Partnership will be
run through the books and records of the NASD member in compliance with Notice
to Members 96-33 and Rules 3030 and 3040 of the NASD Conduct Rules.
10.14 Reimbursement of Organizational Expenses. The General Partners may be
reimbursed for, or the Partnership may pay directly, all expenses in connection
with the organization or offering of the Units including, without limitation,
attorneys' fees, accounting fees, printing costs and other selling expenses
(other than underwriting commissions) in an amount equal to the lesser of ten
percent (10%) of the gross proceeds of the Offering or $3,000,000. The General
Partners may, at their election, pay any offering and organization expenses in
excess of this amount.
10.15 Reimbursement. The Partnership shall reimburse the General Partners
or their Affiliates for the actual cost to the General Partners or their
Affiliates (or pay directly), the cost of goods and materials used for or by the
Partnership and obtained from entities unaffiliated with the General Partners or
their Affiliates. The Partnership shall also pay or reimburse the General
Partners or their Affiliates for the cost of administrative services necessary
to the prudent operation of the Partnership, provided that such reimbursement
will be at the lower of (A) the actual cost to the General Partners or their
Affiliates of providing such services, or (B) 90% of the amount the Partnership
would be required to pay to non affiliated persons rendering similar services in
the same or comparable geographical location. The cost of administrative
services as used in this subsection shall mean the pro rata cost of personnel,
including an allocation of overhead directly attributable to such personnel,
based on the amount of time such personnel spent on such services, or other
method of allocation acceptable to the program's independent certified public
accountant.
10.16 Non-reimbursable Expenses. The General Partners will pay and will not
be reimbursed by the Partnership for any general or administrative overhead
incurred by the General Partners in connection with the administration of the
Partnership which is not directly attributable to services authorized by
Sections 10.15 or 10.17.
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10.17 Operating Expenses. Subject to Sections 10.14 and 10.15 and 10.16 all
expenses of the Partnership shall be billed directly to and paid by the
Partnership which may include, but are not limited to: (i) all salaries,
compensation, travel expenses and fringe benefits of personnel employed by the
Partnership and involved in the business of the Partnership. including persons
who may also be employees of the General Partners or Affiliates of the General
Partners, but excluding control persons of either the General Partners or
Affiliates of the General Partners, (ii) all costs of borrowed money, taxes and
assessments on Partnership properties foreclosed upon and other taxes applicable
to the Partnership, (iii) legal, audit, accounting, and brokerage fees, (iv)
printing, engraving and other expenses and taxes incurred in connection with the
issuance, distribution, transfer, registration and recording of documents
evidencing ownership of an interest in the Partnership or in connection with the
business of the Partnership, (v) fees and expenses paid to leasing agents,
consultants, real estate brokers, insurance brokers, and other agents, (vi)
costs and expenses of foreclosures, insurance premiums, real estate brokerage
and leasing commissions and of maintenance of such property, (vii) the cost of
insurance as required in connection with the business of the Partnership, (viii)
expenses of organizing, revising, amending, modifying or terminating the
Partnership, (ix) expenses in connection with distributions made by the
Partnership, and communications, bookkeeping and clerical work necessary in
maintaining relations with the Limited Partners and outside parties, including
the cost of printing and mailing to such persons certificates for Units and
reports of meetings of the Partnership, and of preparation of proxy statements
and solicitations of proxies in connection therewith, (x) expenses in connection
with preparing and mailing reports required to be furnished to the Limited
Partners for investor, tax reporting or other purposes, or other reports to the
Limited Partners which the General Partners deem to be in the best interests of
the Partnership, (xi) costs of any accounting, statistical or bookkeeping
equipment and services necessary for the maintenance of the books and records of
the Partnership including, but not limited to, computer services and time, (xii)
the cost of preparation and dissemination of the information relating to
potential sale, refinancing or other disposition of Partnership property, (xiii)
costs incurred in connection with any litigation in which the Partnership is
involved, as well as in the examination, investigation or other proceedings
conducted by any regulatory agency with jurisdiction over the Partnership
including legal and accounting fees incurred in connection therewith. (xiv)
costs of any computer services used for or by the Partnership, (xv) expenses of
professionals employed by the Partnership in connection with any of the
foregoing, including attorneys, accountants and appraisers. For the purposes of
Sections 10.17(i), a control person is someone holding a 5% or greater equity
interest in the General Partners or Affiliate or a person having the power to
direct or cause the direction of the General Partners or Affiliate, whether
through the ownership of voting securities, by contract or otherwise.
10.18 Deferral of Fees and Expense Reimbursement. The General Partners may
defer payment of any fee or expense reimbursement provided for herein. The
amount so deferred shall be treated as a non-interest bearing debt of the
Partnership and shall be paid from any source of funds available to the
Partnership, including cash available for Distribution prior to the
distributions to Limited Partners provided for in Article 5.
10.19 Payment upon Termination. Upon the occurrence of a terminating event
specified in Article 9 of the termination of an affiliate's agreement, any
portion of any reimbursement or interest in the Partnership payable according to
the provisions of this Agreement if accrued, but not yet paid, shall be paid by
the Partnership to the General Partners or Affiliates in cash, within thirty
(30) days of the terminating event or termination date set forth in the written
notice of termination.
ARTICLE 11
ARBITRATION
11.1 Arbitration. As between the parties hereto, all questions as to rights
and obligations arising under the terms of this Agreement are subject to
arbitration, including any question concerning any right or duty under the
Securities Act of 1933, the Securities Exchange Act of 1934 and the securities
laws of any state in which Units are offered, and such arbitration shall be
governed by the rules of the American Arbitration Association.
11.2 Demand for Arbitration. If a dispute should arise under this
Agreement, any Partner may within 60 days make a demand for arbitration by
filing a demand in writing with the General Partners.
11.3 Appointment of Arbitrators. The parties may agree upon one arbitrator,
but in the event that they cannot agree, there shall be three, one named in
writing by each of the parties within five (5) days after demand for arbitration
is given and a third chosen by the two appointed. Should either party refuse or
neglect to join in the appointment of the arbitrator(s) or to furnish the
arbitrator(s) with any papers or information demanded, the arbitrator(s) are
empowered by both parties to proceed ex parte.
11.4 Hearing. Arbitration shall take place in San Mateo, California, and
the hearing before the arbitrator(s) of the matter to be arbitrated shall be at
the time and place within said city as is selected by the arbitrator(s). The
arbitrator(s) shall select such time and place promptly after his (or their)
appointment and shall give written notice thereof to each party at least sixty
(60) days prior to the date so fixed. At the hearing any relevant evidence may
be presented by either party, and the formal rules of evidence applicable to
judicial proceedings shall not govern. Evidence may be admitted or excluded in
the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and
determine the matter and shall execute and acknowledge their award in writing
and cause a copy thereof to be delivered to each of the parties.
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11.5 Arbitration Award. If there is only one arbitrator, his decision shall
be binding and conclusive on the parties, and if there are three arbitrators the
decision of any two shall be binding and conclusive. The submission of a dispute
to the arbitrator(s) and the rendering of his (or their) decision shall be a
condition precedent to any right of legal action on the dispute. A judgment
confirming the award of the arbitrator(s) may be rendered by any Court having
Jurisdiction; or such Court may vacate, modify, or correct the award in
accordance with the prevailing sections of California State Law.
11.6 New Arbitrators. If three arbitrators are selected under the foregoing
procedure but two of the three fail to reach an Agreement in the determination
of the matter in question, the matter shall be decided by three new arbitrators
who shall be appointed and shall proceed in the same manner, and the process
shall be repeated until a decision is finally reached by two of the three
arbitrators selected.
11.7 Costs of Arbitration. The costs of such arbitration shall be borne by
the losing party or in such proportions as the arbitrators shall determine.
ARTICLE 12
MISCELLANEOUS
12.1 Covenant to Sign Documents. Without limiting the power granted by
Sections 2.8 and 2.9, each Partner covenants, for himself and his successors and
assigns, to execute, with acknowledgment or verification, if required, any and
all certificates, documents and other writings which may be necessary or
expedient to form the Partnership and to achieve its purposes, including,
without limitation, the Certificate of Limited Partnership and all amendments
thereto, and all such filings, records or publications necessary or appropriate
laws of any jurisdiction in which the Partnership shall conduct its business.
12.2 Notices. Except as otherwise expressly provided for in this Agreement,
all notices which any Partner may desire or may be required to give any other
Partners shall be in writing and shall be deemed duly given when delivered
personally or when deposited in the United States mail, first-class postage
pre-paid. Notices to Limited Partners shall be addressed to the Limited Partners
at the last address shown on the Partnership records. Notices to the General
Partners or to the Partnership shall be delivered to the Partnership's principal
place of business, as set forth in Section 2.3 above or as hereafter charged as
provided herein. Notice to any General Partner shall constitute notice to all
General Partners.
12.3 Right to Engage in Competing Business. Nothing contained herein shall
preclude any Partner from purchasing or lending money upon the security of any
other property or rights therein, or in any manner investing in, participating
in, developing or managing any other venture of any kind, without notice to the
other Partners, without participation by the other Partners, and without
liability to them or any of them. Each Limited Partner waives any right he may
have against the General Partners for capitalizing on information received as a
consequence of the General Partners management of the affairs of this
Partnership.
12.4 Amendment. This Agreement is subject to amendment by the affirmative
vote of a Majority of the Limited Partners in accordance with Section 4.7,
provided, however, that no such amendment shall be permitted if the effect of
such amendment would be to increase the duties or liabilities of any Partner or
materially change any Partner's interest in Profits, Losses, Partnership assets,
distributions, management rights or voting rights, except as agreed by that
Partner. In addition, and notwithstanding anything to the contrary contained in
this Agreement the General Partners shall have the right to amend this
Agreement, without the vote or consent of any of the Limited Partnership, when:
(a) There is a change in the name of the Partnership or the amount of the
contribution of any Limited Partner;
(b) A Person is substituted as a Limited Partner;
(c) An additional Limited Partner is admitted;
(d) A Person is admitted as a successor or additional General Partner in
accordance with the terms of this Agreement;
(e) A General Partner retires, dies, files a petition in bankruptcy,
becomes insane or is removed, and the Partnership business is continued by a
remaining or replacement General Partner;
(f) There is a change in the character of the business of the Partnership;
(g) There is a change in the time as stated in the Agreement for the
dissolution of the Partnership, or the return of a Partnership contribution;
233
(h) To cure any ambiguity, to correct or supplement any provision which may
be inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under this Agreement which will not be
inconsistent with the provisions of this Agreement;
(i) To delete or add any provision of this Agreement required to be so
deleted or added by the Staff of the Securities and Exchange Commission or by a
State "Blue Sky" Administrator or similar official, which addition or deletion
is deemed by the Administrator or official to be for the benefit or protection
of the Limited Partners;
(j) To elect for the Partnership to be governed by any successor California
statute governing limited partnerships; and
(k) To modify provisions of this Agreement as noted in Sections 1.3 and 5.6
to cause this Agreement to comply with Treasury Regulation Section 1.704-1(b).
The General Partners shall notify the Limited Partners within a reasonable
time of the adoption of any such amendment.
12.5 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and supersedes any and all prior agreements and
representations, either oral or in writing, between the parties hereto with
respect to the subject matter contained herein.
12.6 Waiver. No waiver by any party hereto of any breach of, or default
under, this Agreement by any other party shall be construed or deemed a waiver
of any other breach of or default under this Agreement, and shall not preclude
any party from exercising or asserting any rights under this Agreement with
respect to any other.
12.7 Severability. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
12.8 Application of California law; Venue. This Agreement and the
application or interpretation thereof shall be governed, construed, and enforced
exclusively by its terms and by the law of the State of California and the
appropriate Courts in the County of San Mateo, State of California shall be the
appropriate forum for any litigation arising hereunder.
12.9 Captions. Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit, extend or describe the scope of this Agreement.
12.10 Number and Gender. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders.
12.11 Counterparts. This Agreement may be executed in counterparts, any or
all of which may be signed by a General Partner on behalf of the Limited
Partners as their attorney-in-fact.
12.12 Waiver of Action for Partition. Each of the parties hereto
irrevocably waives during the term of the Partnership any right that it may have
to maintain any action for partition with respect to any property of the
Partnership.
12.13 Defined Terms. All terms used in this Agreement which are defined in
the Prospectus of Redwood Mortgage Investors VIII, dated July 9, 2003 shall have
the meanings assigned to them in said Prospectus, unless this Agreement shall
provide for a specific definition in Article 1.
12.14 Assignability. Each and all of the covenants, terms, provisions and
arguments herein contained shall be binding upon and inure to the benefit of the
successors and assigns of the respective parties hereto, subject to the
requirements of Article 7.
234
IN WITNESS WHEREOF, the parties hereto have hereunto set their hand the day
and year first above written.
GENERAL PARTNERS:
------------------------------------
Michael R. Burwell
GYMNO CORPORATION
A California Corporation
By:
--------------------------------
Michael R. Burwell, President
REDWOOD MORTGAGE CORP.
A California Corporation
By:
--------------------------------
Michael R. Burwell, President
LIMITED PARTNERS: GYMNO CORPORATION
(General Partner and Attorney-in-Fact)
By:
---------------------------------
Michael R. Burwell, President
235
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
REDWOOD MORTGAGE INVESTORS VIII
A California Limited Partnership
The undersigned hereby applies to become a limited partner in REDWOOD
MORTGAGE INVESTORS VIII, a California limited partnership (the "partnership"),
and subscribes to purchase the number of units specified herein in accordance
with the terms and conditions of the limited partnership agreement attached as
Exhibit A to the prospectus dated July 9, 2003.
1. Representations and Warranties. The undersigned represents and warrants
to the partnership and its general partners as follows:
(a) I have received, read and understand the prospectus dated July 9, 2003,
and in making this investment I am relying only on the information provided
therein. I have not relied on any statements or representations inconsistent
with those contained in the prospectus.
(b) I, or the fiduciary account for which I am purchasing, meet the
applicable suitability standards and financial requirements set forth in the
prospectus under "INVESTOR SUITABILITY STANDARDS" as they pertain to the state
of my primary residence and domicile.
(c) I am aware that this subscription may be rejected in whole or in part
by the general partners in their sole and absolute discretion; that my
investment, if accepted, is subject to certain risks described in part in "RISKS
AND OTHER FACTORS" set forth in the prospectus; and that there will be no public
market for units, and accordingly, it may not be possible for me to readily
liquidate my investment in the partnership.
(d) I have been informed by the participating broker-dealer firm specified
herein, if any, of all pertinent facts relating to the lack of liquidity or
marketability of this investment. I understand that units may not be sold or
otherwise disposed of without the prior written consent of the general partners,
which consent may be granted or withheld in their sole discretion, that any
transfer is subject to numerous other restrictions described in the prospectus
and in the limited partnership agreement, and that if I am a resident of
California or if the transfer occurs in California, any such transfer is also
subject to the prior written consent of the California Commissioner of
Corporations. I have liquid assets sufficient to assure myself that such
purchase will cause me no undue financial difficulties and that I can provide
for my current needs and possible personal contingencies, or if I am the trustee
of a retirement trust, that the limited liquidity of the units will not cause
difficulty in meeting the trust's obligations to make distributions to plan
participants in a timely manner.
(e) I am of the age of majority (as established in the state in which I am
domiciled) if I am an individual, and in any event, I have full power, capacity,
and authority to enter into a contractual relationship with the partnership. If
acting in a representative or fiduciary capacity for a corporation, partnership
or trust, or as a custodian or agent for any person or entity, I have full power
or authority to enter into this subscription agreement in such capacity and on
behalf of such corporation, partnership, trust, person or entity.
(f) By virtue of my own investment acumen and experience or financial
advice from my independent advisors (other than a person receiving commissions
by reason of my purchase of units), I am capable of evaluating the risks and
merits of an investment in the partnership.
(g) I am buying the units solely for my own account, or for the account of
a member or members of my immediate family or in a fiduciary capacity for the
account of another person or entity and not as an agent for another.
(h) I acknowledge and agree that counsel representing the partnership, the
general partners and their affiliates does not represent me and shall not be
deemed under the applicable codes of professional responsibility to have
represented or to be representing me or any of the limited partners in any
respect.
(i) If I am buying the units in a fiduciary capacity or as a custodian for
the account of another person or entity, I have been directed by that person or
entity to purchase the unit(s), and such person or entity is aware of my
purchase of units on their behalf, and consents thereto and is aware of the
merits and risks involved in the investment in the partnership.
236
By making these representations, the subscriber has not waived any right of
action available under applicable federal or state securities laws including but
not limited to the Securities Act of 1933.
2. Power of Attorney. The undersigned hereby irrevocably constitutes and
appoints the general partners, and each of them, either one acting alone, as his
true and lawful attorney-in-fact, with full power and authority for him, and in
his name, place and stead, to execute, acknowledge, publish and file:
(a) The limited partnership agreement and any amendments thereto or
cancellations thereof required under the laws of the State of California;
(b) Any other instruments, and documents as may be required by, or may be
appropriate under, the laws of any state or other jurisdiction in which the
partnership is doing or intends to do business; and
(c) Any documents which may be required to effect the continuation of the
partnership, the admission of an additional or substituted limited partner, or
the dissolution and termination of the partnership.
The power of attorney granted above is a special power of attorney coupled
with an interest, is irrevocable, and shall survive the death or incapacity of
the undersigned or, if the undersigned is a corporation, partnership, trust or
association, the dissolution or termination thereof. The power of attorney shall
also survive the delivery of an assignment of units by a limited partner;
provided, that where the assignee thereof has been approved by the general
partners for admission to the partnership as a substituted limited partner, such
power of attorney shall survive the delivery of such assignment for the sole
purpose of enabling the general partners to execute, acknowledge, file and
record any instrument necessary to effect such substitution.
3. Acceptance. This subscription agreement will be accepted or rejected by
a general partner within thirty (30) days of its receipt by the partnership.
Upon acceptance, this subscription will become irrevocable, and will obligate
the undersigned to purchase the number of units specified herein, for the
purchase price of $1 per unit. The general partners will return a countersigned
copy of this subscription agreement to accepted subscribers, which copy
(together with my canceled check) will be evidence of my purchase of units.
4. Payment of Subscription Price. The full purchase price for units is $1
per unit, payable in cash concurrently with delivery of this subscription
agreement. I understand that my subscription funds will be held by the general
partners until my funds are needed by the partnership to fund a mortgage
investment or for other proper partnership purposes, and only then will I
actually be admitted to the partnership. In the interim, my subscription funds
will earn interest at passbook savings accounts rates. If I elect to receive
monthly, quarterly or annual cash distributions, then such interest will be
returned to me after I am admitted to the partnership. If I elect to allow my
share of partnership income to be paid in the form of additional units that will
be reinvested by the partnership, then such interest will be invested in the
partnership in which case I understand that the number of units I initially
subscribed for will be increased accordingly. If I initially elect to receive
additional units and reinvest my share of partnership income, I may after three
(3) years change my election and receive monthly, quarterly or annual cash
distributions. I understand that if I initially elect to receive monthly,
quarterly or annual cash distributions, my election to receive cash
distributions is irrevocable. However, I understand that I may change whether I
receive such distributions on a monthly, quarterly or annual basis.
5. THE UNDERSIGNED AGREES TO INDEMNIFY AND HOLD REDWOOD MORTGAGE INVESTORS
VIII, A CALIFORNIA LIMITED PARTNERSHIP, AND ITS GENERAL PARTNERS AND OTHER
AGENTS AND EMPLOYEES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LIABILITIES, AND DAMAGES, INCLUDING, WITHOUT LIMITATION, ALL ATTORNEYS' FEES
WHICH SHALL BE PAID AS INCURRED) WHICH ANY OF THEM MAY INCUR, IN ANY MANNER OR
TO ANY PERSON, BY REASON OF THE FALSITY, INCOMPLETENESS OR MISREPRESENTATION OF
ANY INFORMATION FURNISHED BY THE UNDERSIGNED HEREIN OR IN ANY DOCUMENT SUBMITTED
HEREWITH.
237
6. Signature. The undersigned represents that: (a) I have read the
foregoing and that all the information provided by me is accurate and complete;
and (b) I will notify the general partners immediately of any material adverse
change in any of the information set forth herein which occurs prior to the
acceptance of my subscription.
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VIII
SUBSCRIPTION AGREEMENT
PLEASE READ THIS AGREEMENT BEFORE SIGNING
Type Of Ownership: (check one)
[ ] INDIVIDUAL * [ ] SEP/IRA
(Investor and Custodian
[ ] TRUST (Trustee signature required) must sign)
(Title page and signature pages
of the Trust Agreement MUST be [ ] PENSION PLAN (Trustee
enclosed) signature required)
* [ ] JOINT TENANTS WITH RIGHT OF [ ] PROFIT SHARING PLAN
SURVIVORSHIP (Trustee signature
(All parties must sign) required)
* [ ] COMMUNITY PROPERTY [ ] KEOGH (H.R.10)
(Custodian signature
* [ ] TENANTS IN COMMON required)
(All parties must sign)
[ ] CUSTODIAL/UGMA (circle one)
* [ ] IRA (INDIVIDUAL RETIREMENT (Custodian signature
ACCOUNT) required)
(Investor and Custodian must sign)
[ ] TOD - Transfer On Death
* [ ] ROTH IRA (must be titled as an
(Investor and Custodian must sign) Individual or as Joint
Tenants only - special form
required)
[ ] OTHER (Please describe)
--------------------------------
--------------------------------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable.
- --------------------------------------------------------------------------------
238
1. INVESTOR NAME Type or print your name(s) exactly as the title
AND ADDRESS should appear in the account records of the
partnership. Complete this section for all
trusts other than IRA/Keogh or other qualified
plans. If IRA/Keogh or qualified plan, Section 2
must also be completed. All checks and
correspondence will go to this address unless
another address is listed in Sections 2 or 5 below.
---------------------------------------------------
Name as it will appear on the account (How title
should be held)
---------------------------------------------------
(Additional Name(s) if held in joint tenancy,
community property, tenants-in-common)
---------------------------------------------------
Street Address
---------------------------------------------------
City State Zip Code
------------------- ---------------------------
Home Phone Number Social Security#/TaxpayerID#
A social security number or taxpayer identification number is required for
each individual investor. (For IRAs, Keoghs (HR10) and qualified plans, the
taxpayer identification number is your plan or account tax or employer
identification number. For most individual taxpayers, it is your social security
number. NOTE: If the units are to be held in more than one name, only one number
will be used and will be that of the first person listed).
2. CUSTODIAN/TRUST
COMPANY REGISTRATION Name of Custodian/Trust Company or
Plan Administrator:
-----------------------------------
Please print here the exact name of
Custodian/Trust Company or Plan
Administrator
-----------------------------------------------
Address
-----------------------------------------------
City State Zip Code
-----------------------------------------------
Taxpayer ID# Client Account Number
SIGNATURE:
------------------------------------
(X) (Custodian/Trust Company or
Plan Administrator)
239
3. INVESTMENT Number of units to be purchased ---------
Minimum subscription is 2,000
units at $1 per unit ($2,000, Amount of payment enclosed ---------
with additional investments
of any amount with minimum of
1,000 units ($1,000) for
existing limited partners.
Please make check payable to "Redwood Mortgage Investors VIII"
If the investor has elected to compound his share of monthly, quarterly or
annual income (see 4. below), then the interest earned on subscription funds
until admission to the partnership will be invested in additional units on
behalf of the investor; therefore, the actual number of units to be issued to
the investor upon admission to the partnership will be increased.
Check one: [ ] Initial Investment [ ] Additional Investment*
*A completed Subscription Agreement is required for each initial and
additional investment
4. DISTRIBUTIONS Does the investor wish to have his income compounded or
distributed?
Check One: [ ] Compounded or [ ] Distributed
If income is to be distributed:
Check One: [ ] Monthly [ ] Quarterly [ ] **Annually
(**payable only on 12/31)
The election to compound income may only be changed after three (3) years.
5. SPECIAL ADDRESS FOR
CASH DISTRIBUTIONS -----------------------------------------------
(If the same as in 2, Name Client Account #
please disregard)
-----------------------------------------------
Address
-----------------------------------------------
City State Zip Code
If cash distributions are to be sent to a money market or other account at
an address other than that listed, please enter that account number and address
here. All other communications will be mailed to the investor's registered
address of record under Sections 1 or 2, or to the alternate address listed in
Section 5 above. In no event will the partnership or its affiliates be
responsible for any adverse consequences of direct deposits.
DIRECT DEPOSIT Check one: Checking: [ ] Savings: [ ]
Account # ABA (Routing) #
------------- -----------------
(Must attach original voided check for checking account deposits, deposit
slip for savings account deposits)
6. SIGNATURES IN WITNESS WHEREOF, the undersigned has executed
below this day of , 20 , at
------ ------------ ---
(City)
---------------------------------
Investor's primary residence is in
(State)
--------------------------
(X)
------------------------------------------------------
(Investor Signature and Title)
(X)
------------------------------------------------------
(Investor Signature and Title)
240
7. BROKER-DEALER DATA The undersigned broker-dealer hereby certifies
(To be completed by that (i) a copy of the prospectus, as amended
selling broker-dealer) and/or supplemented to date, has been delivered
to the above investor; and (ii) that the
appropriate suitability determination as set
forth in the prospectus has been made and that
the appropriate records are being maintained.
(X)
-----------------------------------------------
Broker-Dealer Authorized Signature (Required on
all orders)
Broker-Dealer Name: --------------------------------
Street Address: --------------------------------
City, State, Zip Code: --------------------------------
Registered Representative
Name (Last, First): --------------------------------
Street Address: --------------------------------
City, State, Zip Code --------------------------------
Phone No.: --------------------------------
The registered representative, by signing below, certifies
that he has reasonable grounds to believe, on the basis of
information obtained from the investor concerning his
investment objectives, other investments, financial situa-
tion and needs and any other information known by the
selling broker-dealer, that investment in the units is
suitable for the investor and that suitability records are
being maintained; and that he has informed the investor of
all pertinent facts relating to the liquidity and market-
ability of the units.
Registered Representative's Signature:
(X)
---------------------------------------------------
8. ACCEPTANCE This subscription accepted
This subscription will not be
an effective agreement until REDWOOD MORTGAGE INVESTORS VIII,
it or a facsimile is signed by A California Limited Partnership
a general partner of Red- wood P.O. Box 5096
Mortgage Investors VIII, a Redwood City, California 94063
California limited partnership
(650) 365-5341
By:
----------------------------------
(Office Use Only)
Partner #: Date Entered:
-------- ----------
Check Amount: $ Check Date:
-------- ----------
Check Number:
--------
241
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
COMMISSIONER'S RULE 260.141.11
260.141.11 Restriction on Transfer
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a
copy of this section to be delivered to each issuee or transferee of such
security.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the Code
or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferor's ancestors,
descendants or spouse; or to a transferee by a trustee or custodian for the
account of the transferee or the transferee's ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as
such or as a finder) to a resident of a foreign state, territory or country who
is neither domiciled in this state to the knowledge of the broker-dealer, nor
actually present in this state if the sale of such securities is not in
violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule is not required;
(10) by way of a sale qualified under Sections 25111, 25112, or 25113, or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or Subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or
by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or 25113
of the Code, provided that no order under Section 25140 or Subdivision (a) of
Section 25148 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state, if, in either
such case, such person (i) discloses to potential purchasers at the sale that
transfer of the securities is restricted under this rule, (ii) delivers to each
purchaser a copy of this rule, and (iii) advises the Commissioner of the name of
each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities, provided that
any such transfer is on the condition that any certificate evidencing the
security issued to such transferee shall contain the legend required by this
section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
242
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
UNSOLICITED SALES
The undersigned hereby applies to become a limited partner in REDWOOD
MORTGAGE INVESTORS VIII, a California limited partnership (the "partnership"),
and subscribes to purchase the number of units specified herein in accordance
with the terms and conditions of the limited partnership agreement attached as
Exhibit A to the prospectus dated July 9, 2003.
1. Representations and Warranties. The undersigned represents and warrants
to the partnership and its general partners as follows:
(a) I have received, read and understand the prospectus dated July 9, 2003,
and in making this investment I am relying only on the information provided
therein. I have not relied on any statements or representations inconsistent
with those contained in the prospectus.
(b) I, or the fiduciary account for which I am purchasing, meet the
applicable suitability standards and financial requirements set forth in the
prospectus under "INVESTOR SUITABILITY STANDARDS" as they pertain to the state
of my primary residence and domicile.
(c) I am aware that this subscription may be rejected in whole or in part
by the general partners in their sole and absolute discretion; that my
investment, if accepted, is subject to certain risks described in part in "RISKS
AND OTHER FACTORS" set forth in the prospectus; and that there will be no public
market for units, and accordingly, it may not be possible for me to readily
liquidate my investment in the partnership.
(d) I have been informed by the registered investment advisor ("advisor")
or participating broker-dealer firm specified herein, if any, of all pertinent
facts relating to the lack of liquidity or marketability of this investment. I
understand that units may not be sold or otherwise disposed of without the prior
written consent of the general partners, which consent may be granted or
withheld in their sole discretion, that any transfer is subject to numerous
other restrictions described in the prospectus and in the limited partnership
agreement, and that if I am a resident of California or if the transfer occurs
in California, any such transfer is also subject to the prior written consent of
the California Commissioner of Corporations. I have liquid assets sufficient to
assure myself that such purchase will cause me no undue financial difficulties
and that I can provide for my current needs and possible personal contingencies,
or if I am the trustee of a retirement trust, that the limited liquidity of the
units will not cause difficulty in meeting the trust's obligations to make
distributions to plan participants in a timely manner.
(e) I am of the age of majority (as established in the state in which I am
domiciled) if I am an individual, and in any event, I have full power, capacity,
and authority to enter into a contractual relationship with the partnership. If
acting in a representative or fiduciary capacity for a corporation, partnership
or trust, or as a custodian, or agent for any person or entity. I have full
power or authority to enter into this subscription agreement in such capacity
and on behalf of such corporation, partnership, trust, person or entity;
(f) By virtue of my own investment acumen and experience or financial
advice from my independent advisors (other than a person receiving commissions
by reason of my purchase of units), I am capable of evaluating the risks and
merits of an investment in the partnership.
(g) I am buying the units solely for my own account, or for the account of
a member or members of my immediate family or in a fiduciary capacity for the
account of another person or entity and not as an agent for another.
(h) I acknowledge and agree that counsel representing the partnership, the
general partners and their affiliates does not represent me and shall not be
deemed under the applicable codes of professional responsibility to have
represented or to be representing me or any of the limited partners in any
respect.
(i) If I am buying the units in a fiduciary capacity or as a custodian for
the account of another person or entity, I have been directed by that person or
entity to purchase the unit(s), and such person or entity is aware of my
purchase of units on their behalf, and consents thereto and is aware of the
merits and risks involved in the investment in the partnership.
(j) If I have used the services of an advisor in connection with my
acquisition of units, I understand that I may, but am not obligated to,
authorize the partnership to pay any client fees owing to my advisor based upon
the outstanding balance in my capital account and payable from cash
distributions payable to me either in the form of cash or units. I further
understand and acknowledge that if I elect to have such client fees paid through
243
the partnership I will receive less cash or units, as applicable, from
distributions than an investor who does not pay such client fees or does not pay
such client fees through the partnership. Further, I understand and acknowledge,
that the partnership and the general partners are merely, as an administrative
convenience, making such payments of client fees to the advisor, and shall have
no liability as a result thereof.
(k) If I authorize the partnership to pay any client fees pursuant to the
terms of the authorization to make payments of client fees (the "authorization")
I understand and acknowledge that neither the partnership nor the general
partners shall have any liability for disbursement. The undersigned further
acknowledges that all cash distributions by the partnership are noncumulative
and thus the obligation to pay client fees pursuant to the terms of the
authorization is noncumulative. Further, the undersigned understands that the
general partners are in no way guaranteeing that there will be sufficient cash
flow for cash distributions or that such distribution will be sufficient to make
the payments authorized by the authorization. In the event of insufficient cash
distributions, the general partners and the partnership shall have no liability
to the undersigned or their registered investment advisor.
By making these representations, the subscriber has not waived any right of
action available under applicable federal or state securities laws INCLUDING BUT
NOT LIMITED TO THE SECURITIES ACT OF 1933.
2. Power of Attorney. The undersigned hereby irrevocably constitutes and
appoints the general partners, and each of them, either one acting alone, as his
true and lawful attorney-in-fact, with full power and authority for him, and in
his name, place and stead, to execute, acknowledge, publish and file:
(a) The limited partnership agreement and any amendments thereto or
cancellations thereof required under the laws of the State of California;
(b) Any other instruments, and documents as may be required by, or may be
appropriate under, the laws of any state or other jurisdiction in which the
partnership is doing or intends to do business; and
(c) Any documents which may be required to effect the continuation of the
partnership, the admission of an additional or substituted limited partner, or
the dissolution and termination of the partnership.
The power of attorney granted above is a special power of attorney coupled
with an interest, is irrevocable, and shall survive the death or incapacity of
the undersigned or, if the undersigned is a corporation, partnership, trust or
association, the dissolution or termination thereof. The power of attorney shall
also survive the delivery of an assignment of units by a limited partner;
provided, that where the assignee thereof has been approved by the general
partners for admission to the partnership as a substituted limited partner, such
power of attorney shall survive the delivery of such assignment for the sole
purpose of enabling the general partners to execute, acknowledge, file and
record any instrument necessary to effect such substitution.
3. Acceptance. This subscription agreement will be accepted or rejected by
a general partner within thirty (30) days of its receipt by the partnership.
Upon acceptance, this subscription will become irrevocable, and will obligate
the undersigned to purchase the number of units specified herein, for the
purchase price of $1 per unit. The general partners will return a countersigned
copy of this subscription agreement to accepted subscribers, which copy
(together with my canceled check) will be evidence of my purchase of units.
4. Payment of Subscription Price. The full purchase price for units is $1
per unit, payable in cash concurrently with delivery of this subscription
agreement. I understand that my subscription funds will be held by the general
partners until my funds are needed by the partnership to fund a mortgage
investment or for other proper partnership purposes, and only then will I
actually be admitted to the partnership. In the interim, my subscription funds
will earn interest at passbook savings accounts rates. If I elect to receive
monthly, quarterly or annual cash distributions, then such interest will be
returned to me after I am admitted to the partnership. If I elect to allow my
share of partnership income to be paid in the form of additional units that will
be reinvested by the partnership, then such interest will be invested in the
partnership in which case I understand that the number of units I initially
subscribed for will be increased accordingly. If I initially elect to receive
additional units and reinvest my share of partnership income, I may after three
(3) years change my election and receive monthly, quarterly or annual cash
distributions. I understand that if I initially elect to receive monthly,
quarterly or annual cash distributions, my election to receive cash
distributions is irrevocable. However, I understand that I may change whether I
receive such distributions on a monthly, quarterly or annual basis.
5. THE UNDERSIGNED AGREES TO INDEMNIFY AND HOLD REDWOOD MORTGAGE INVESTORS
VIII, A CALIFORNIA LIMITED PARTNERSHIP, AND ITS GENERAL PARTNERS AND OTHER
AGENTS AND EMPLOYEES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LIABILITIES, AND DAMAGES, INCLUDING, WITHOUT LIMITATION, ALL ATTORNEYS' FEES
WHICH SHALL BE PAID AS INCURRED WHICH ANY OF THEM MAY INCUR, IN ANY MANNER OR TO
ANY PERSON, BY REASON OF THE FALSITY, INCOMPLETENESS OR MISREPRESENTATION OF ANY
INFORMATION FURNISHED BY THE UNDERSIGNED HEREIN OR IN ANY DOCUMENT SUBMITTED
HEREWITH.
244
6. Signature. The undersigned represents that: (a) I have read the
foregoing and that all the information provided by me is accurate and complete;
and (b) I will notify the general partners immediately of any material adverse
change in any of the information set forth herein which occurs prior to the
acceptance of my subscription.
REDWOOD MORTGAGE INVESTORS VIII
SUBSCRIPTION AGREEMENT
PLEASE READ THIS AGREEMENT BEFORE SIGNING
Type Of Ownership: (check one)
[ ] INDIVIDUAL * [ ] SEP/IRA
(Investor and Custodian
[ ] TRUST (Trustee signature required) must sign)
(Title page and signature pages
of the Trust Agreement MUST be [ ] PENSION PLAN (Trustee
enclosed) signature required)
* [ ] JOINT TENANTS WITH RIGHT OF [ ] PROFIT SHARING PLAN
SURVIVORSHIP (Trustee signature
(All parties must sign) required)
* [ ] COMMUNITY PROPERTY [ ] KEOGH (H.R.10)
(Custodian signature
* [ ] TENANTS IN COMMON required)
(All parties must sign)
[ ] CUSTODIAL/UGMA (circle one)
* [ ] IRA (INDIVIDUAL RETIREMENT (Custodian signature
ACCOUNT) required)
(Investor and Custodian must sign)
[ ] TOD - Transfer On Death
* [ ] ROTH IRA (must be titled as an
(Investor and Custodian must sign) Individual or as Joint
Tenants only - special form
required)
[ ] OTHER (Please describe)
--------------------------------
--------------------------------
* Two or more signatures required. Complete Sections 1 through 6 where
applicable.
- --------------------------------------------------------------------------------
245
1. INVESTOR NAME Type or print your name(s) exactly as the title
AND ADDRESS should appear in the account records of the
partnership. Complete this section for all
trusts other than IRA/Keogh or other qualified
plans. If IRA/Keogh or qualified plan, Section 2
must also be completed. All checks and
correspondence will go to this address unless
another address is listed in Sections 2 or 5 below.
---------------------------------------------------
Name as it will appear on the account (How title
should be held)
---------------------------------------------------
(Additional Name(s) if held in joint tenancy,
community property, tenants-in-common)
---------------------------------------------------
Street Address
---------------------------------------------------
City State Zip Code
------------------- ---------------------------
Home Phone Number Social Security#/TaxpayerID#
A social security number or taxpayer identification number is required for
each individual investor. (For IRAs, Keoghs (HR10) and qualified plans, the
taxpayer identification number is your plan or account tax or employer
identification number. For most individual taxpayers, it is your social security
number. NOTE: If the units are to be held in more than one name, only one number
will be used and will be that of the first person listed).
2. CUSTODIAN/TRUST
COMPANY REGISTRATION Name of Custodian/Trust Company or
Plan Administrator:
-----------------------------------
Please print here the exact name of
Custodian/Trust Company or Plan
Administrator
-----------------------------------------------
Address
-----------------------------------------------
City State Zip Code
-----------------------------------------------
Taxpayer ID# Client Account Number
SIGNATURE:
----------------------------------------
(X) (Custodian/Trust Company or
Plan Administrator)
246
3. INVESTMENT Number of units to be purchased ---------
Minimum subscription is 2,000
units at $1 per unit ($2,000, Amount of payment enclosed ---------
with additional investments
of any amount with minimum of
1,000 units ($1,000) for
existing limited partners.
Please make check payable to "Redwood Mortgage Investors VIII"
If the investor has elected to compound his share of monthly, quarterly or
annual income (see 4. below), then the interest earned on subscription funds
until admission to the partnership will be invested in additional units on
behalf of the investor; therefore, the actual number of units to be issued to
the investor upon admission to the partnership will be increased.
Check one: [ ] Initial Investment [ ] Additional Investment*
*A completed Subscription Agreement is required for each initial and
additional investment
4. DISTRIBUTIONS Does the investor wish to have his income compounded or
distributed?
Check One: [ ] Compounded or [ ] Distributed
If income is to be distributed:
Check One: [ ] Monthly [ ] Quarterly [ ] **Annually
(**payable only on 12/31)
The election to compound income may only be changed after three (3) years.
5. SPECIAL ADDRESS FOR
CASH DISTRIBUTIONS -----------------------------------------------
(If the same as in 2, Name Client Account #
please disregard)
-----------------------------------------------
Address
-----------------------------------------------
City State Zip Code
If cash distributions are to be sent to a money market or other account at
an address other than that listed, please enter that account number and address
here. All other communications will be mailed to the investor's registered
address of record under Sections 1 or 2, or to the alternate address listed in
Section 5 above. In no event will the partnership or its affiliates be
responsible for any adverse consequences of direct deposits.
DIRECT DEPOSIT Check one: Checking: [ ] Savings: [ ]
Account # ABA (Routing) #
----------------- ------------
(Must attach original voided check for checking account deposits, deposit
slip for savings account deposits)
6. SIGNATURES IN WITNESS WHEREOF, the undersigned has executed
below this day of , 20 , at
------ ----------- ---
(City)
---------------------------------
Investor's primary residence is in
(State)
--------------------------
(X)
------------------------------------------------------
(Investor Signature and Title)
(X)
------------------------------------------------------
(Investor Signature and Title)
247
7. ADVISOR DATA (To be completed by recommending advisor)
The undersigned advisor hereby certifies that (i) a copy of the prospectus,
as amended and/or supplemented to date, has been delivered to the above
investor; and (ii) that the appropriate suitability determination as set forth
in the prospectus has been made and that the appropriate records are being
maintained.
Advisor:
Last Name First:
------------------------------------------------------
Street Address:
------------------------------------------------------
City, State, Zip Code:
------------------------------------------------------
Broker-Dealer Affiliated? [ ]YES [ ]NO Broker-Dealer Name ____________________
Are you a registered investment advisor ("RIA") under applicable state or
federal law? [ ]YES [ ]NO
The advisor, by signing below, (1) certifies that he has reasonable grounds
to believe, on the basis of information obtained from the investor concerning
his investment objectives, other investments, financial situation and needs and
any other information known by the advisor, that investment in the units is
suitable for the investor and that suitability records are being maintained; (2)
certifies that if the advisor is affiliated with an NASD firm, that all fees
received by him in connection with this transaction will be run through the
books and records of the NASD member firm in compliance with Notice to Members
96-33 and Rules 3030 and 3040 of the NASD Conduct Rules; (3) that he has
informed the investor of all pertinent facts relating to the liquidity and
marketability of the units; (4) the undersigned agrees and acknowledges that the
general partners are relying upon the certification of the undersigned herein
with respect to the suitability of the client to purchase limited partnership
units in the partnership; (5) that if the undersigned's client has elected to
pay client fees from earnings, the undersigned hereby represents and warrants
that he is a registered investment advisor under applicable federal and/or state
securities laws; (6) that, if applicable, he understands and acknowledges that
neither the partner- ship or the general partners shall have any liability to
him with respect to any client fees paid from investors' earnings under the
authorization agreement and that the general partners and the partnership in no
way guarantee that there will be sufficient cash for distribution to investors
and, thus in the case of a signed authorization agreement, sufficient cash for
the investor to pay his client fees from earnings; and (7) that, in any dispute
between the undersigned and the investor regarding payment of client fees, the
partnership and the general partners will respect the wishes of the investor and
that the general partners and the partnership will have no liability to the
undersigned as a result thereof.
Advisor's Signature
------------------------------------------------------
Print or Type Name:
------------------------------------------------------
Please check applicable box. (Only clients of RIAs may elect to have client
fees paid, provided such client fees are no more than 2% annually of the RMI
VIII assets under management which, for purposes of this subscription agreement
is the investor's capital account.):
[ ] Yes, client fees paid. If client fees are to be paid, a completed
authorization to make payments of client fees ("authorization") attached hereto
must be completed, signed and returned to the general partners along with this
subscription agreement.
If the investor has elected to receive cash distributions, client fees will
be calculated on a monthly basis, based upon the capital account balance of the
investor at the end of the month. Such client fees will be paid to the advisor
on a monthly basis.
If the Investor has elected to reinvest their earnings in lieu of receiving
periodic cash distributions, client fees will be calculated on a monthly basis,
based upon the capital account balance of the investor at the end of the month.
Such client fees shall be paid to the advisor on a monthly basis.
[ ] No client fees paid from earnings or distributions
248
8. ACCEPTANCE This subscription will not be an effective agreement until it
is signed by a general partner of Redwood Mortgage Investors VIII, a California
limited partnership
This subscription accepted
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
P.O. Box 5096
Redwood City, California 94063
(650) 365-5341
By:
----------------------------------------
(Office Use Only)
Partner #: Date Entered:
----------- -------------
Check Amount: $ Check Date:
----------- -------------
Check Number:
-----------
249
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VIII
AUTHORIZATION TO MAKE PAYMENTS OF CLIENT FEES
FOR INVESTORS WHO UTILIZE THE SERVICES OF REGISTERED INVESTMENT ADVISORS
- --------------------------------------------------------------------------------
The undersigned limited partner hereby certifies that the undersigned is a
limited partner owning units in Redwood Mortgage Investors VIII (the
"partnership" or "RMI VIII"). By signing and delivering this authorization to
the partnership and the general partners, the undersigned hereby authorizes and
directs the partnership to pay to the person or entity set forth below as the
payee an estimated annual amount equal to _____% (not more than 2% annually) of
the undersigned's capital account ("client fees"). All client fees payable will
be calculated on a monthly basis based upon the capital account balance of the
investor at the end of the month. If the investor elected to receive periodic
cash distributions, such client fees will be paid at the same time the investor
receives distributions, either monthly, quarterly or annually. If the investor
has elected to reinvest earnings in lieu of receiving periodic cash
distributions, such client fees shall be paid to the advisor on either a
monthly, quarterly or annual basis as determined by the investor in the
completed subscription agreement. The capital accounts of the limited partners
who elect to pay client fees through the partnership will be less than the
capital accounts of limited partners who do not pay client fees or who do pay
client fees through the partnership.
The undersigned acknowledges and agrees that neither the partnership nor
the general partners shall have any liability for disbursements made pursuant to
this authorization. The undersigned acknowledges that all periodic cash
distributions by the partnership are non-cumulative. Further, the undersigned
acknowledges that the general partners are in no way guaranteeing that there
will be sufficient cash flow for periodic cash distributions or that such
distributions will be sufficient to make the payments authorized by this
agreement. In the event of insufficient earnings, the partnership and the
general partners shall have no liability to the undersigned or the payee. The
undersigned further acknowledges and agrees that the partnership is authorized
to comply with this request unless and until this authorization is expressly
revoked in writing and terminated by the undersigned limited partner. Any
revocation of this authorization shall be effective the quarter after the
quarter in which it is received by the partnership.
PAYEE 1 LIMITED PARTNER
Please designate whether Advisor or
roker/Dealer Firm
- ----------------------------------- ----------------------------------------
Name of Payee - Please Print Name of Limited Partner - Please Print
- ----------------------------------- ----------------------------------------
Authorized Signature of Payee Signature of Limited Partner (or Trustee)
- ----------------------------------- ----------------------------------------
Firm Name Signature of Joint Owner (if applicable)
- ----------------------------------- ----------------------------------------
Street Address Date of Admission
- -----------------------------------
City, State, Zip Code
Limited partners in RMI VIII (the "partnership") who utilized the services
of an advisor may authorize the direct payment by the partnership of a portion
of the earnings otherwise distributable to them or otherwise used to acquire
additional units by executing this authorization and delivering it to the
partnership. Execution of the authorization is at the option of the limited
partner and is not required in connection with an investment in the partnership.
This authorization is not intended to describe an investment in the partnership
or to be used as sales material or in any other manner in connection with the
offer or sale of units in the partnership. An offer to sell units of the
partnership may only be made by the prospectus. This document is not authorized
to be used in any way in connection with the offer or sale of units in the
partnership, and unauthorized use of this document is strictly prohibited and
may constitute a violation of federal and state securities laws.
PLEASE INCLUDE DOCUMENT WITH THE COMPLETED SUBSCRIPTION AGREEMENT
- -------------------------------
1 If the advisor is affiliated with an NASD broker-dealer firm, all fees
received by him in connection with this transaction will be run through the
books and records of the NASD member in compliance with Notice to Members 96-33
and Rules 3030 and 3040 of the NASD Conduct Rules
250
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
COMMISSIONER'S RULE 260.141.11
260.141.11 Restriction on Transfer
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a
copy of this section to be delivered to each issuee or transferee of such
security.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the Code
or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferor's ancestors,
descendants or spouse; or to a transferee by a trustee or custodian for the
account of the transferee or the transferee's ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as
such or as a finder) to a resident of a foreign state, territory or country who
is neither domiciled in this state to the knowledge of the broker-dealer, nor
actually present in this state if the sale of such securities is not in
violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule is not required;
(10) by way of a sale qualified under Sections 25111, 25112, or 25113, or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or Subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or
by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or 25113
of the Code, provided that no order under Section 25140 or Subdivision (a) of
Section 25148 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state, if, in either
such case, such person (i) discloses to potential purchasers at the sale that
transfer of the securities is restricted under this rule, (ii) delivers to each
purchaser a copy of this rule, and (iii) advises the Commissioner of the name of
each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities, provided that
any such transfer is on the condition that any certificate evidencing the
security issued to such transferee shall contain the legend required by this
section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
251
Exhibit 3.2
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
COMMISSIONER'S RULE 260.141.11
260.141.11 Restriction on Transfer
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a
copy of this section to be delivered to each issuee or transferee of such
security.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the Code
or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferor's ancestors,
descendants or spouse; or to a transferee by a trustee or custodian for the
account of the transferee or the transferee's ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as
such or as a finder) to a resident of a foreign state, territory or country who
is neither domiciled in this state to the knowledge of the broker-dealer, nor
actually present in this state if the sale of such securities is not in
violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule is not required;
(10) by way of a sale qualified under Sections 25111, 25112, or 25113, or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or Subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or
by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or 25113
of the Code, provided that no order under Section 25140 or Subdivision (a) of
Section 25148 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state, if, in either
such case, such person (i) discloses to potential purchasers at the sale that
transfer of the securities is restricted under this rule, (ii) delivers to each
purchaser a copy of this rule, and (iii) advises the Commissioner of the name of
each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities, provided that
any such transfer is on the condition that any certificate evidencing the
security issued to such transferee shall contain the legend required by this
section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
252
Exhibit 3.3 (a)
(Seal of the State of State of California Form LP-1
California) March Fong Eu
Secretary of State
CERTIFICATE OF LIMITED PARTNERSHIP
IMPORTANT-Read instructions on back before completing this form
This certificate is presented for filing purposes pursuant to Section 15621, California Corporations Code.
- -----------------------------------------------------------------------------------------------------------------------------------
1. NAME OF LIMITED PARTNERSHIP
Redwood Mortgage Investors VIII, a California limited partnership
- -----------------------------------------------------------------------------------------------------------------------------------
2. STREET ADDRESS OF PRINCIPAL EXECUTIVE OFFICE CITY AND STATE ZIP CODE
650 El Camino Real, Suite G Redwood City, CA 94063
- -----------------------------------------------------------------------------------------------------------------------------------
3. STREET ADDRESS OF CALIFORNIA OFFICE IF EXECUTIVE OFFICE IS IN ANOTHER STATE CITY ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
4. Complete if limited partnership was formed prior to July 1, 1984 and is in existence on date this certificate is executed.
- -----------------------------------------------------------------------------------------------------------------------------------
5. ORIGINAL LIMITED PARTNERSHIP WAS RECORDED ON____________________19______, WITH THE
RECORDER OF ___________________________COUNTY. FILE OR RECORDATION NUMBER_________________________
- -----------------------------------------------------------------------------------------------------------------------------------
6. NAMES AND ADDRESS OF ALL GENERAL PARTNERS (CONTINUE ON SECOND PAGE IF NECESSARY)
NAME: D. Russell Burwell NAME: Gymno Corporation, a California Corporation
ADDRESS: 650 El Camino Real, Suite G ADDRESS: 650 El Camino Real, Suite G
CITY: Redwood City STATE: CA ZIP CODE: 94063 CITY: Redwood City STATE: CA ZIP CODE: 94063
- --------------------------------------------------------------------- -------------------------------------------------------------
NAME: Michael R. Burwell NAME:
ADDRESS: 650 El Camino Real, Suite G ADDRESS:
CITY: Redwood City STATE: CA ZIP CODE: 94063 CITY:
- --------------------------------------------------------------------- -------------------------------------------------------------
NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS
NAME: Stephen C. Ryan, Esq.
ADDRESS: 235 Montgomery Street, Suite 450 CITY: San Francisco STATE: ca ZIP CODE: 94104
- -----------------------------------------------------------------------------------------------------------------------------------
7. Other matters to be included in this 8. INDICATE THE NUMBER OF GENERAL PARTNERS
CERTIFICATE MAY STATED ON SEPARATE PAGES SIGNATURES REQUIRED FOR FILING CERTIFICATE OF
AND BY REFERENCE HEREIN ARE PART OF THIS AMENDMENT, DISSOLUTION, CONTINUATION AND
CERTIFICATE. CANCELLATION.
NUMBER OF GENERAL PARTNER(S) SIGNATURE (S)
NUMBER OF PAGES ATTACHED: 0 IS/ARE 1
- --------------------------------------------------------------------- -------------------------------------------------------------
It is hereby declared that I am (we are) the perSON(S) WHO EXECUTED THIS SPACE FOR FILING
THIS CERTIFICATE OF LIMITED PARTNERSHIP WHICH EXECUTION IS MY (OUR) OFFICER USE
ACT AND DEED. (SEE INSTRUCTIONS)
/s/ D. Russell Burwell 5/21/92 /s/ D. Russell Burwell 5/21/92 9215400002
- ------------------------------- -------------------------------
D. Russell Burwell Gymno Corporation (General Partner)
a California Corporation,
its: President
/s/ Michael R. Burwell 5/21/92 FILED
- -------------------------------
Michael R. Burwell, General Partner In the office of the
TITLE DATE POSITION OR TITLE Secretary of State
===================================================================================================
===================================================================================================
RETURN ACKNOWLEDEMENT TO: May 27, 1992
/s/ March Fong Eu
Stephen C. Ryan, Esq. March Fong Eu
Wilson, Ryan & Campilongo SECRETARY OF STATE
235 Montgomery Street, Suite 450
San Francisco, CA 94104
==================================================================================================================================
253
- -------------------------------------------------------------------------------
Exhibit 3.3 (b)
(Seal of the State of State of California FILED
California) Secretary of State In the office of the
Bill Jones Secretary of State
Of the State of California
AMENDMENT TO CERTIFICATE OF LIMITED PARTNERSHIP
March 14, 2000
A $30.00 filing fee must accompany this form.
IMPORTANT - Read instructions before completing this form /s/ Bill Jones
BILL JONES,
Secretary of State
This space for filing use only
- -----------------------------------------------------------------------------------------------------------------------------------
1. SECRETARY OF STATE FILE NUMBER 2. NAME OF LIMITED PARTNERSHIP
199215400002 Redwood Mortgage Investors VIII, a California Limited Partnership
- --------------------------------------------------- -------------------------------------------------------------------------------
3. COMPLETE ONLY THE BOXES WHERE INFORMATION IS BEING CHANGED. ADDITIONAL PAGES MAY BE ATTACHED IF NECESSARY
- -----------------------------------------------------------------------------------------------------------------------------------
A. LIMITED PARTNERSHIP NAME (END THE NAME WITH THE WORDS "LIMITED PARTNERSHIP" OR THE ABBREVIATION "L.P."
- -----------------------------------------------------------------------------------------------------------------------------------
B. THE STREET ADDRESS OF THE PRINCIPAL OFFICE
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
C. THE STREET ADDRESS IN CALIFORNIA WHERE RECORDS ARE KEPT
STREET ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
D. THE ADDRESS OF THE GENERAL PARTNER (S)
NAME
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
E. NAME CHANGE OF A GENERAL PARTNER FROM TO
- -----------------------------------------------------------------------------------------------------------------------------------
F. GENERAL PARTNER(S) CESSATION
- -----------------------------------------------------------------------------------------------------------------------------------
G. GENERAL PARTNER ADDED
NAME Redwood Mortgage Corp.
ADDRESS 650 El Camino Real, Suite G
CITY Redwood City STATE CA ZIP CODE 94063
- -----------------------------------------------------------------------------------------------------------------------------------
H. THE PERSON(S) AUTHORIZED TO WIND UP AFFAIRS OF THE LIMITED PARTNERSHIP
NAME
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
I. THE NAME OF THE AGENT FOR SERVICE TO PROCESS
- -----------------------------------------------------------------------------------------------------------------------------------
J. IF AN INDIVIDUAL, CALIFORNIA STREET ADDRESS OF THE AGENT FOR SERVICE OF PROCESS
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
K. NUMBER OF GENERAL PARTNERS' SIGNATURES REQUIRED FOR FILING CERTIFICATE OF AMENDMENT,
REINSTATEMENT, MERGER, DISSOLUTION, CONTINUATION AND CANCELLATION |_|
- -----------------------------------------------------------------------------------------------------------------------------------
L. OTHER MATTERS (ATTACH ADDITIONAL PAGES IF NECESSARY).
- -----------------------------------------------------------------------------------------------------------------------------------
4. TOTAL NUMBER OF PAGES ATTACHED IF ANY 0
- -----------------------------------------------------------------------------------------------------------------------------------
5. I CERTIFY THAT THE STATEMENTS CONTAINED IN THIS DOCUMENT ARE TRUE AND CORRECT TO MY OWN KNOWLEDGE. I DECLARE THAT I AM THE
PERSON WHO IS EXECUTING THE INSTRUMENT, WHICH EXECUTION IS MY ACT AND DEED.
/s/ Michael R. Burwell General Partner Michael R. Burwell 2/8/00
- ---------------------- --------------- ---------- ------
SIGNATURE POSITION OR TITLE PRINT NAME DATE
/s/ D. Russell Burwell General Partner/President Redwood Mortgage Corp.
D. Russell Burwell 2/8/00
- ---------------------- ---------------- -------------- ------
SIGNATURE POSITION OR TITLE PRINT NAME DATE
- -----------------------------------------------------------------------------------------------------------------------------------
FORM LP-2
- -----------------------------------------------------------------------------------------------------------------------------------
254
Exhibit 3.3 (c)
(Seal of the Office of the
Secretary of State)
SECRETARY OF STATE
I, Bill Jones, Secretary of State of the State of
California, hereby certify:
That the attached transcript of 1 page(s) has been compared
with the record on file in the office, of which it purports to
be a copy, and that it is full, true and correct.
(Seal of the State of California) In witness thereof, I execute this
certificate and affix the Great Seal of the
State of California this day of April 05, 2002
/s/ Bill Jones
Secretary of State
255
Exhibit 3.3 (d)
(Seal of the State of State of California ENDORSED-FILED
California) Secretary of State In the office of the
Bill Jones Secretary of State
Of the State of California
AMENDMENT TO CERTIFICATE OF LIMITED PARTNERSHIP
April 2, 2002
A $30.00 filing fee must accompany this form.
IMPORTANT - Read instructions before completing this form /s/ Bill Jones
BILL JONES,
Secretary of State
This space for filing use only
- -----------------------------------------------------------------------------------------------------------------------------------
1. SECRETARY OF STATE FILE NUMBER 2. NAME OF LIMITED PARTNERSHIP
9215400002 Redwood Mortgage Investors VIII, a California Limited Partnership
- --------------------------------------------------- -------------------------------------------------------------------------------
3. COMPLETE ONLY THE BOXES WHERE INFORMATION IS BEING CHANGED. ADDITIONAL PAGES MAY BE ATTACHED IF NECESSARY
- -----------------------------------------------------------------------------------------------------------------------------------
A. LIMITED PARTNERSHIP NAME (END THE NAME WITH THE WORDS "LIMITED PARTNERSHIP" OR THE ABBREVIATION "L.P."
- -----------------------------------------------------------------------------------------------------------------------------------
B. THE STREET ADDRESS OF THE PRINCIPAL OFFICE
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
C. THE STREET ADDRESS IN CALIFORNIA WHERE RECORDS ARE KEPT
STREET ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
D. THE ADDRESS OF THE GENERAL PARTNER (S)
NAME
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
E. NAME CHANGE OF A GENERAL PARTNER FROM TO
- -----------------------------------------------------------------------------------------------------------------------------------
F. GENERAL PARTNER(S) CESSATION D. Russell Burwell
- -----------------------------------------------------------------------------------------------------------------------------------
G. GENERAL PARTNER ADDED
NAME
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
H. THE PERSON(S) AUTHORIZED TO WIND UP AFFAIRS OF THE LIMITED PARTNERSHIP
NAME
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
I. THE NAME OF THE AGENT FOR SERVICE TO PROCESS
- -----------------------------------------------------------------------------------------------------------------------------------
J. IF AN INDIVIDUAL, CALIFORNIA STREET ADDRESS OF THE AGENT FOR SERVICE OF PROCESS
ADDRESS
CITY STATE ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------------
K. NUMBER OF GENERAL PARTNERS' SIGNATURES REQUIRED FOR FILING CERTIFICATE OF AMENDMENT, REINSTATEMENT, MERGER, DISSOLUTION,
CONTINUATION AND CANCELLATION |_|
- -----------------------------------------------------------------------------------------------------------------------------------
L. OTHER MATTERS (ATTACH ADDITIONAL PAGES IF NECESSARY).
- -----------------------------------------------------------------------------------------------------------------------------------
4. TOTAL NUMBER OF PAGES ATTACHED IF ANY 0
- -----------------------------------------------------------------------------------------------------------------------------------
5. I CERTIFY THAT THE STATEMENTS CONTAINED IN THIS DOCUMENT ARE TRUE AND CORRECT TO MY OWN KNOWLEDGE. I DECLARE THAT I AM THE
PERSON WHO IS EXECUTING THE INSTRUMENT, WHICH EXECUTION IS MY ACT AND DEED
/s/ Michael R. Burwell General Partner Michael R. Burwell 3/28/02
- ---------------------- --------------- ---------- -------
SIGNATURE POSITION OR TITLE PRINT NAME DATE
- ---------------------- --------------- ---------- -------
SIGNATURE POSITION OR TITLE PRINT NAME DATE
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
FORM LP-2
- ------------------------------------------------------------------------------
256
Exhibit 5.1
July 9, 2003
Michael R. Burwell
Gymno Corporation
Redwood Mortgage Corp.
Redwood Mortgage Investors VIII
900 Veterans Blvd., Suite 500
Redwood City, California 94063
Re: Redwood Mortgage Investors VIII;
Securities Opinion;
Gentlemen:
We have acted as special counsel for Redwood Mortgage Investors VIII, a
limited partnership formed pursuant to the California Revised Limited
Partnership Act (the "Partnership"), and its General Partners, Michael R.
Burwell, Gymno Corporation, and Redwood Mortgage Corp. (the "General Partners"),
in connection with the public offering of up to 75,000,000 units of limited
partnership interests on the Partnership, at $1.00 per Unit, as described more
fully in the Registration Statement and Prospectus of Redwood Mortgage Investors
VIII, as filed on Form S-11.
We have been requested by the Partnership to furnish our opinion as to the
legality of units of limited partnership interests (the "Units") being offered
by the Partnership. In connection therewith, we have examined (i) the
Registration Statement and the related Prospectus; (ii) the Fifth Amended and
Restated Limited Partnership Agreement, which is included as Exhibit A to the
Prospectus; (iii) the Certificate of Limited Partnership filed with the
California Secretary of State; (iv) the Subscription Package, which is included
as Exhibit B to the Prospectus; and (v) such other documents and instruments as
we have deemed necessary or appropriate for the purposes of this opinion.
However, we have not independently verified any of the facts or representations
contained in such documents. We have also conducted various meetings,
discussions and conversations with the General Partners regarding the offer and
sale of the Units.
In our examination, we have assumed the authenticity of the original
documents, the conformity to the originals of all documents purporting to be
copies thereof, the accuracy of the copies and genuineness and due authority of
all signatures. We have relied upon the representations and statements of the
General Partners (without making any independent investigation of the facts)
with respect to the factual determinations underlying the legal conclusions set
forth herein. We have not attempted to verify independently such representations
and statements.
In rendering this Opinion, we have assumed that: (i) each other party that
has executed or will execute a document, instrument or agreement to which the
Partnership is a party duly and validly executed and delivered each document,
instrument or agreement to which such party is a signatory and that such party's
obligations set forth therein are its legal, valid and binding obligations,
enforceable in accordance with their respective terms; (ii) each person
executing any document, instrument or agreement on behalf of any such party is
duly authorized to do so; and (iii) each natural person executing any
instrument, document or agreement referred to herein is legally competent to do
so.
We are members of the Bar of the State of California and do not purport to
be conversant with the laws of jurisdictions other than California and the
United States of America. Accordingly, we do not express any opinion as to the
effect on the transactions described herein of the laws of any state or
jurisdiction other than the federal laws of the United States of America and the
laws of the State of California.
Based upon the foregoing, we are of the opinion that:
The Partnership, as described in the Prospectus, has been duly formed and
is a validly existing limited partnership under the laws of the State of
California.
257
Subject to obtaining any necessary government approvals or authorizations
prior to the issue and sale of the units in the manner described in the
Prospectus, and to the issue and sale of the units in such a manner, upon the
execution of the Limited Partnership Agreement by the Limited Partners, the
Units will be legally and validly issued, fully paid and non-assessable, to the
extent described in the Prospectus under the heading "SUMMARY OF PARTNERSHIP
AGREEMENT".
The Partnership will have all authority necessary to own and manage its
Mortgage Investments as and when required, and to conduct the business which it
proposes to conduct as described in the Limited Partnership Agreement.
The opinions expressed herein have been carefully considered and reflect
what we regard as the likely manner in which the Units in the Partnership will
be issued based upon the statutory provisions, regulations promulgated
thereunder, and interpretations thereof by the Commission and the courts having
jurisdiction over such matters as of the date of this opinion. However, a number
of questions raised by the matters on which we have not expressed an opinion
herein have not been definitely answered by statute, regulations, Commission
interpretations or court decisions. We assume no obligation to revise or
supplement this Opinion Letter should applicable law be changed by legislative,
judicial or administrative action or otherwise.
Except as set forth herein, we have made no independent attempts to verify
the facts or representations or assumptions made herein except to the extent we
deem reasonable under ABA Formal Opinion 335 and in connection with our position
as counsel to the issuer. Where we render an opinion "to the best of our
knowledge" or concerning an item that "has come to our attention" or our opinion
otherwise refers to knowledge it means a conscious awareness of facts or other
information based upon: (i) an inquiry of attorneys within this firm; (ii)
receipt of a certificate executed by the General Partners covering such matters
or (iii) such other actual investigation, if any, that we specifically set forth
herein. Reference to "us" or "our" is limited to a reference to the lawyer who
signs this Opinion Letter or any lawyer of this firm who has been active in
preparing the relevant documents. Any inaccuracy in any fact or representation
by the General Partners, or any amendment to any documents or any materials
cited herein, or any changes in the affairs of the Partnership or General
Partners after the date of this opinion may affect all or part of this opinion.
We hereby consent to the inclusion of this Opinion in the Registration
Statement as an exhibit thereto and to any reference to our firm included or
made a part thereof.
Sincerely yours,
COX CASTLE & NICHOLSON LLP
By: /s/ Stephen C. Ryan
-----------------------------
A Member of the Firm
258
Exhibit 5.2
July 9, 2003
Michael R. Burwell
Gymno Corporation
Redwood Mortgage Corp.
Redwood Mortgage Investors VIII
900 Veterans Blvd., Suite 500
Redwood City, CA 94063
Re: Redwood Mortgage Investors VIII;
ERISA Opinion;
Our File No.:
-----------
Gentlemen:
We are acting as counsel for Redwood Mortgage Investors VIII, a limited
partnership formed under the California Revised Limited Partnership Act, with
respect to its Registration Statement on Form S-11, Registration No. 333-106900,
as may be amended (the "Registration Statement") and the Preliminary Prospectus
(the "Prospectus") included therein, filed by you with the Securities and
Exchange Commission in connection with the registration under the Securities Act
of 1933, as amended, of up to 75,000,000 Units of Limited Partnership Interests
(the "Units"). Unless otherwise stated herein, capitalized terms not otherwise
defined shall have the meanings ascribed to them in the Prospectus.
You have requested our opinion as to certain questions arising under the
Employee Retirement Income Security Act of 1974 involved in the operation of the
referenced Partnership. This opinion is based upon the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA"), the applicable
Department of Labor Regulations ("DOL Regulations"), proposed DOL Regulations,
the Internal Revenue Code of 1986, as amended (the "Code"), the applicable
Treasury Regulations promulgated thereunder (the "Regulations"), and proposed
Treasury Regulations (the "Proposed Treasury Regulations"), current
administrative rulings and judicial interpretations of the foregoing, all
existing as of the date of this letter. It must be emphasized, however, that all
such authority is subject to modification at any time by legislative, judicial
and/or administrative action and that any such modification could be applied on
a retroactive basis.
The Partnership will not request (and would not likely obtain) a ruling
from the Department of Labor as to any matters related to ERISA and the herein
described transactions. While the Partnership will receive this opinion, it is
not binding upon the Department of Labor. Thus, there can be no assurance that
the Department of Labor will not contest one or more of the conclusions reached
herein, or one or more matters as to which no opinion is expressed herein, nor
can there be any assurance that the Department of Labor will not prevail in any
such contest. Further, even if the Department of Labor were not successful in
any such contest, the Partnership, or the Limited Partners in opposing the
Department of Labor's position, could incur substantial legal, accounting and
other expenses.
OPINION
Our opinion is limited to a consideration of the following matters:
(1) Whether the underlying assets of the Partnership will, under ERISA, be
considered "plan assets" of a benefit plan subject to ERISA or Section 4975 of
the Code that invests in the Partnership (a "Plan Investor"), and
(2) Whether various proposed transactions involving the Partnership, the
General Partners, their Affiliates and the invested assets of Plan Investors
will violate either (1) the prohibitions against fiduciary self-dealing in
Section 406(b) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code, or (2)
the prohibitions against transactions with parties in interest in Section 406(a)
of ERISA and Sections 4975(c)(1)(A) through (D) of the Code.
259
Section 406(b) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code
prohibit a fiduciary of a retirement plan subject to those provisions (a "Plan")
from engaging with the Plan in various acts of self-dealing. If the General
Partners or their Affiliates are fiduciaries with respect to Plan Investors,
investment by those Plans in the Partnership could constitute a violation of
Section 406(b) of ERISA and Section 4975(c)(1)(E) and (F) of the Code.
Therefore, the critical issue is to what extent, if any, the General Partners or
their Affiliates meet the definition of "fiduciary" under ERISA. Under Section 3
(2 1)(A) of ERISA,
. . . a person is a fiduciary with respect to a plan to the
extent (i) he exercises any discretionary authority or
discretionary control respecting management of such plan or
exercises any authority or control respecting management or
disposition of its assets, (ii) he renders investment advice
for a fee or other compensation, direct or indirect, with
respect to any moneys or other property of such plan, or has
any authority or responsibility to do so, or (iii) he has any
discretionary authority or discretionary responsibility in the
administration of such plan.
Section 4975(e)(3) of the Code contains a substantially similar definition.
While the question is inherently factual, we are of the opinion that the
General Partners and their Affiliates are not fiduciaries with respect to Plan
Investors for the reasons discussed below. First, the General Partners and their
Affiliates will not permit Plan Investors to purchase Units with assets of any
Plans (i) if the General Partners and their Affiliates have investment
discretion with respect to such assets, or (ii) if they regularly give
individualized investment advice which serves as the primary basis for the
investment decisions made with respect to such assets or (iii) if they have any
discretionary authority or discretionary responsibility in the administration of
such Plans. In rendering this opinion, we assume that no transaction will be
entered into in violation of these restrictions. Second, the activities of the
General Partners and their Affiliates with respect to the Partnership will not
make the General Partners and their Affiliates fiduciaries with respect to any
Plan Investors. None of their activities with respect to the Partnership, as
described in the Prospectus, involve management or administration of a Plan or
rendering investment advice to a Plan. Therefore, the General Partners and their
Affiliates would be fiduciaries only if they were involved in "management or
disposition" of "Plan assets."
The term "plan assets" is not defined by statue; however, in 1975, the
Department of Labor2 issued Interpretive Bulletin 75-2 on the question of
whether a transaction between a "party in interest"3 to a Plan and a corporation
or partnership in which the Plan has invested would constitute a prohibited
transaction. The Department of Labor stated, in part, that:
Generally, investment by a plan in securities . . . of a
corporation or partnership will not, solely by reason of such
investment, be considered to be an investment in the
underlying assets of such corporation or partnership so as to
make the assets "plan assets" and thereby make a subsequent
transaction between the party-in-interest and a corporation or
partnership a prohibited transaction under Section 40-6 of
[ERISA].
It is our opinion that the underlying assets of the Partnership will not be
considered assets of Plan Investors under the regulations promulgated by the
Department of Labor. On January 8, 1985, the Department of Labor issued proposed
regulations concerning the definition of what constitutes the assets of a Plan.
"Proposed Regulations Relating to the Definition of Plan Assets", 50 Fed. Reg.
961 (Jan. 8, 1985). An amendment to such proposed regulations was issued by the
Department of Labor on February 15, 1985 (50 Fed. Reg. 6361) (such proposed
regulations, as so amended, are referred to herein as the "Proposed DOL
Regulations").
The Proposed DOL Regulations were published in final form on November 13,
1986 (51 Fed. Reg. 41262, (November 13, 1986)) and are generally effective on or
after March 13, 1987 (the "Final DOL Regulations"). Under the Final DOL
Regulations, when a Plan Investor acquires an equity interest in another entity,
the Plan's assets include its investment but do not, solely by reason of such
- --------------------------
2 The Department ot Labor has authority to interpret Section 406 of ERISA
and Section 4975(c)(1) of Code the Code. Section 102(a) Reorganization Plan No.
1978
3 As used herein, the phrase "party of interest" refers to both a party in
interest under Section 3(14) of ERISA and a disqualified person under Section
4975(e) (2) of the Code.
260
investment, include any of the underlying assets of the entity where the
equity interest is of an entity that is a "publicly offered security." 29
CFR 2510.3-101(a)(2).
An "equity interest" means any interest in an entity other than an
instrument that is treated as indebtedness under applicable local law. A profits
interest in a partnership is considered an equity interest. 29 CFR
2510.3-101(b)(1). We are of the opinion that the Units in the Partnership will
be "equity interests."
The Units will be considered a "publicly offered security" only if they
are: (i) "freely transferable," (ii) part of a class of securities that is
"widely held," and (iii) sold pursuant to an effective registration statement
under the Securities Act of 1933 and is later registered under the Securities
Exchange Act of 1934. 29 CFR 2510.3 - 10 1 (b)(2).
The determination of whether the Partnership Units are "freely
transferable" is a factual one. 29 CFR 2510.3-101(b)(4) and 51 Fed. Reg. 41268.
Where the minimum required investment is $10,000 or less, the presence of any of
the following restrictions governing the transferability of Units will not
ordinarily affect a finding that the Units are freely transferable:
(1) Any requirement that not less than a minimum number of shares or units
of such security be transferred or assigned by any investor, provided that such
requirement does not prevent transfer of all of the then remaining shares or
units held by an investor;
(2) Any prohibition against transfer or assignment of such security or
rights in respect thereof to an ineligible or unsuitable investor;
(3) Any restriction on, or prohibition against, any transfer or assignment
which would either result in a termination or reclassification of the entity for
federal or state tax purposes or which would violate any state or federal
statute, regulation, court order, judicial decree, or rule of law;
(4) Any requirement that reasonable transfer or administrative fees be paid
in connection with a transfer or assignment;
(5) Any requirement that advance notice of a transfer or assignment be
given to the entity and any requirement regarding execution of documentation
evidencing such transfer or assignment (including documentation setting forth
representations from either or both of the transferor or transferee as to
compliance with any restriction or requirement described in this paragraph of
this section or requiring compliance with the entity's governing instruments);
(6) Any restriction on substitution of an assignee as a limited partner of
a partnership, including a general partner consent requirement, provided that
the economic benefits of ownership of the assignor may be transferred or
assigned without regard to such restriction or consent (other than compliance
with any other restriction described in this paragraph of this section);
(7) Any administrative procedure which establishes an effective date, or an
event, such as completion of the offering, prior to which a transfer or
assignment will not be effective; and
(8) Any limitation or restriction on transfer or assignment which is not
created or imposed by the issuer or any person acting for or on behalf of such
issuer.
Accordingly, while a factual matter, we are of the opinion that the Units
will be considered freely transferable within the meaning of the Final DOL
Regulations.
Whether the Units are considered "widely held" is determined by a
bright-line test that the Units be held by 100 or more investors, independent
from each other and management. 29 CFR 2510.3-101(b)(3). Based upon the
representations of the General Partners, it is our opinion that the Partnership
meets this test.
Finally, pursuant to the registration of the Units with the Securities and
Exchange Commission and the undertakings required therewith, we are of the
opinion that the Partnership meets the "registration" requirements of 29 CFR
2510 3-101(b)(2).
261
Therefore, we are of the opinion that, under the Final DOL Regulations,
only the Units of the Partnership, rather than the underlying investments of the
Partnership, will be considered the plan assets by the Plan Investors
subscribing for Units in the Partnership.
If, on the other hand, the underlying assets of the Partnership were deemed
to be "plan assets" under ERISA (i) the prudence standards and other provisions
of Part 4 of Title I of ERISA applicable to investments by employee benefit
plans and their fiduciaries would extend (as to all plan fiduciaries) to
investments made by the Partnership and (ii) certain transactions that the
Partnership might seek to enter into might constitute "prohibited transactions"
under ERISA.
Based on and subject to the foregoing opinion regarding the status of the
Partnership's underlying assets as other than plan assets, the activities of the
General Partners and their Affiliates with respect to management and disposition
of those assets do not make the General Partners and their Affiliates
fiduciaries with respect to any Plan Investors. Therefore, we are of the opinion
that the prohibitions against fiduciary self-dealing contained in Section 406(b)
of ERISA and Sections 4975(c)(1)(E) and (F) of the Code would not be violated by
the dealings of the General Partners and their Affiliates with the Partnership
or the Plan Investors' funds in the Partnership.
SCOPE OF OPINION
The current state of the law with respect to many issues which might be
raised in connection with the activities described herein is unsettled. Several
of the relevant statutory provisions discussed above have been enacted only
recently; few or no judicial interpretation of these provisions. Therefore, the
consequences to the Partnership cannot be predicted with a high degree of
assurance.
There is no assurance that the Department of Labor will not raise issues
that have not been discussed herein. The Department of Labor may disagree with
our conclusions and may be upheld by a court. The Department of Labor has
indicated that it will closely scrutinize activities such as those in which the
Partnership will be engaged, and there is a very substantial possibility that
the Department of Labor will examine the Partnership's activities and take
positions adverse to the Partnership.
No opinion is expressed with respect to Federal or state securities laws,
state and local taxes, and Federal or State income tax issues or any other
Federal or state laws not explicitly referred to or discussed herein. Further,
we have assumed no obligation to revise or supplement this opinion letter should
applicable law be changed by legislative, judicial or administrative law or
otherwise.
Except as set forth herein, we have made no independent attempt to verify
the facts or representations or assumption made herein except to the extent we
deem reasonable under ABA Formal Opinion 335 and in connection with our position
as counsel to the Partnership. Where we render an opinion "to the best of our
knowledge" or concerning an item that "has come to our attention" or our opinion
otherwise refers to knowledge it means a conscious awareness of facts or other
information based upon: (i) an inquiry of attorneys within this firm, (ii)
receipt of a certificate executed by the General Partners covering such matters;
(iii) such other actual investigation, if any, that we specifically set forth
herein. `Reference to "us" or "our" is limited to a reference to the lawyer who
signs this opinion letter or any lawyer of this firm who has been actively
involved in preparing the relevant documents.
The opinions expressed in this letter are based solely upon the information
and representations set forth above and we have not attempted, nor deemed it
necessary, to verify independently the relevant or pertinent facts or
representations. If there have been any misstatements of facts or omissions of
any material facts, or any change in any material fact after the date of this
opinion, or any amendment or change in any document referred to herein, please
notify us, since any misstatement, omission or change may effect all or part of
this opinion.
This opinion is furnished solely to advise the Partnership, the Limited
Partners, and you concerning the certain issues arising under ERISA involved in
the operation of the Partnership. Except as expressly set forth below, this
opinion may not be filed with or furnished to any other person, or any
governmental agency, except for registered broker dealers who have executed
selling agreements, and may not be quoted in whole or in part or otherwise
referred to in any context, without, in each instance, out prior written
consent, and without, in each instance, the exercise of due diligence on your
part to verify that there are no material errors or omissions of fact and no
changes in the facts or in the text of the documents you have provided us.
262
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and to the references to this firm contained therein
concerning this opinion and under the headings "ERISA CONSIDERATIONS" and
"EXPERTS" in the Prospectus.
Sincerely yours,
COX CASTLE & NICHOLSON LLP
By: /s/ Stephen C. Ryan
----------------------------
A Member of the Firm
263
Exhibit 8.1
July 9, 2003
Michael R. Burwell
Gymno Corporation
Redwood Mortgage Corp.
Redwood Mortgage Investors VIII
900 Veterans Blvd., Suite 500
Redwood City, CA 94063
Re: Redwood Mortgage Investors VIII;
Tax Opinion;
Our File No.:
-----------
Gentlemen:
This is an opinion which you have requested as to the summary of federal
income tax consequences set forth in the section entitled "RISK FACTORS," under
the subheading "Tax Risks" and in the section entitled "MATERIAL FEDERAL INCOME
TAX CONSEQUENCES" of the prospectus ("Prospectus") contained in the Form S-11
Registration Statement for Redwood Mortgage Investors VIII (the "Partnership")
filed with the Securities and Exchange Commission on July 9, 2003, in connection
with the registration under the Securities Act of 1933, as amended, of up to
75,000,000 Units of Limited Partnership Interests (the "Units" or "Securities").
We have been retained to represent the General Partners and the Partnership
in connection with the offering of the Units. We do, however, consent to the
reliance by the Limited Partners upon this opinion in connection with the
offering of Securities by the Partnership. In rendering this opinion, we have
examined the following:
1. The Fifth Amended and Restated Limited Partnership Agreement of the
Partnership, dated July 9, 2003, as amended (the "Partnership Agreement").
2. The Certificate of Limited Partnership of the Partnership filed with the
Limited Partnership Division of the California Secretary of State's Office on
May 27, 1992, as amended pursuant to an Amendment to Certificate of Limited
Partnership filed with the Secretary of State of California on March 14, 2000,
and an Amendment to Certificate of Limited Partnership filed with the Secretary
of State of California on April 2, 2002 (the "Certificate").
3. The Registration Statement and its related Prospectus.
4. Such other documents and instruments we have considered necessary for
rendering the opinions hereinafter set forth.
In our examination of the forgoing, we have assumed the authenticity of
original documents, the accuracy of copies and the genuineness of signatures and
we have relied upon the representations and statements of the General Partners.
However, we have not independently verified any of the facts contained in such
documents or the representations or statements of the General Partners.
264
As to matters of fact, we have relied exclusively upon a certificate of the
General Partners and other documents and have assumed the genuineness of all
signatures, the authenticity of all documents purporting to be originals, and
the conformity to the originals of all documents purporting to be copies
thereof.
In rendering this Opinion, we have assumed that: (1) each other party that
has executed or will execute a document, instrument or agreement to which the
Partnership is a party duly and validly executed and delivered each document,
instrument or agreement to which such party is a signatory and that such party's
obligations set forth therein are its legal, valid and binding obligations,
enforceable in accordance with their respective terms; (2) each person executing
any document, instrument or agreement on behalf of any such party is duly
authorized to do so; and (3) each natural person executing any instrument,
document or agreement referred to herein is legally competent to do so.
We are lawyers admitted to practice in California and have reviewed such
laws of the United States and California as we have deemed necessary for the
purpose of providing the opinions set forth herein. We have not reviewed the
laws of any jurisdiction other than the United States and California, and
accordingly, we express no opinion herein as to the laws of any other state or
jurisdiction.
Capitalized terms used herein and not otherwise defined in this opinion
shall have the same meaning as they have in the Partnership Agreement, as the
context requires. This opinion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulations promulgated thereunder (the "Regulations') and proposed Treasury
Regulations (the "Proposed Treasury Regulations"), current administrative
rulings and judicial opinions of the foregoing, all existing as of the date of
this letter. It must be emphasized, however, that all such authority is subject
to modification at any time by legislative, judicial and/or administrative
action and that any such modification could be applied on a retroactive basis.
Future tax reform proposals may have a material adverse effect on the potential
tax benefits that may be expected to be realized from an investment in the
Partnership. Even under current law, the existence and amount of deductions
expected to be claimed by the Partnership involve complex legal and factual
issues and will depend on certain factual determinations, characterizations,
expenditures and other matters, all or any of which may be subject to challenge
and possible disallowance by the Internal Revenue Service (the "Service") upon
an audit of the personal tax return of a Partner.
The Partnership will not request a ruling from the Service as to the
subject matter herein. While the Partnership will receive this opinion as to
certain tax matters, it is not binding upon the Service. Thus, there can be no
assurance that the Service will not contest one or more of the conclusions
reached herein, or one or more tax matters as to which no opinion is expressed
herein, nor can there be any assurance that the Service will not prevail in any
such contest. Further, even if the Service was not successful in any such
contest, the Partnership, in opposing the Service's position, could incur
substantial legal, accounting and other expenses.
OPINION
As more fully described in the section of the Prospectus entitled "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES" and specifically subject to the qualifications
set forth therein, it is our opinion that:
1. The summary of the income tax consequences set forth in the section of
the Prospectus entitled "RISK FACTORS" under the subheading "Tax Risks" and in
the sections entitled "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" and "ERISA
CONSIDERATIONS" addresses fully and fairly all material federal income tax
consequences of an investment in the Units, is an accurate statement in all
material respects of the matters discussed therein and accurately reflects our
opinion as to those matters therein as to which an opinion is specifically
attributed to us.
2. The Partnership will be treated as a partnership as defined in Sections
7701(a)(2) and 761 (a) of the Code and not as an association taxable as a
corporation, and the Limited Partners will be subject to tax as partners
pursuant to Subchapter K of the Code.
265
3. The Partnership will not constitute a publicly traded partnership for
purposes of Sections 7704 and 469(k) of the Code.
SCOPE OF OPINION
It is not feasible to present in this opinion (and in the section of the
Prospectus entitled "MATERIAL FEDERAL INCOME TAX CONSEQUENCES") a detailed
explanation of the effect of the tax treatment of partnerships originating,
investing in, holding, selling and disposing of loans, or the tax treatment of
investments in such partnerships. The current state of the law with respect to
many issues which might be raised in connection with the activities described
herein is unsettled. Several of the relevant statutory provisions discussed
above have been enacted only recently; few Regulations have been proposed or
promulgated under these provisions, and there is little or no judicial
interpretation of these provisions. Therefore, the tax consequences to the
Partnership cannot be predicted with a high degree of assurance. Further,
although the transactions contemplated by the Prospectus are prospective in
nature, we are not assuming an obligation to revise or supplement this Opinion
Letter should applicable law be changed by legislative, judicial or
administrative action or otherwise. In this regard, we express no opinion as to
the effects occurring, circumstances arising, or changes of law becoming
effective occurring after the date hereof on the matters addressed in this
opinion letter, and we assume no responsibility to inform you of additional or
changed facts, or changes in law, of which we may become aware.
There is no assurance that the Service will not raise issues that have not
been discussed herein. The Service may disagree with our conclusions and may be
upheld by a court. The Service has indicated that it will closely scrutinize
activities such as those in which the Partnership will be engaged, and there is
a very substantial possibility that the Service will examine the Partnership's
activities and take positions adverse to the Partnership.
No opinion is expressed with respect to Federal or state securities laws,
state, local or foreign taxes, and Federal income tax issues other than those
discussed herein, or any other Federal or state laws not explicitly referred to
or discussed herein.
The opinions expressed in this letter are based solely upon the information
and representations set forth above and we have not attempted, nor deemed it
necessary, to verify independently the relevant or pertinent facts or
representations. In addition, any changes in the facts as they have been
represented to or assumed by us, could affect our analysis and conclusions. We
assume no obligation to update our opinions to address other facts.
This opinion is furnished solely to advise the Partnership, the Limited
Partners, and you concerning the federal income tax issues discussed herein
We hereby consent to the inclusion of this opinion in the Registration
Statement as an Exhibit thereto and to the references to our firm under the
heading "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" and "EXPERTS" in the
Prospectus.
Sincerely yours,
COX CASTLE & NICHOLSON LLP
By: /s/ Stephen C. Ryan
-------------------------------
A Member of the Firm
266
Exhibit 10.2
LOAN SERVICING AGREEMENT
AND AUTHORIZATION TO COLLECT
This Agreement is entered into as of the date set forth below by and
between Redwood Mortgage Corp., a California corporation (BROKER) and
BENEFICIARY for the purpose of establishing the terms, conditions and authority
for the servicing of a loan evidenced by a promissory note (the Note) and deed
of trust (the Deed of Trust), described as follows:
Borrower: ____________________________________________________________________
Loan Amount: $ __________ Term: ____________ Interest Rate: _________%
Late Charge: $ ___________ Prepayment Bonus: Yes _____ No _____
Deed of Trust Recorded: Instrument No. __________ County _______________, CA
Beneficiary's Investment: $ ________ Percentage of Ownership: ___________%
It is understood that the BENEFICIARY'S interest in said Note may be a
partial ownership, and that other lenders (partial beneficiaries) also may own
fractional undivided interests in said Note. BENEFICIARY and the other partial
beneficiaries (collectively Beneficiaries) are not engaged in a partnership or
joint venture, but their relationship is specifically agreed to be that of
tenants in common. This Agreement shall be executed in counterpart by all
Beneficiaries, each of which shall be deemed an original and all of which
together shall constitute one agreement, and the terms hereof shall be uniformly
binding upon and enforceable by BENEFICIARY and all other partial beneficiaries,
against BROKER and as between themselves.
BENEFICIARY hereby appoints BROKER to service the Note on his behalf from
and after the close of escrow, to hold the original Note and the original Deed
of Trust as BENEFICIARY'S agent, and to deliver copies of all other documents as
provided in BENEFICIARY'S escrow instructions executed in connection with this
loan transaction to BENEFICIARY at the address indicated below. Such servicing
activities shall include all activities reasonably and customarily required to
collect, disburse and account for payment of principal, interest, late charges
and prepayment bonuses under the Note and to enforce all the terms and
provisions of the Note and Deed of Trust. BROKER accepts such appointment and
agrees to use diligence in the performance of its duties hereunder.
BROKER further agrees as follows: (1) All loan payments received by BROKER
hereunder shall be deposited immediately into BROKERS trust account, which trust
account shall be maintained in accordance with the provisions of law and rule
for trust accounts of licensed real estate brokers and in accordance with the
provisions of Rule 260.105.30 of Title 10 of the California Administrative Code;
(2) Such loan payments shall not be commingled with the other assets of BROKER
or any affiliate, or used for any transaction other than the transaction for
which such funds are received by BROKER; (3) All loan payments received on the
Note (less service fees as described below and other costs, charges, and
anticipated foreclosure expenses) shall be transmitted to BENEFICIARY and the
other partial beneficiaries pro rata according to their respective percentage
ownership interests in the Note within 25 days after receipt thereof by BROKER;
(4) BROKER shall provide BENEFICIARY with a monthly and annual accounting of
BENEFICIARY'S interest in the Note; (5) BROKER shall use diligence and care to
assure that proper casualty insurance is maintained on the real property covered
by the Deed of Trust or Deeds of Trust securing the Note; (6) BROKER shall issue
demands for payment and otherwise enforce the terms of the note in accordance
with its established policies; (7) BROKER shall request Notices of Default on
prior encumbrances pursuant to California Civil Code Section 2924(b) and will
promptly notify BENEFICIARY of any such defaults, and (8) To the extent required
by 10 Cal.Adm.C. Rule 260.105.30(j)(3), BROKER will arrange for the inspection
of BROKER'S trust account by an independent certified public accountant and
forward the report of such accountant to the California Commissioner of
Corporations in the manner required by law.
In the event of any default by the obligor or obligors under the Note,
Broker shall perform all acts and execute all documents necessary to exercise
the power of sale contained in the Deed of Trust or Deeds of Trust securing
same, including without limitation the following: Substitute trustees, select a
foreclosure agent, give demands, accept reinstatements, commence litigation to
enforce the collection of the note, obtain relief from any court-ordered stay of
foreclosure proceedings, defend any litigation which may seek to restrain said
foreclosure, receive a trustees deed for the benefit of BENEFICIARIES, as
tenants-in-common, and otherwise to do all things reasonably necessary or
appropriate to enforce BENEFICIARY'S rights under the Note and Deed of Trust or
Deeds of Trust. BENEFICIARY hereby authorizes BROKER to initiate, maintain
and/or defend any such legal actions or proceedings in the name of BENEFICIARY,
and to employ attorneys therefor at BENEFICIARY'S expense.
267
BENEFICIARY agrees that BROKER shall not be liable for any costs, expenses
or damages that may arise from or in connection with any acts or omissions of
BROKER or its agents or employees hereunder, so long as any such act or omission
shall have been undertaken in good faith, notwithstanding any active or passive
negligence (whether sole or contributory) of BROKER or its agents or employees,
and BENEFICIARY shall hold BROKER harmless therefrom.
In consideration for the services to be rendered hereunder, BROKER shall be
entitled to receive an annual service fee equal to one and one half percent
(1.5%), or such lesser amount as may be agreed to by BROKER and BENEFICIARY from
time to time, of the outstanding principal balance of the Note, payable in equal
monthly installments, or in other periodic payments if payments by obligor are
made other than monthly. BROKER is hereby authorized to deduct and retain all
such service fees from the collected monthly loan payments. In addition,
BENEFICIARY hereby assigns to BROKER fifty percent (50%), or such lesser amount
as may be agreed to by BROKER and BENEFICIARY from time to time, of all
collected late charges that become due and owing under the Note, and, further,
in the event BROKER has advanced its own sums to BENEFICIARY shall be deemed to
have assigned to BROKER one hundred percent (100%) of all such late charges
accruing and paid with respect to such payments. In addition, BENEFICIARY hereby
assigns to BROKER twenty percent (20%), or such lesser amount as may be agreed
to by BROKER and BENEFICIARY from time to time, of all collected prepayment
penalties that become due and owing under the Note.
In the event of default in payment of any sum due under the Note, BROKER
shall be authorized to advance such payments to BENEFICIARY, but shall have no
obligation whatsoever to do so. In the event the source for any payment to
BENEFICIARY is not the obligor under the Note, then BROKER shall inform
BENEFICIARY of the actual source of such payment. BROKER shall also be
authorized to advance monthly payments or other sums to any senior lien holder,
to pay insurance and taxes and to pay any other expenses reasonably incurred in
connection with the enforcement of the Note and the protection of the security
of the Deed of Trust securing same, but shall have no obligation whatsoever to
do so.
In the event of a default under the Note or Deed of Trust, or any
foreclosure action, legal action, sale or any other event in which payments are
advanced to BENEFICIARY or any other person or expenses are incurred to protect
the rights of BENEFICIARY under the Note and Deed of Trust, then BENEFICIARY
agrees to pay (or reimburse BROKER for) his pro rata share of such advances and
expenses upon demand therefor by BROKER, according to his respective ownership
interest in the Note. In the event BENEFICIARY fails to pay such sums upon
demand, then the following provisions shall apply: (1) interest shall accrue on
such sums at the same rate as is provided in the Note, and (2) BROKER and the
other partial beneficiaries shall have the option, but not the obligation, to
advance such sums for the benefit of BENEFICIARY, and in such event the
defaulting BENEFICIARY shall and hereby agrees to forfeit, in favor of the other
partial Beneficiaries who advance defaulting BENEFICIARY'S share of such sums,
twenty-five percent (25%) of defaulting BENEFICIARY'S ownership interest in the
Note and Deed of Trust. It is further agreed that said defaulting BENEFICIARY
shall forfeit, in favor of the other partial Beneficiaries, all interest in any
profits or excess funds that said defaulting BENEFICIARY may otherwise be
entitled to. All sums thereafter collected by BROKER hereunder shall be applied
in the following priority; (1) first, to the reinstatement of any senior liens
or encumbrances; (2) Second, to reimburse BROKER for any advances made by BROKER
hereunder; (3) Third, to reimburse all Beneficiaries for any advances made to
enforce the Note or protect the security of the Deed of Trust or Deeds of Trust
securing same, in the same order as such advances were make; (4) Fourth, to the
payment of principal under the Note; (5) Fifth, to the payment of accrued but
unpaid interest under the Note (such principal and interest to be allocated
among all BENEFICIARIES after providing for any defaulting BENEFICIARY'S partial
forfeiture as described above); and (6) Thereafter, any remaining sums shall be
allocated only among those BENEFICIARIES who did not default in the advancement
of sums upon demand therefor by BROKER.
In the event BENEFICIARY assigns his interest in the Note to any person,
such assignment shall be evidenced by execution and delivery to BROKER of an
Assignment of Note and Deed of Trust in recordable form, and the assignee shall
be required to execute a counterpart of this Agreement.
BENEFICIARIES holding 50% or more of the unpaid dollar amount of the Note
may determine and direct the actions by BROKER on behalf of all BENEFICIARIES in
the event of default or with respect to other matters requiring the direction or
approval of the BENEFICIARIES.
Upon any default under the Note or Deed of Trust BENEFICIARY shall have the
right to (1) direct the Trustee under the Deed of Trust to exercise the power of
sale contained therein, or (2) to bring an action of judicial foreclosure, in
which event all other partial BENEFICIARIES shall be joined therein. BENEFICIARY
understands and acknowledges that, if the power of sale under the Deed of Trust
securing the Note is exercised, all BENEFICIARIES may acquire fee title to the
security property as tenants-in-common. In such event, reasonable cooperation
between all BENEFICIARIES will be essential for the protection of this
investment, and BENEFICIARY therefore agrees to execute in favor of BROKER a
special power of attorney authorizing BROKER on behalf of BENEFICIARY to sell
such property on such terms and conditions as BROKER may deem proper and
reasonable.
268
BENEFICIARY hereby authorizes BROKER, as BENEFICIARY'S agent, to receive
and act upon any Notice of Rescission delivered by any borrower under the Truth
in Lending Simplification and Reform Act (the Act) with respect to the Note or
any refinancing thereof. In the event that BENEFICIARY is a creditor as defined
in the Act, BENEFICIARY hereby agrees that BROKER shall comply with all
requirements of the Act and regulations issued thereunder, and to give all
written disclosures required thereby.
In the event at the time of maturity of this Note, the borrower is in the
process of refinancing the loan with the assistance of BROKER, the BENEFICIARY
agrees to extend the term of this loan for an additional period not to exceed
(90) days or such other period of time to which the BROKER AND BENEFICIARY
agree. All other terms and conditions of the original Promissory Note shall
continue in full force and effect during said extension period.
This Agreement may be terminated by the parties as follows: (1) by BROKER,
at any time, upon 30 days written notice to BENEFICIARY, (2) by BENEFICIARY
and/or other partial BENEFICIARIES holding 50% of the outstanding ownership
interests in the Note, upon 30 days written notice to BROKER. BENEFICIARY
understands that this Agreement may not be terminated by BENEFICIARY alone
without the written consent of such 50% interest of all owners of the Note, and
further that other partial Beneficiaries have the right to terminate this
Agreement as to all Beneficiaries including the undersigned BENEFICIARY, without
BENEFICIARY'S consent, if such other partial BENEFICIARIES constitute such 50%
interest of all owners of the Note. In such event, BENEFICIARY agrees to accept
the substitution of any servicing agent chosen by such 50% interest so long as
the compensation to be paid shall not exceed the amounts set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
respective dates set forth below.
BROKER: REDWOOD MORTGAGE CORP, a California corporation
By:
----------------------------------
Michael Burwell, President
Date:
---------------------------------
BENEFICIARY:
-------------------------------------
-------------------------------------
By:
------------------------------------
Michael Burwell, President
269
EXHIBIT 10.3 (a)
PROMISSORY NOTE
Loan No.: ________________ ________________, 2000
Redwood City, California
FOR VALUABLE CONSIDERATION, ________________________________ (herein
"Maker"), hereby promises to pay to _________________________, or order (herein
"Payee"), at the address set forth below, or at such other address as the holder
hereof may, from time to time designate, the sum of ____________________
($__________) with interest on the unpaid balance of the principal sum disbursed
by Payee to or for the account of Maker at the interest rate specified below.
1. Interest and Payments.
(a) Fixed Rate Interest. Maker agrees that fixed interest earned by and
payable to Payee hereunder ("Interest") shall be equal to ____________ percent
(____%) per year of the outstanding principal amount disbursed beginning on the
date of disbursement of funds by Payee. Interest shall be calculated for actual
days elapsed on the basis of a 360-day year, which results in higher interest
payments than if a 365-day were used.
(b) Payments. Interest only shall be payable by Maker from the date of
disbursement of funds by Payee, with the Interest for the period through
________ due and payable upon execution and delivery of this Note. Beginning on
______________, and on the first day of each consecutive month thereafter until
the Maturity Date (as defined below), Maker shall make monthly payments of
Interest only. All payments received shall be credited first to costs, then to
Interest, and last to principal due hereunder.
2. Maturity Date. The outstanding principal balance of this Note and all
accrued but unpaid Interest shall be due and payable in full on
_________________ ("Maturity Date").
3. Prepayment. The right is reserved by Maker to prepay the outstanding
principal amount in whole or in part together with accrued Interest thereon. All
prepayments shall be applied to the most remote principal installments then
unpaid under this Note.
4. Late Charge. If Payee fails to receive any payments of Interest or
principal within ten (10) days after the date the same is due and payable, a
late charge to compensate Payee for damages Payee will suffer as a result shall
be immediately due and payable. Maker recognizes that a default by Maker in
making the payments agreed to be paid when due will result in Payee's incurring
additional expenses in servicing the loan, including, but not limited to,
sending out notices of delinquency, computing interest and segregating the
delinquent sums from not delinquent sums on all accounting, loan and data
processing records, in loss to Payee of the use of the money due, and in
frustration to Payee in meeting its other financial commitments. Maker agrees
that, if for any reason Maker fails to pay any amounts due under this Note so
that Payee fails to receive such payments within ten (10) days after the same
are due and payable, Payee shall be entitled to damages for the detriment caused
thereby, but that it is extremely difficult and impractical to ascertain the
extent of such damages. Maker therefore agrees that a sum equal to $.06 for each
$1.00 of each payment that becomes delinquent ten (10) days after its due date,
is a reasonable estimate of the fair average compensation for the loss and
damages Payee will suffer, that such amount shall be presumed to be the amount
of damages sustained by Payee in such case, and that Maker agrees to pay Payee
this sum on demand.
5. Default. If there exists any Event of Default, as defined below, under
the terms of this Note or under the terms of the Construction Deed of Trust,
Assignment of Leases and Rents, Security Agreement and Fixture Filing ("Deed of
Trust"), or any other document executed in connection with this Note (herein
called "Loan Documents"), Payee or the holder hereof is expressly authorized
without notice or demand of any kind to make all sums of Interest and principal
and any other sums owing under this Note immediately due and payable and to
apply all payments made on this Note or any of the Loan Documents to the payment
of any such part of any Event of Default as it may elect.
An Event of Default shall be either (1) a default in the payment of the
whole or in any part of the several installments of this Note when due, or (2)
any of the Events of Default contained in any of the Loan Documents. At any time
after an Event of Default the entire unpaid balance of principal, together with
Interest accrued thereon, shall, at the option of the legal holder hereof and
without notice (except as specified in any Loan Documents) and without demand or
presentment, become due and payable at the place of payment. Anything contained
herein or in any of the Loan Documents to the contrary notwithstanding, the
principal balance together with accrued Interest thereon so accelerated and
declared due as aforesaid shall continue to bear Interest and shall include
compensation for late payments on any and all overdue installments as described
above.
270
If an Event of Default has occurred, the failure of Payee or the holder
hereof to promptly exercise its rights to declare the indebtedness remaining
unpaid hereunder to be immediately due and payable shall not constitute a waiver
of such rights while such Event of Default continues nor a waiver of such right
in connection with any future Event of Default.
Maker hereby waives presentment for payment, protest and demand, and notice
of protest, demand, dishonor, nonpayment and nonperformance including notice of
dishonor with respect to any check or draft used in payment of any sum due
hereunder.
6. Legal Limits. All agreements between Maker and Payee are hereby
expressly limited so that in no event whatsoever, whether by reason of deferment
in accordance with this Note or under any agreement or by virtue of the
advancement of the loan proceeds, acceleration or maturity of the loan, or
otherwise, shall the amount paid or agreed to be paid to the Payee for the loan,
use, forbearance or detention of the money to be loaned hereunder or to
compensate Payee for damages to be suffered by reason of a late payment hereof,
exceed the maximum permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision hereof, or of any provision in any of
the Loan Documents at the time performance of such provision shall be due, shall
involve transcending the limit of validity prescribed by law, ipso facto the
obligations to be fulfilled shall be reduced to the limit of such validity. This
provision shall never be superseded or waived and shall control every other
provision of all agreements between Maker and Payee.
7. Attorneys' Fees. If an action is instituted on this Note, or if any
other judicial or non-judicial action is instituted by the holder hereof or by
any other person, and an attorney is employed by the holder hereof to appear in
any such action or proceeding or to reclaim, sequester, protect, preserve or
enforce the holder's interest in the real property security or any other
security for this Note, including, but not limited to, proceedings to foreclose
the loan evidenced hereby, proceedings under the United States Bankruptcy Code,
or in eminent domain, or under the probate code, or in connection with any state
or federal tax lien, or to enforce an assignment of rents, or for the
appointment of a receiver, or disputes regarding the proper disbursement of
construction loan funds, the Maker and every endorser and guarantor hereof and
every person who assumes the obligations evidenced by this Note and the Loan
Documents, jointly and severally promise to pay reasonable attorney's fees for
services performed by the holder's attorneys, and all costs and expenses
incurred incident to such employment. If Maker is the prevailing party in any
action by Maker pursuant to this Note, Payee shall pay such attorneys fees as
the court may direct.
8. Interest After Expiration or Acceleration. If the entire balance of
principal and accrued Interest is not paid in full on the Maturity Date, or upon
acceleration of this Note as provided in paragraphs 5 above or 10 below, without
waiving or modifying in any way any of the rights, remedies or recourse, Payee
may have under this Note or under any of the Loan Documents by virtue of this
default, the entire unpaid balance of principal and accrued interest shall bear
interest from the Maturity Date or the date of acceleration until paid in full a
the higher of: (a) eighteen percent (18%) per annum; or (b) a fluctuating rate
per annum at all times equal to the Discount Rate established by the Federal
Reserve Bank of San Francisco ("Discount Rate") plus ____________ percent (___%)
("Maturity Interest Rate"). If at any time the Discount Rate (or any previously
substituted alternative index) is no longer available, is unverifiable, or is no
longer calculated in substantially the same manner as before, then Payee may, in
its sole and absolute discretion, select and substitute an alternative index
over which Payee has no control. In addition, the holder hereof shall have any
and all other rights and remedies available at law or in equity or under the
Deed of Trust.
9. Security. This Note is secured by and is entitled to the benefits of the
Deed of Trust dated on or about the date of this Note executed by Maker to PLM
LENDER SERVICES, INC., a California corporation, as Trustee, for the use and
benefit of Payee covering and relating to the interest of Maker in the property
particularly described in Exhibit A to the Deed of Trust ("Property"). The
provisions of the Deed of Trust are incorporated herein by reference as if set
forth in full, and this Note is subject to all of the covenants and conditions
therein contained.
10. Acceleration. Without limiting the obligations of Maker or the rights
and remedies of Payee or the holder hereof under the terms and covenants of this
Note and the Deed of Trust, Maker agrees that Payee shall have the right, at its
sole option, to declare any indebtedness and obligations hereunder or under the
Deed of Trust, irrespective of the Maturity Date specified herein, due and
payable in full if: (1) Maker or any one or more of the tenants-in-common, joint
tenants, or other persons comprising Maker sells, enters into a contract of
sale, conveys, alienates or encumbers the Property or any portion thereof or any
fractional undivided interest therein, or suffers Maker's title or any interest
therein to be divested or encumbered, whether voluntarily or involuntarily, or
leases with an option to sell, or changes or permits to be changed the character
or use of the Property, or drills or extracts or enters into a lease for the
drilling for or extracting of oil, gas or other hydrocarbon substances or any
mineral of any kind or character on the Property; (2) The interest of any
general partner of Maker (or the interest of any general partner in a
partnership that is a partner) is assigned or transferred; (3) More than
twenty-five percent (25%) of the corporate stock of Maker (or of any corporate
partner or other corporation comprising Maker) is sold, transferred or assigned;
(4) There is a change in beneficial ownership with respect to more than
twenty-five percent (25%) of Maker (if Maker is a partnership, limited liability
company, trust or other legal entity) or of any partner or tenant-in-common of
Maker which is a partnership, limited liability company, trust or other legal
entity; or (5) a default has occurred hereunder or under any Loan Document and
is continuing. In such case, Payee or other holder of this Note may exercise any
and all of the rights and remedies and recourses set forth in the Deed of Trust
271
and as granted by law. Maker and any successor who acquires any record interest
in the Property agrees to notify Payee promptly in writing of any transaction or
event described in this section.
11. Governing Law and Severability. This Note is made pursuant to, and
shall be construed and governed by, the laws of the State of California. If any
paragraph, clause or provision of this Note or any of the Loan Documents is
construed or interpreted by a court of competent jurisdiction to be void,
invalid or unenforceable, such decision shall affect only those paragraphs,
clauses or provisions so construed or interpreted and shall not affect the
remaining paragraphs, clauses and provisions of this Note or the other Loan
Documents.
12. Time of Essence. Time is of the essence of this Note.
13. Payment Without Offset. Principal and Interest shall be paid without
deduction or offset in immediately available funds in lawful money of the United
States of America. Payments shall be deemed received only upon actual receipt by
Payee and upon Payee's application of such payments as provided herein.
14. Notices. All notices under this Note shall be in writing and shall be
served in person or by first class or certified mail addressed to the following
respective parties as follows:
MAKER:
------------------------------------
------------------------------------
------------------------------------
Attn:
-------------------------------
PAYEE:
----------------------------------
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1394
Attn: Michael Burwell
Any such notice or demand so served by first class or certified mail shall
be deposited in the United States mail, with postage thereon fully prepaid and
addressed to the party so to be served at its address above stated or at such
other address of which said party shall have theretofore notified in writing, as
provided above, the party giving such notice. Service of any such notice or
demand so made shall be deemed effective on the day of actual delivery or the
expiration of three business days after the date of mailing, whichever is the
earlier in time.
15. Collection. Any remittances by check or draft may be handled for
collection in accordance with the practices of the collecting party and any
receipt issued therefor shall be void unless the amount due is actually received
by Payee.
16. Assignment. Payee or other holder of this Note may assign all of its
rights, title and interest in this Note to any person, firm, corporation or
other entity without the consent of Maker.
17. Relationship. The relationship of the parties hereto is that of
borrower and lender and it is expressly understood and agreed that nothing
contained herein or in any of the Loan Documents shall be interpreted or
construed to make the parties partners, joint venturers or participants in any
other legal relationship except for borrower and lender.
18. Remedies. No right, power or remedy given Payee by the terms of this
Note, or in the Loan Documents is intended to be exclusive of any right, power
or remedy, and each and every such right, power or remedy shall be cumulative
and in addition to every other right, power or remedy given to Payee by the
terms of any of the Loan Documents or by any statute against Maker or any other
person. Every right, power and remedy of Payee shall continue in full force and
effect until such right, power or remedy is specifically waived by an instrument
in writing, executed by Payee.
19. Headings. The subject headings of the paragraphs of this Note are
included for purposes of convenience only, and shall not affect the construction
or interpretation of any of its provisions.
20. Jury Trial Waiver.
MAKER AND PAYEE HEREBY WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS
NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS
KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY MAKER AND PAYEE AND MAKER
ACKNOWLEDGES THAT NEITHER THE PAYEE NOR ANY PERSON ACTING ON BEHALF OF THE PAYEE
HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR
272
HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND
PAYEE ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT MAKER AND PAYEE HAVE ALREADY RELIED ON THIS WAIVER
IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS
WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND PAYEE FURTHER ACKNOWLEDGE
THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED)
IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL.
Maker: Payee:
----------------- --------------------
Maker:
--------------------------------------------
--------------------------------------------
273
EXHIBIT 10.3 (b)
PROMISSORY NOTE
Loan No.: _______________________ __________________, 20________
__________________, California
FOR VALUABLE CONSIDERATION, __________________________________ (herein
"Maker"), hereby promises to pay to _________________________________, or order
(herein "Payee"), at the address set forth below, or at such other address as
the holder hereof may from time to time designate, the sum of
___________________________ ($_______________) with interest on the unpaid
balance of the principal sum disbursed by Payee to or for the account of Maker
at the interest rate specified below.
1. Interest and Payments
(a) Fixed Rate Interest. Maker agrees that fixed interest earned by and
payable to Payee hereunder ("Interest") shall be equal to ______________ percent
(___%) per year of the principal sum disbursed by Payee. Interest shall be
calculated for actual days elapsed on the basis of a 360-day year, which results
in higher interest payments than if a 365-day were used.
(b) Payments. Interest only shall be payable by Maker from the date of
disbursement of funds by Payee, with the Interest for the period through
________, 20___ due and payable upon execution and delivery of this Note.
Beginning on _______, 20___, and on the first day of each consecutive month
thereafter until the Maturity Date (as defined below), Maker shall make monthly
payments of Interest only. All payments received shall be credited first to
costs, then to Interest, and last to principal due hereunder.
2. Maturity Date. The outstanding principal balance of this Note and all
accrued but unpaid Interest shall be due and payable in full on ________, 20___
("Maturity Date").
3. Prepayment. The right is reserved by Maker to prepay the outstanding
principal amount in whole or in part together with accrued Interest thereon. All
prepayments shall be applied to the most remote principal installments then
unpaid under this Note.
4. Late Charge. If Payee fails to receive any payments of Interest or
principal within ten (10) days after the date the same is due and payable, a
late charge to compensate Payee for damages Payee will suffer as a result shall
be immediately due and payable. Maker recognizes that a default by Maker in
making the payments agreed to be paid when due will result in Payee's incurring
additional expenses in servicing the loan, including, but not limited to,
sending out notices of delinquency, computing interest, and segregating the
delinquent sums from not delinquent sums on all accounting, loan and data
processing records, in loss to Payee of the use of the money due, and in
frustration to Payee in meeting its other financial commitments. Maker agrees
that if for any reason Maker fails to pay any amounts due under this Note so
that Payee fails to receive such payments within ten (10) days after the same
are due and payable, Payee shall be entitled to damages for the detriment caused
thereby, but that it is extremely difficult and impractical to ascertain the
extent of such damages. Maker therefore agrees that a sum equal to $.06 for each
$1.00 of each payment that becomes delinquent ten (10) days after its due date,
is a reasonable estimate of the fair average compensation for the loss and
damages Payee will suffer, that such amount shall be presumed to be the amount
of damages sustained by Payee in such case, and that Maker agrees to pay Payee
this sum on demand.
5. Default. If there exists any Event of Default, as defined below, under
the terms of this Note or under the terms of the Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing ("Deed of Trust") dated
on or about the date of this Note executed by Maker to PLM Lender Services,
Inc., a California corporation, as Trustee, for the use and benefit of Payee
covering and relating to the interest of Maker in the property particularly
described in Exhibit A to the Deed of Trust ("Property") or any other document
executed in connection with this Note (herein called "Loan Documents"), Payee or
the holder hereof is expressly authorized without notice or demand of any kind
to make all sums of Interest and principal and any other sums owing under this
Note immediately due and payable and to apply all payments made on this Note or
any of the Loan Documents to the payment of any such part of any Event of
Default as it may elect.
274
An Event of Default shall be either: (1) a default in the payment of the
whole or in any part of the several installments of this Note when due, or (2)
any of the Events of Default contained in any of the Loan Documents. At any time
after an Event of Default the entire unpaid balance of principal, together with
Interest accrued thereon, shall, at the option of the legal holder hereof and
without notice (except as specified in any Loan Documents) and without demand or
presentment, become due and payable at the place of payment. Anything contained
herein or in any of the Loan Documents to the contrary notwithstanding, the
principal balance together with accrued Interest thereon so accelerated and
declared due as aforesaid shall continue to bear Interest and shall include
compensation for late payments on any and all overdue installments as described
above.
If an Event of Default has occurred, the failure of Payee or the holder
hereof to promptly exercise its rights to declare the indebtedness remaining
unpaid hereunder to be immediately due and payable shall not constitute a waiver
of such rights while such Event of Default continues nor a waiver of such right
in connection with any future Event of Default.
Maker hereby waives presentment for payment, protest and demand, and notice
of protest, demand, dishonor, nonpayment and nonperformance including notice of
dishonor with respect to any check or draft used in payment of any sum due
hereunder.
6. Legal Limits. All agreements between Maker and Payee are hereby
expressly limited so that in no event whatsoever, whether by reason of deferment
in accordance with this Note or under any agreement or by virtue of the
advancement of the loan proceeds, acceleration or maturity of the loan, or
otherwise, shall the amount paid or agreed to be paid to the Payee for the loan,
use, forbearance or detention of the money to be loaned hereunder or to
compensate Payee for damages to be suffered by reason of a late payment hereof,
exceed the maximum permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision hereof, or of any provision in any of
the Loan Documents at the time performance of such provision shall be due, shall
involve transcending the limit of validity prescribed by law, ipso facto the
obligations to be fulfilled shall be reduced to the limit of such validity. This
provision shall never be superseded or waived and shall control every other
provision of all agreements between Maker and Payee.
7. Attorneys' Fees. If an action is instituted on this Note, or if any
other judicial or non-judicial action is instituted by the holder hereof or by
any other person, and an attorney is employed by the holder hereof to appear in
any such action or proceeding or to reclaim, sequester, protect, preserve or
enforce the holder's interest in the real property security or any other
security for this Note, including, but not limited to, proceedings to foreclose
the loan evidenced hereby, proceedings under the United States Bankruptcy Code,
or in eminent domain, or under the probate code, or in connection with any state
or federal tax lien, or to enforce an assignment of rents, or for the
appointment of a receiver, the Maker and every endorser and guarantor hereof and
every person who assumes the obligations evidenced by this Note and the Loan
Documents, jointly and severally promise to pay reasonable attorney's fees for
services performed by the holder's attorneys, and all costs and expenses
incurred incident to such employment. If Maker is the prevailing party in any
action by Maker pursuant to this Note, Payee shall pay such attorneys fees as
the court may direct.
8. Interest After Expiration or Acceleration. If the entire balance of
principal and accrued Interest is not paid in full on the Maturity Date or upon
acceleration of this Note as provided in paragraphs 5 above or 10 below, without
waiving or modifying in any way any of the rights, remedies or recourse Payee
may have under this Note or under any of the Loan Documents by virtue of this
default, the entire unpaid balance of principal and accrued Interest shall bear
interest from the Maturity Date or the date of acceleration until paid in full
at the higher of: (a) eighteen percent (18%) per annum; or (b) a fluctuating
rate per annum at all times equal to the Discount Rate of the Federal Reserve
Bank of San Francisco ("Discount Rate") plus ______________ percent (___%)
("Maturity Interest Rate"). If at any time the Discount Rate (or any previously
substituted alternative index) is no longer available, is unverifiable, or is no
longer calculated in substantially the same manner as before, then Payee may, in
its sole and absolute discretion, select and substitute an alternative index
over which Payee has no control. In addition, the holder hereof shall have any
and all other rights and remedies available at law or in equity or under the
Deed of Trust.
9. Security. This Note is secured by and is entitled to the benefits of the
Deed of Trust. The provisions of the Deed of Trust are incorporated herein by
reference as if set forth in full, and this Note is subject to all of the
covenants and conditions therein contained.
10. Acceleration. Without limiting the obligations of Maker or the rights
and remedies of Payee or the holder hereof under the terms and covenants of this
Note and the Deed of Trust, Maker agrees that Payee shall have the right, at its
sole option, to declare any indebtedness and obligations hereunder or under the
Deed of Trust, irrespective of the Maturity Date specified herein, due and
payable in full if: (1) Maker or any one or more of the tenants-in-common, joint
tenants, or other persons comprising Maker sells, enters into a contract of
sale, conveys, alienates or encumbers the Property or any portion thereof or any
fractional undivided interest therein, or suffers Maker's title or any interest
therein to be divested or encumbered, whether voluntarily or involuntarily, or
leases with an option to sell, or changes or permits to be changed the character
or use of the Property, or drills or extracts or enters into a lease for the
drilling for or extracting of oil, gas or other hydrocarbon substances or any
mineral of any kind or character on the Property; (2) The interest of any
general partner of Maker (or the interest of any general partner in a
partnership that is a partner) is assigned or transferred; (3) If Maker is a
275
corporation or partnership, more than twenty-five percent (25%) of the corporate
stock of Maker (or of any corporate partner or other corporation comprising
Maker) is sold, transferred or assigned; (4) There is a change in beneficial
ownership with respect to more than twenty-five percent (25%) of Maker (if Maker
is a limited liability company, trust or other legal entity) or of any partner
or tenant-in-common of Maker which is a limited liability company, trust or
other legal entity; or (5) a default has occurred hereunder or under any Loan
Document and is continuing. In such case, Payee or other holder of this Note may
exercise any and all of the rights and remedies and recourses set forth in the
Deed of Trust and as granted by law. Maker and any successor who acquires any
record interest in the Property agrees to notify Payee promptly in writing of
any transaction or event described in this section.
11. Governing Law and Severability. This Note is made pursuant to, and
shall be construed and governed by, the laws of the State of California. If any
paragraph, clause or provision of this Note or any of the Loan Documents is
construed or interpreted by a court of competent jurisdiction to be void,
invalid or unenforceable, such decision shall affect only those paragraphs,
clauses or provisions so construed or interpreted and shall not affect the
remaining paragraphs, clauses and provisions of this Note or the other Loan
Documents.
12. Time of Essence. Time is of the essence of this Note.
13. Payment Without Offset. Principal and Interest shall be paid without
deduction or offset in immediately available funds in lawful money of the United
States of America. Payments shall be deemed received only upon actual receipt by
Payee and upon Payee's application of such payments as provided herein.
14. Notices. All notices under this Note shall be in writing and shall be
effective upon personal delivery to the authorized representatives of either
party or upon being sent by certified or first class mail, postage prepaid,
addressed to the following respective parties as follows:
MAKER:
------------------------------------
------------------------------------
------------------------------------
Attn:-------------------------------
PAYEE:
------------------------------------
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1394
Attn: Michael Burwell
15. Collection. Any remittances by check or draft may be handled for
collection in accordance with the practices of the collecting party and any
receipt issued therefor shall be void unless the amount due is actually received
by Payee.
16. Assignment. Payee or other holder of this Note may assign all of its
rights, title and interest in this Note to any person, firm, corporation or
other entity without the consent of Maker.
17. Relationship. The relationship of the parties hereto is that of
borrower and lender and it is expressly understood and agreed that nothing
contained herein or in any of the Loan Documents shall be interpreted or
construed to make the parties partners, joint venturers or participants in any
other legal relationship except for borrower and lender.
18. Remedies. No right, power or remedy given Payee by the terms of this
Note, or in the Loan Documents is intended to be exclusive of any right, power
or remedy, and each and every such right, power or remedy shall be cumulative
and in addition to every other right, power or remedy given to Payee by the
terms of any of the Loan Documents or by any statute against Maker or any other
person. Every right, power and remedy of Payee shall continue in full force and
effect until such right, power or remedy is specifically waived by an instrument
in writing, executed by Payee.
19. Joint and Several Liability. If Maker is composed of more than one
person, then each person comprising Maker shall be jointly and severally liable
for the obligations, covenants and agreements created by or arising out of this
Note.
276
20. Jury Trial Waiver. MAKER AND PAYEE HEREBY WAIVE THEIR RESPECTIVE RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE
SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING
ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY
MAKER AND PAYEE AND MAKER ACKNOWLEDGES THAT NEITHER THE PAYEE NOR ANY PERSON
ACTING ON BEHALF OF THE PAYEE HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE
THIS WAIVER OF TRAIL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR
NULLIFY ITS EFFECT. MAKER AND PAYEE ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL
INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND PAYEE HAVE
ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM
WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND
PAYEE FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE
OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF
THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.
Maker: Payee:
------- ----------
21. Headings. The subject headings of the paragraphs of this Note are
included for purposes of convenience only, and shall not affect the construction
or interpretation of any of its provisions.
Maker:
---------------------------------
---------------------------------
277
EXHIBIT 10.3 (c)
PROMISSORY NOTE
Loan No.: _______________________ ________________, 20________
________________, California
FOR VALUABLE CONSIDERATION, __________________________________ (herein
"Maker"), hereby promises to pay to _________________________________, or order
(herein "Payee"), at the address set forth below, or at such other address as
the holder hereof may from time to time designate, the sum of
___________________________ ($_______________) with interest on the unpaid
balance of the principal sum disbursed by Payee to or for the account of Maker
at the interest rate specified below.
1. Interest and Payments
(a) Fixed Rate Interest. Maker agrees that fixed interest earned by and
payable to Payee hereunder ("Interest") shall be equal to ______________ percent
(___%) per year of the principal sum disbursed by Payee. Interest shall be
calculated for actual days elapsed on the basis of a 360-day year, which results
in higher interest payments than if a 365-day were used.
(b) Payments. Interest shall be payable by Maker from the date of
disbursement of funds by Payee, with the Interest for the period through
________, 2000 due and payable upon execution and delivery of this Note.
Beginning on _______, 2000, and on the first day of each consecutive month
thereafter until the Maturity Date (as defined below), Maker shall make monthly
payments of $_________ consisting of principal and Interest. All payments
received shall be credited first to costs, then to Interest, and last to
principal due hereunder.
2. Maturity Date. The outstanding principal balance of this Note and all
accrued but unpaid Interest shall be due and payable in full on ________, 19___
("Maturity Date").
3. Prepayment. The right is reserved by Maker to prepay the outstanding
principal amount in whole or in part together with accrued Interest thereon. All
prepayments shall be applied to the most remote principal installments then
unpaid under this Note.
4. Late Charge. If Payee fails to receive any payments of Interest or
principal within ten (10) days after the date the same is due and payable, a
late charge to compensate Payee for damages Payee will suffer as a result shall
be immediately due and payable. Maker recognizes that a default by Maker in
making the payments agreed to be paid when due will result in Payee's incurring
additional expenses in servicing the loan, including, but not limited to,
sending out notices of delinquency, computing interest, and segregating the
delinquent sums from not delinquent sums on all accounting, loan and data
processing records, in loss to Payee of the use of the money due, and in
frustration to Payee in meeting its other financial commitments. Maker agrees
that if for any reason Maker fails to pay any amounts due under this Note so
that Payee fails to receive such payments within ten (10) days after the same
are due and payable, Payee shall be entitled to damages for the detriment caused
thereby, but that it is extremely difficult and impractical to ascertain the
extent of such damages. Maker therefore agrees that a sum equal to $.06 for each
$1.00 of each payment that becomes delinquent ten (10) days after its due date,
is a reasonable estimate of the fair average compensation for the loss and
damages Payee will suffer, that such amount shall be presumed to be the amount
of damages sustained by Payee in such case, and that Maker agrees to pay Payee
this sum on demand.
5. Default. If there exists any Event of Default, as defined below, under
the terms of this Note or under the terms of the Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing ("Deed of Trust") dated
on or about the date of this Note executed by Maker to PLM Lender Services,
Inc., a California corporation, as Trustee, for the use and benefit of Payee
covering and relating to the interest of Maker in the property particularly
described in Exhibit A to the Deed of Trust ("Property") or any other document
executed in connection with this Note (herein called "Loan Documents"), Payee or
the holder hereof is expressly authorized without notice or demand of any kind
to make all sums of Interest and principal and any other sums owing under this
Note immediately due and payable and to apply all payments made on this Note or
any of the Loan Documents to the payment of any such part of any Event of
Default as it may elect.
278
An Event of Default shall be either: (1) a default in the payment of the
whole or in any part of the several installments of this Note when due, or (2)
any of the Events of Default contained in any of the Loan Documents. At any time
after an Event of Default the entire unpaid balance of principal, together with
Interest accrued thereon, shall, at the option of the legal holder hereof and
without notice (except as specified in any Loan Documents) and without demand or
presentment, become due and payable at the place of payment. Anything contained
herein or in any of the Loan Documents to the contrary notwithstanding, the
principal balance together with accrued Interest thereon so accelerated and
declared due as aforesaid shall continue to bear Interest and shall include
compensation for late payments on any and all overdue installments as described
above.
If an Event of Default has occurred, the failure of Payee or the holder
hereof to promptly exercise its rights to declare the indebtedness remaining
unpaid hereunder to be immediately due and payable shall not constitute a waiver
of such rights while such Event of Default continues nor a waiver of such right
in connection with any future Event of Default.
Maker hereby waives presentment for payment, protest and demand, and notice
of protest, demand, dishonor, nonpayment and nonperformance including notice of
dishonor with respect to any check or draft used in payment of any sum due
hereunder.
6. Legal Limits. All agreements between Maker and Payee are hereby
expressly limited so that in no event whatsoever, whether by reason of deferment
in accordance with this Note or under any agreement or by virtue of the
advancement of the loan proceeds, acceleration or maturity of the loan, or
otherwise, shall the amount paid or agreed to be paid to the Payee for the loan,
use, forbearance or detention of the money to be loaned hereunder or to
compensate Payee for damages to be suffered by reason of a late payment hereof,
exceed the maximum permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision hereof, or of any provision in any of
the Loan Documents at the time performance of such provision shall be due, shall
involve transcending the limit of validity prescribed by law, ipso facto the
obligations to be fulfilled shall be reduced to the limit of such validity. This
provision shall never be superseded or waived and shall control every other
provision of all agreements between Maker and Payee.
7. Attorneys' Fees. If an action is instituted on this Note, or if any
other judicial or non-judicial action is instituted by the holder hereof or by
any other person, and an attorney is employed by the holder hereof to appear in
any such action or proceeding or to reclaim, sequester, protect, preserve or
enforce the holder's interest in the real property security or any other
security for this Note, including, but not limited to, proceedings to foreclose
the loan evidenced hereby, proceedings under the United States Bankruptcy Code,
or in eminent domain, or under the probate code, or in connection with any state
or federal tax lien, or to enforce an assignment of rents, or for the
appointment of a receiver, the Maker and every endorser and guarantor hereof and
every person who assumes the obligations evidenced by this Note and the Loan
Documents, jointly and severally promise to pay reasonable attorney's fees for
services performed by the holder's attorneys, and all costs and expenses
incurred incident to such employment. If Maker is the prevailing party in any
action by Maker pursuant to this Note, Payee shall pay such attorneys fees as
the court may direct.
8. Interest After Expiration or Acceleration. If the entire balance of
principal and accrued Interest is not paid in full on the Maturity Date or upon
acceleration of this Note as provided in paragraphs 5 above or 10 below, without
waiving or modifying in any way any of the rights, remedies or recourse Payee
may have under this Note or under any of the Loan Documents by virtue of this
default, the entire unpaid balance of principal and accrued Interest shall bear
interest from the Maturity Date or the date of acceleration until paid in full
at the higher of: (a) eighteen percent (18%) per annum; or (b) a fluctuating
rate per annum at all times equal to the Discount Rate of the Federal Reserve
Bank of San Francisco ("Discount Rate") plus ______________ percent (___%)
("Maturity Interest Rate"). If at any time the Discount Rate (or any previously
substituted alternative index) is no longer available, is unverifiable, or is no
longer calculated in substantially the same manner as before, then Payee may, in
its sole and absolute discretion, select and substitute an alternative index
over which Payee has no control. In addition, the holder hereof shall have any
and all other rights and remedies available at law or in equity or under the
Deed of Trust.
9. Security. This Note is secured by and is entitled to the benefits of the
Deed of Trust. The provisions of the Deed of Trust are incorporated herein by
reference as if set forth in full, and this Note is subject to all of the
covenants and conditions therein contained.
10. Acceleration. Without limiting the obligations of Maker or the rights
and remedies of Payee or the holder hereof under the terms and covenants of this
Note and the Deed of Trust, Maker agrees that Payee shall have the right, at its
sole option, to declare any indebtedness and obligations hereunder or under the
Deed of Trust, irrespective of the Maturity Date specified herein, due and
payable in full if: (1) Maker or any one or more of the tenants-in-common, joint
tenants, or other persons comprising Maker sells, enters into a contract of
sale, conveys, alienates or encumbers the Property or any portion thereof or any
fractional undivided interest therein, or suffers Maker's title or any interest
therein to be divested or encumbered, whether voluntarily or involuntarily, or
leases with an option to sell, or changes or permits to be changed the character
or use of the Property, or drills or extracts or enters into a lease for the
drilling for or extracting of oil, gas or other hydrocarbon substances or any
mineral of any kind or character on the Property; (2) The interest of any
279
general partner of Maker (or the interest of any general partner in a
partnership that is a partner) is assigned or transferred; (3) If Maker is a
corporation or partnership, more than twenty-five percent (25%) of the corporate
stock of Maker (or of any corporate partner or other corporation comprising
Maker) is sold, transferred or assigned; (4) There is a change in beneficial
ownership with respect to more than twenty-five percent (25%) of Maker (if Maker
is a limited liability company, trust or other legal entity) or of any partner
or tenant-in-common of Maker which is a limited liability company, trust or
other legal entity; or (5) a default has occurred hereunder or under any Loan
Document and is continuing. In such case, Payee or other holder of this Note may
exercise any and all of the rights and remedies and recourses set forth in the
Deed of Trust and as granted by law. Maker and any successor who acquires any
record interest in the Property agrees to notify Payee promptly in writing of
any transaction or event described in this section.
11. Governing Law and Severability. This Note is made pursuant to, and
shall be construed and governed by, the laws of the State of California. If any
paragraph, clause or provision of this Note or any of the Loan Documents is
construed or interpreted by a court of competent jurisdiction to be void,
invalid or unenforceable, such decision shall affect only those paragraphs,
clauses or provisions so construed or interpreted and shall not affect the
remaining paragraphs, clauses and provisions of this Note or the other Loan
Documents.
12. Time of Essence. Time is of the essence of this Note.
13. Payment Without Offset. Principal and Interest shall be paid without
deduction or offset in immediately available funds in lawful money of the United
States of America. Payments shall be deemed received only upon actual receipt by
Payee and upon Payee's application of such payments as provided herein.
14. Notices. All notices under this Note shall be in writing and shall be
effective upon personal delivery to the authorized representatives of either
party or upon being sent by certified or first class mail, postage prepaid,
addressed to the following respective parties as follows:
MAKER:
-----------------------------------
-----------------------------------
-----------------------------------
Attn:
------------------------------
PAYEE:
-----------------------------------
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1394
Attn: Michael Burwell
15. Collection. Any remittances by check or draft may be handled for
collection in accordance with the practices of the collecting party and any
receipt issued therefor shall be void unless the amount due is actually received
by Payee.
16. Assignment. Payee or other holder of this Note may assign all of its
rights, title and interest in this Note to any person, firm, corporation or
other entity without the consent of Maker.
17. Relationship. The relationship of the parties hereto is that of
borrower and lender and it is expressly understood and agreed that nothing
contained herein or in any of the Loan Documents shall be interpreted or
construed to make the parties partners, joint venturers or participants in any
other legal relationship except for borrower and lender.
18. Remedies. No right, power or remedy given Payee by the terms of this
Note, or in the Loan Documents is intended to be exclusive of any right, power
or remedy, and each and every such right, power or remedy shall be cumulative
and in addition to every other right, power or remedy given to Payee by the
terms of any of the Loan Documents or by any statute against Maker or any other
person. Every right, power and remedy of Payee shall continue in full force and
effect until such right, power or remedy is specifically waived by an instrument
in writing, executed by Payee.
19. Joint and Several Liability. If Maker is composed of more than one
person, then each person comprising Maker shall be jointly and severally liable
for the obligations, covenants and agreements created by or arising out of this
Note.
280
20. Jury Trial Waiver. MAKER AND PAYEE HEREBY WAIVE THEIR RESPECTIVE RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE
SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING
ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY
MAKER AND PAYEE AND MAKER ACKNOWLEDGES THAT NEITHER THE PAYEE NOR ANY PERSON
ACTING ON BEHALF OF THE PAYEE HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE
THIS WAIVER OF TRAIL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR
NULLIFY ITS EFFECT. MAKER AND PAYEE ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL
INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND PAYEE HAVE
ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM
WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND
PAYEE FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE
OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF
THIS WAIVER BY INDEPENDENT LEGAL COUNSEL.
Maker: Payee:
------ ------
21. Headings. The subject headings of the paragraphs of this Note are
included for purposes of convenience only, and shall not affect the construction
or interpretation of any of its provisions.
Maker:
---------------------------------
---------------------------------
281
EXHIBIT 10.3 (d)
NOTE SECURED BY DEED OF TRUST
Loan No.:
2000 Redwood City, California
- --------------------------------
(PROPERTY ADDRESS)
1. BORROWER'S PROMISE TO PAY LOAN AND INTEREST
In return for a loan I promise to pay $_________ (this amount will be
called "Principal"), plus interest at a yearly rate of _________ percent (__%)
to the order__________________________________________________________ (who will
be called "Lender").
I understand that the Lender may transfer this Note. The Lender or anyone
who takes an interest in this Note by transfer and who is entitled to receive
payments under this Note will be called the "Note Holder(s)".
All payments received on this Note shall be applied pro rata in proportion
to the interest held by each of the Note Holder(s).
Interest will be charged on that part of Principal, which has not been
paid. Interest will be charged beginning on ____________, 20__ and continuing
until the full amount of Principal and interest has been paid. I also agree to
pay interest at the above rate on the prepaid finance charges, which are a part
of the Principal.
2. PAYMENTS
I will pay interest only by making payments each month of $_______. I will
make my payments on the ___ day of each month beginning on _________, 20__. I
will make these payments every month until _________, 20___ (the "Due Date"). On
the Due Date I will still owe the Principal; on the Due Date I will pay all
amounts I owe under this Note, in full, on that date.
I will make my monthly payments at P.O. Box 5096, Redwood City, CA
94063-0096 or at a different place if I am notified by the Note Holder(s).
3. BORROWER'S FAILURE TO PAY AS REQUIRED
(A) LATE CHARGE FOR OVERDUE PAYMENTS
If the Note Holder(s) has not received the full amount of any of my monthly
payments by the end of 10th calendar days after the date it is due, I will pay a
late charge to the Note Holder(s). The amount of the charge will be 6% of the
amount overdue or $5.00, whichever is more. I will pay this late charge only
once on any late payment.
(B) NONPAYMENT - DEFAULT
If I do not pay any payment of Principal or interest by the date stated in
Section 2 above, I will be in default, and the Lender and the Note Holder may
demand that I pay immediately all amounts that I owe under this Note.
Even if, at a time which I am in default, the Note Holder does not demand
that I pay immediately in full as described above, the Note Holder will still
have the right to do so if I am in default at a later time. If there is more
than one Note Holder, any one Note Holder may exercise any right under this Note
in the event of a default. A default upon any interest of any Note Holder shall
be a default upon all interests.
282
(C) ADVANCES
All advances made pursuant to the terms of the Deed of Trust securing this
Note shall bear interest from the date of advance at the rate of interest in
this Note.
(D) PAYMENT OF NOTE HOLDER'S COSTS AND EXPENSES
If the Note Holder has required me to pay immediately in full as described
above, the Note Holder will have the right to be paid back for all of its costs
and expenses to the extent not prohibited by applicable law. Those expenses
include, for example, reasonable attorney's fees.
(E) INTEREST INCREASE IF NOTE NOT PAID ON DUE DATE
If the Note Holder has not received all amounts owed under this Note on the
Due Date, I will pay interest on the full amount of unpaid Principal at _______
percent (__%) per annum plus the loan or forbearance rate established by the
Federal Reserve Bank of San Francisco on advances to member banks under Section
13 and 13a of the Federal Reserve Act, on the Due Date, or the rate of interest
called for in this Note, whichever is greater.
4. THIS NOTE IS SECURED BY A DEED OF TRUST
This Note is secured by a Deed of Trust upon real property in
_______________________ County, California.
5. BORROWER'S REQUIRED REPAYMENT IN FULL BEFORE THE SCHEDULED DATE
In the event of any sale or conveyance of any part of the real property
described in the Deed of Trust securing this Note, then the Note Holder(s) may
demand payment in full of all amounts that I owe under this Note, as allowed by
law.
6. BORROWER'S PAYMENTS BEFORE THEY ARE DUE - PREPAYMENT PENALTY.
I have the right to make payments of principal at any time before they are
due. There shall be no prepayment penalty.
7. INTENT TO COMPLY WITH LAW
It is the intent of all of the parties to this Note to abide by all of the
provisions of the California Business and Professions Code governing Real
Property Loans and any terms of this Note inconsistent with that law are hereby
waived by the Lender and Note Holder(s).
8. Jury Trial Waiver.
MAKER AND PAYEE HEREBY WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS
NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS
KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY MAKER AND PAYEE AND MAKER
ACKNOWLEDGES THAT NEITHER THE PAYEE NOR ANY PERSON ACTING ON BEHALF OF THE PAYEE
HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR
HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND
PAYEE ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT MAKER AND PAYEE HAVE ALREADY RELIED ON THIS WAIVER
IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS
WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND PAYEE FURTHER ACKNOWLEDGE
THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED)
IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL.
Maker: Payee:
------ ------
- ----------------------------------- ---------------------
(Borrower) (Date)
- ----------------------------------- ---------------------
(Borrower) (Date)
283
EXHIBIT 10.3 (e)
NOTE SECURED BY DEED OF TRUST
Loan No.:
2000 Redwood City, California
- --------------------------------
(PROPERTY ADDRESS)
1. BORROWER'S PROMISE TO PAY LOAN AND INTEREST
In return for a loan I promise to pay $________________ (this amount will
be called "Principal"), plus interest at a yearly rate of __________ percent
(___%) to the order of ______________________________________________________
(who will be called "Lender").
I understand that the Lender may transfer this Note. The Lender or anyone
who takes an interest in this Note by transfer and who is entitled to receive
payments under this Note will be called the "Note Holder(s)".
All payments received on this Note shall be applied pro rata in proportion
to the interest held by each of the Note Holder(s).
Interest will be charged on that part of Principal which has not been paid.
Interest will be charged beginning on _____________, 20__ and continuing until
the full amount of Principal and interest has been paid. I also agree to pay
interest at the above rate on the prepaid finance charges, which are a part of
the Principal.
2. PAYMENTS
I will pay Principal and interest by making payments of each month of
$___________. I will make my payments on the ___ day of each month beginning on
________, 20 ____. I will make these payments every month until _________, 20___
(the "Due Date"). On the Due Date I will pay remaining Principal plus accrued
interest that I owe under this Note, in full, on that date.
I will make my monthly payments at P.O. Box 5096, Redwood City, CA
94063-0096 or at a different place if I am notified by the Note Holder(s).
3. BORROWER'S FAILURE TO PAY AS REQUIRED
(A) LATE CHARGE FOR OVERDUE PAYMENTS
If the Note Holder(s) has not received the full amount of any of my monthly
payments by the end of 10th calendar days after the date it is due, I will pay a
late charge to the Note Holder(s). The amount of the charge will be 6% of the
amount overdue or $5.00, whichever is more. I will pay this late charge only
once on any late payment.
(B) NONPAYMENT - DEFAULT
If I do not pay any payment of Principal or interest by the date stated in
Section 2 above, I will be in default, and the Lender and the Note Holder may
demand that I pay immediately all amounts that I owe under this Note.
Even if, at a time which I am in default, the Note Holder does not demand
that I pay immediately in full as described above, the Note Holder will still
have the right to do so if I am in default at a later time. If there is more
than one Note Holder, any one Note Holder may exercise any right under this Note
in the event of a default. A default upon any interest of any Note Holder shall
be a default upon all interests.
(C) ADVANCES
All advances made pursuant to the terms of the Deed of Trust securing this
Note shall bear interest from the date of advance at the rate of interest in
this Note.
284
(D) PAYMENT OF NOTE HOLDER'S COSTS AND EXPENSES
If the Note Holder has required me to pay immediately in full as described
above, the Note Holder will have the right to be paid back for all of its costs
and expenses to the extent not prohibited by applicable law. Those expenses
include, for example, reasonable attorney's fees.
(E) INTEREST INCREASE IF NOTE NOT PAID ON DUE DATE
If the Note Holder has not received all amounts owed under this Note on the
Due Date, I will pay interest on the full amount of unpaid Principal at ________
percent (__%) per annum plus the loan or forbearance rate established by the
Federal Reserve Bank of San Francisco on advances to member banks under Section
13 and 13a of the Federal Reserve Act, on the Due Date, or the rate of interest
called for in this Note, whichever is greater.
4. THIS NOTE IS SECURED BY A DEED OF TRUST
This Note is secured by a Deed of Trust upon real property in
_______________________ County, California.
5. BORROWER'S REQUIRED REPAYMENT IN FULL BEFORE THE SCHEDULED DATE
In the event of any sale or conveyance of any part of the real property
described in the Deed of Trust securing this Note, then the Note Holder(s) may
demand payment in full of all amounts that I owe under this Note, as allowed by
law.
6. BORROWER'S PAYMENTS BEFORE THEY ARE DUE - PREPAYMENT PENALTY.
I have the right to make payments of principal at any time before they are
due. There shall be no prepayment penalty.
7. INTENT TO COMPLY WITH LAW
It is the intent of all of the parties to this Note to abide by all of the
provisions of the California Business and Professions Code governing Real
Property Loans and any terms of this Note inconsistent with that law are hereby
waived by the Lender and Note Holder(s).
8. Jury Trial Waiver.
MAKER AND PAYEE HEREBY WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS
NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS
KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY MAKER AND PAYEE AND MAKER
ACKNOWLEDGES THAT NEITHER THE PAYEE NOR ANY PERSON ACTING ON BEHALF OF THE PAYEE
HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR
HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND
PAYEE ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT MAKER AND PAYEE HAVE ALREADY RELIED ON THIS WAIVER
IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS
WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND PAYEE FURTHER ACKNOWLEDGE
THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED)
IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL.
Maker: Payee:
------ ------
- ----------------------------------- --------------------
(Borrower) (Date)
- ----------------------------------- --------------------
(Borrower) (Date)
285
EXHIBIT 10.4 (a)
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
Redwood Mortgage Corp.
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1394
Attn: Michael Burwell
- ----------------------------------------------------------------
LOAN NO.:
CONSTRUCTION DEED OF TRUST, ASSIGNMENT
OF LEASES AND RENTS, SECURITY
AGREEMENT AND FIXTURE FILING
THIS CONSTRUCTION DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY
AGREEMENT AND FIXTURE FILING (this "Deed of Trust") is made as of
______________, 20___, by ________________________________________, whose
address is _____________________________________________, (herein "Trustor"), to
PLM LENDER SERVICES, INC., a California corporation, whose address is 577 Salmar
Avenue, Suite #100, Campbell, California 95008, (herein "Trustee"), in favor of
- ------------------------------------------, whose address is 900 Veterans Blvd.,
Suite 500, Redwood City, California 94063-1394 (herein "Beneficiary").
Trustor, in consideration of the loan described below, irrevocably grants,
conveys, transfers and assigns to Trustee, its successors and assigns, in trust,
with power of sale and right of entry and possession, all of Trustor's estate,
right, title and interest in and to that certain real property located in the
City of ________________, County of _______________, State of California, more
particularly described in Exhibit A attached hereto and incorporated herein by
this reference (the "Land"),
TOGETHER WITH THE FOLLOWING:
(a) Improvements. All buildings and other improvements now or hereafter
located on the Land, including, but not limited to, the Fixtures (as defined
below) (collectively, the "Improvements");
(b) Fixtures. All fixtures (goods that are or become so related to the Land
or Improvements that an interest in them arises under real estate law) now or
hereafter located on, attached to, installed in or used in connection with the
Land and Improvements;
(c) Intellectual Property Rights, Other Personal Property. All intangible
property and rights relating to the Land or the operation thereof, or used in
connection therewith, including, without limitation, tradenames and trademarks;
all machinery, equipment, building materials, appliances and goods of every
nature whatsoever (herein collectively called "equipment" and other "personal
property") now or hereafter located in, or on, attached or affixed to, or used
or intended to be used in connection with, the Land, including, but without
limitation, all heating, lighting, laundry, incinerating, gas, electric and
power equipment, engines, pipes, pumps, tanks, motors, conduits, switchboards,
plumbing, lifting, cleaning, fire prevention, fire extinguishing, refrigerating,
ventilating and communications apparatus, air cooling and air conditioning
apparatus, elevators and escalators and related machinery and equipment, pool
and pool operation and maintenance equipment and apparatus, shades, awnings,
blinds, curtains, drapes, attached floor coverings, including rugs and
carpeting, television, radio and music cable antennae and systems, screens,
storm doors and windows, stoves, refrigerators, dishwashers and other installed
appliances, attached cabinets, partitions, ducts and compressors, furnishings
and furniture, and trees, plants and other items of landscaping (except that the
foregoing equipment and other personal property covered hereby shall not include
machinery, apparatus, equipment, fittings and articles of personal property used
in the business of Trustor (commonly referred to as "trade fixtures") whether
the same are annexed to said real property or not, unless the same are also used
in the operation of any building or other improvement located thereon or unless
the same cannot be removed without materially damaging said real property or any
such building or other improvement), all of which, including replacements and
additions thereto, shall, to the fullest extent permitted by law and for the
purposes of this Deed of Trust, be deemed to be part and parcel of, and
appropriated to the use of, said real property and, whether affixed or annexed
thereto or not, be deemed conclusively to be real property and conveyed by this
Deed of Trust, and all proceeds and products of any and all thereof;
286
(d) Contracts, Permits, Plans, Easements. All now or hereafter existing
plans and specifications prepared for construction of Improvements on the Land
and all studies, data and drawings related thereto, and also all contracts and
agreements of Trustor relating to the plans and specifications or to the
studies, data and drawings, or to the construction of Improvements on the
Property (the "Plans and Specifications"); all contracts, permits, certificates,
plans, studies, data, drawings, licenses, approvals, entitlements and
authorizations, however, characterized, issued or in any way furnished for the
acquisition, construction, operation and use of the Land and Improvements,
including building permits, environmental certificates, licenses, certificates
of operation, warranties and guaranties; all easements, rights and appurtenances
thereto or used in connection with the above-described real property;
(e) Interest in Leases. All existing and future Leases relating to the Land
and Improvements or any interest in them;
(f) Proceeds. All rents, royalties, issues, profits, revenues, income,
remittances, payments and other benefits arising or derived from the use or
enjoyment of all or any portion of the Land or Improvements, or derived from any
Lease, sublease, license, or agreement relating to the use or enjoyment of the
Land or Improvements (subject to the rights given below to Trustor to collect
and apply such rents, royalties, issues, profits, revenues, income, remittances,
payments and other benefits);
(g) Funds. Any of Trustor's funds held by or on behalf of Beneficiary,
including pursuant to the Holdback Agreement, as defined below;
(h) Additional Proceeds. All Trustor's other existing or future estates,
easements, licenses, interests, rights, titles, homestead or other claims or
demands, both in law and in equity in the Mortgaged Property (as defined below)
including, without limitation, (1) all damages or awards made to Trustor related
to the Land or Improvements, including without limitation, for the partial or
complete taking by eminent domain, or by an proceeding or purchase in lieu of
eminent domain, of the Land and Improvements, and (2) all proceeds of any
insurance covering the Land and Improvements. Trustor agrees to execute and
deliver, from time to time, such further instruments and documents as may be
required by Beneficiary to confirm the lien of this Deed of Trust on any of the
foregoing.
All of the foregoing property referred to in this section, together with
the Land, are herein referred to as the "Mortgaged Property".
FOR THE PURPOSE OF SECURING, in such order of priority as Beneficiary may
elect:
(a) The repayment of the indebtedness evidenced by Trustor's promissory
note of even date herewith payable to the order of Beneficiary in the original
principal sum of ____________________________________________________
($_____________), with interest thereon, as provided therein, and all prepayment
charges, late charges and loan fees required thereunder, and all extensions,
renewals, modifications, amendments and replacements thereof (herein "Note");
(b) The payment of all other sums which may be advanced by or otherwise be
due to Trustee or Beneficiary under any provision of this Deed of Trust or under
any other instrument or document referred to in subsection (c) below, with
interest thereon at the rate provided herein or therein;
(c) The performance of each and every of the covenants and agreements of
Trustor contained (1) herein, in the Note, and in any note evidencing a Future
Advance (as hereinafter defined), (2) in the Environmental Agreement and
Indemnity executed by Trustor concurrently herewith, (3) in the Holdback
Agreement by and between Beneficiary and Trustor executed contemporaneously
herewith (the "Holdback"), and in any and all pledge agreements, supplemental
agreements, assignments and all instruments of indebtedness or security now or
hereafter executed by Trustor in connection with any indebtedness referred to in
subsection (a) above or subsection (d) below or for the purpose of supplementing
or amending this Deed of Trust or any instrument secured hereby (all of the
foregoing in these Clauses (2) and (3), as the same may be amended, modified or
supplemented from time to time, being referred to hereinafter as "Related
Agreements"); and
(d) The repayment of any other loans or advances, with interest thereon,
hereafter made to Trustor (or any successor in interest to Trustor as the owner
of the Mortgaged Property or any part thereof) by Beneficiary when the
promissory note evidencing the loan or advance specifically states that said
note is secured by this Deed of Trust, together with all extensions, renewals,
modifications, amendments and replacements thereof (herein "Future Advance").
287
ARTICLE I
COVENANTS OF TRUSTOR
To protect the security of this Deed of Trust, Trustor covenants and agrees
as follows:
1.01 Performance of Obligations Secured.
Trustor shall promptly pay when due the principal of and interest on the
indebtedness evidenced by the Note, the principal of and interest on any Future
Advances, and any prepayment, late charges and loan fees provided for in the
Note or in any note evidencing a Future Advance or provided for herein, and
shall further perform fully and in a timely manner all other obligations of
Trustor contained herein or in the Note or in any note evidencing a Future
Advance or in any of the Related Agreements. All sums payable by Trustor
hereunder shall be paid without demand, counterclaim, offset, deduction or
defense and Trustor waives all rights now or hereinafter conferred by statute or
otherwise to any such demand, counterclaim, offset, deduction or defense.
1.02 Insurance.
Trustor shall keep the Mortgaged Property insured with an all-risk policy
insuring against loss or damage by fire and earthquake with extended coverage
and against any other risks or hazards which, in the opinion of Beneficiary,
should be insured against, in an amount not less than 100% of the full insurable
value thereof on a replacement cost basis, with an inflation guard endorsement,
with a company or companies and in such form and with such endorsements as may
be approved or required by Beneficiary, including, if applicable, boiler
explosion coverage and sprinkler leakage coverage. All losses under said
insurance, and any other insurance obtained by Trustor with respect to the
Mortgaged Property whether or not required by Beneficiary, shall be payable to
Beneficiary and shall be applied in the manner provided in Section 1.03 hereof.
Trustor shall also carry comprehensive general public liability insurance and
twelve (12) months' rent loss insurance in such form and amounts and with such
companies as are satisfactory to Beneficiary. Trustor shall also carry insurance
against flood if required by the Federal Flood Disaster Protection Act of 1973
and regulations issued thereunder. All hazard, flood and rent loss insurance
policies shall be endorsed with a standard noncontributory mortgagee clause in
favor of and in form acceptable to Beneficiary, and may be canceled or modified
only upon not less than thirty (30) days' prior written notice to Beneficiary.
All of the above-mentioned insurance policies or certificates of such insurance
satisfactory to Beneficiary, together with receipts for the payment of premiums
thereon, shall be delivered to and held by Beneficiary, which delivery shall
constitute assignment to Beneficiary of all return premiums to be held as
additional security hereunder. All renewal and replacement policies shall be
delivered to Beneficiary at least thirty (30) days before the expiration of the
expiring policies. Beneficiary shall not by the fact of approving, disapproving,
accepting, preventing, obtaining or failing to obtain any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of insurance contracts, solvency of insurance companies, or
payment or defense of lawsuits, and Trustor hereby expressly assumes full
responsibility therefor and all liability, if any, with respect thereto.
1.03 Condemnation and Insurance Proceeds.
(a) The proceeds of any award or claim for damages, direct or
consequential, in connection with any condemnation or other taking of or damage
or injury to the Mortgaged Property, or any part thereof, or for conveyance in
lieu of condemnation, are hereby assigned to and shall be paid to Beneficiary.
In addition, all causes of action, whether accrued before or after the date of
this Deed of Trust, of all types for damages or injury to the Mortgaged Property
or any part thereof, or in connection with any transaction financed by funds
loaned to Trustor by Beneficiary and secured hereby, or in connection with or
affecting the Mortgaged Property or any part thereof, including, without
limitation, causes of action arising in tort or contract and causes of action
for fraud or concealment of a material fact, are hereby assigned to Beneficiary
as additional security, and the proceeds thereof shall be paid to Beneficiary.
Beneficiary may at its option appear in and prosecute in its own name any action
or proceeding to enforce any such cause of action and may make any compromise or
settlement thereof. Trustor, immediately upon obtaining knowledge of any
casualty damage to the Mortgaged Property or damage in any other manner in
excess of $25,000.00 or knowledge of the institution of any proceedings relating
to condemnation or other taking of or damage or injury to the Mortgaged Property
or any portion thereof, will immediately notify Beneficiary in writing.
Beneficiary, in its sole discretion, may participate in any such proceedings and
may join Trustor in adjusting any loss covered by insurance.
(b) All compensation, awards, proceeds, damages, claims, insurance
recoveries, rights of action and payments which Trustor may receive or to which
Trustor may become entitled with respect to the Mortgaged Property in the event
of any damage or injury to or a partial condemnation or other partial taking of
the Mortgaged Property shall be paid over to Beneficiary and shall be applied
first toward reimbursement of all costs and expenses of Beneficiary in
connection with recovery of the same, and then shall be applied, as follows:
288
(1) Beneficiary shall consent to the application of such payments to the
restoration of the Mortgaged Property so damaged if and only if Trustor fulfills
all of the following conditions (a breach of any one of which shall constitute
an Event of Default under this Deed of Trust and shall entitle Beneficiary to
exercise all rights and remedies Beneficiary may have in such event): (a) that
no default or Event of Default is then outstanding under this Deed of Trust, the
Note, or any Related Agreement; (b) that Trustor is not in default under any of
the terms, covenants and conditions of any of the Leases (hereinafter defined);
(c) that the Leases shall continue in full force and effect; (d) that Trustor
has in force rental continuation and business interruption insurance covering
the Mortgaged Property for the longer of twelve (12) months or the time
Beneficiary reasonably estimates will be necessary to complete such restoration
and rebuilding; (e) Beneficiary is satisfied that during the period from the
time of damage or taking until restoration and rebuilding of the Mortgaged
Property is completed (the "Gap Period") Trustor's net income from (1) all
leases, subleases, licenses and other occupancy agreements affecting the
Mortgaged Property (the "Leases") which may continue without abatement of rent
during such Gap Period, plus (2) all Leases in effect during the Gap Period
without abatement of rent which Trustor may obtain in substitution for any of
the same which did not continue during such Gap Period, plus (3) the proceeds of
rental continuation and business interruption insurance, is sufficient to
satisfy Trustor's obligations under this Deed of Trust as they come due; (f)
Beneficiary is satisfied that the insurance or award proceeds shall be
sufficient to fully restore and rebuild the Mortgaged Property free and clear of
all liens except the lien of this Deed of Trust, or, in the event that such
proceeds are in Beneficiary's sole judgment insufficient to restore and rebuild
the Mortgaged Property, then Trustor shall deposit promptly with Beneficiary
funds which, together with the insurance or award proceeds, shall be sufficient
in Beneficiary's sole judgment to restore and rebuild the Mortgaged Property;
(g) construction and completion of restoration and rebuilding of the Mortgaged
Property shall be completed in accordance with plans and specifications and
drawings submitted to and approved by Beneficiary, which plans, specifications
and drawings shall not be substantially modified, changed or revised without the
Beneficiary's prior written consent; (h) Beneficiary shall also have approved
all prime and subcontractors, and the general contract or contracts the Trustor
proposes to enter into with respect to the restoration and rebuilding; and (i)
any and all monies which are made available for restoration and rebuilding
hereunder shall be disbursed through Beneficiary, the Trustee or a title
insurance and trust company satisfactory to Beneficiary, in accord with standard
construction lending practice, including, if requested by Beneficiary, monthly
lien waivers and title insurance datedowns, and the provision of payment and
performance bonds by Trustor, or in any other manner approved by Beneficiary in
Beneficiary's sole discretion; or
(2) If less than all of conditions (a) through (i) in subsection (1) above
are satisfied, then such payments shall be applied in the sole and absolute
discretion of Beneficiary (a) to the payment or prepayment with any applicable
prepayment premium of any indebtedness secured hereby in such order as
Beneficiary may determine, or (b) to the reimbursement of Trustor's expenses
incurred in the rebuilding and restoration of the Mortgaged Property. In the
event Beneficiary elects under this subsection (2) to make any monies available
to restore the Mortgaged Property, then all of conditions (a) through (i) in
subsection (1) above shall apply, except such conditions which Beneficiary, in
its sole discretion, may waive.
(c) If any material part of the Mortgaged Property is damaged or destroyed
and the loss is not adequately covered by insurance proceeds collected or in the
process of collection, Trustor shall deposit, within ten (10) days of the
Beneficiary's request therefor, the amount of the loss not so covered.
(d) All compensation, awards, proceeds, damages, claims, insurance
recoveries, rights of action and payments which Trustor may receive or to which
Trustor may become entitled with respect to the Mortgaged Property in the event
of a total condemnation or other total taking of the Mortgaged Property shall be
paid over to Beneficiary and shall be applied first toward reimbursement of all
costs and expenses of Beneficiary in connection with recovery of the same, and
then shall be applied to the payment or prepayment with any applicable
prepayment premium of any indebtedness secured hereby in such order as
Beneficiary may determine, until the indebtedness secured hereby has been paid
and satisfied in full. Any surplus remaining after payment and satisfaction of
the indebtedness secured hereby shall be paid to Trustor as its interest may
then appear.
(e) Any application of such amounts or any portion thereof to any
indebtedness secured hereby shall not be construed to cure or waive any default
or notice of default hereunder or invalidate any act done pursuant to any such
default or notice.
(f) If any part of any automobile parking areas included within the
Mortgaged Property is taken by condemnation or before such areas are otherwise
reduced, Trustor shall provide parking facilities in kind, size and location to
comply with all Leases, and before making any contract for such substitute
parking facilities, Trustor shall furnish to Beneficiary satisfactory assurance
of completion thereof, free of liens and in conformity with all governmental
zoning, land use and environmental regulations.
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1.04 Taxes, Liens and Other Items.
Trustor shall pay at least ten days before delinquency, all taxes, bonds,
assessments, special assessments, common area charges, fees, liens, charges,
fines, penalties, impositions and any and all other items which are attributable
to or affect the Mortgaged Property and which may attain a priority over this
Deed of Trust by making payment prior to delinquency directly to the payee
thereof, unless Trustor shall be required to make payment to Beneficiary on
account of such items pursuant to Section 1.05 hereof. Prior to the delinquency
of any such taxes or other items, Trustor shall furnish Beneficiary with
receipts indicating such taxes and other items have been paid. Trustor shall
promptly discharge any lien which has attained or may attain priority over this
Deed of Trust. In the event of the passage after the date of this Deed of Trust
of any law deducting from the value of real property for the purposes of
taxation any lien thereon, or changing in any way the laws for the taxation of
deeds of trust or debts secured by deeds of trust for state, federal or any
other purposes, or the manner of the collection of any such taxes, so as to
affect this Deed of Trust, the Beneficiary and holder of the debt which it
secures shall have the right to declare the principal sum and the interest due
on a date to be specified by not less than thirty (30) days written notice to be
given to Trustor by Beneficiary; provided, however, that such election shall be
ineffective if Trustor is permitted by law to pay the whole of such tax in
addition to all other payments required hereunder and if, prior to such
specified date, does pay such taxes and agrees to pay any such tax when
hereafter levied or assessed against the Mortgaged Property, and such agreement
shall constitute a modification of this Deed of Trust.
1.05 Funds for Taxes and Insurance.
If an Event of Default has occurred under this Deed of Trust or under any
of the Related Agreements, regardless of whether the same has been cured, then
thereafter at any time Beneficiary may, at its option to be exercised upon
thirty (30) days' written notice to Trustor, require the deposit with
Beneficiary or its designee by Trustor, at the time of each payment of an
installment of interest or principal under the Note, of an additional amount
sufficient to discharge the obligations of Trustor under Sections 1.02 and 1.04
hereof as and when they become due. The determination of the amount payable and
of the fractional part thereof to be deposited with Beneficiary shall be made by
Beneficiary in its sole discretion. These amounts shall be held by Beneficiary
or its designee not in trust and not as agent of Trustor and shall not bear
interest, and shall be applied to the payment of the obligations in such order
or priority as Beneficiary shall determine. If at any time within thirty (30)
days prior to the due date of any of the aforementioned obligations the amounts
then on deposit therefor shall be insufficient for the payment of such
obligation in full, Trustor shall within ten (10) days after demand deposit the
amount of the deficiency with Beneficiary. If the amounts deposited are in
excess of the actual obligations for which they were deposited, Beneficiary may
refund any such excess, or, at its option, may hold the same in a reserve
account, not in trust and not bearing interest, and reduce proportionately the
required monthly deposits for the ensuing year. Nothing herein contained shall
be deemed to affect any right or remedy of Beneficiary under any other provision
of this Deed of Trust or under any statute or rule of law to pay any such amount
and to add the amount so paid to the indebtedness hereby secured.
All amounts so deposited shall be held by Beneficiary or its designee as
additional security for the sums secured by this Deed of Trust and upon the
occurrence of an Event of Default hereunder Beneficiary may, in its sole and
absolute discretion and without regard to the adequacy of its security
hereunder, apply such amounts or any portion thereof to any part of the
indebtedness secured hereby. Any such application of said amounts or any portion
thereof to any indebtedness secured hereby shall not be construed to cure or
waive any default or notice of default hereunder.
If Beneficiary requires deposits to be made pursuant to this Section 1.05,
Trustor shall deliver to Beneficiary all tax bills, bond and assessment
statements, statements of insurance premiums, and statements for any other
obligations referred to above as soon as such documents are received by Trustor.
If Beneficiary sells or assigns this Deed of Trust, Beneficiary shall have
the right to transfer all amounts deposited under this Section 1.05 to the
purchaser or assignee, and Beneficiary shall thereupon be released and have no
further liability hereunder for the application of such deposits, and Trustor
shall look solely to such purchaser or assignee for such application and for all
responsibility relating to such deposits.
1.06 Assignment of Rents and Profits.
(a) All of Trustor's interest in any Leases or other occupancy agreements
pertaining to the Mortgaged Property now existing or hereafter entered into, and
all of the rents, royalties, issues, profits, revenue, income and other benefits
of the Mortgaged Property arising from the use or enjoyment of all or any
portion thereof or from any Lease or agreement pertaining to occupancy of any
portion of the Mortgaged Property now existing or hereafter entered into whether
now due, past due, or to become due, including all prepaid rents and security
deposits, and including without limitation all present or future rights of
Trustor in and to all operating revenues derived from the operation of the
Mortgaged Property (the "Rents and Profits"), are hereby absolutely, presently
and unconditionally assigned, transferred and conveyed to Beneficiary to be
applied by Beneficiary in payment of the principal and interest and all other
sums payable on the Note, and of all other sums payable under this Deed of Trust
subject to the rights of residential tenants under California Civil Code Section
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1950.5(d). Prior to the occurrence of any Event of Default (hereinafter
defined), Trustor shall have a license to collect and receive all Rents and
Profits, which license shall be terminable at the sole option of Beneficiary,
without regard to the adequacy of its security hereunder and without notice to
or demand upon Trustor, upon the occurrence of any Event of Default. It is
understood and agreed that neither the foregoing assignment of Rents and Profits
to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies
under Article IV hereof shall be deemed to make Beneficiary a
"mortgagee-in-possession" or otherwise responsible or liable in any manner with
respect to the Mortgaged Property or the use, occupancy, enjoyment or operation
of all or any portion thereof, unless and until Beneficiary, in person or by
agent, assumes actual possession thereof. Nor shall appointment of a receiver
for the Mortgaged Property by any court at the request of Beneficiary or by
agreement with Trustor, or the entering into possession of the Mortgaged
Property or any part thereof by such receiver, be deemed to make Beneficiary a
mortgagee-in-possession or otherwise responsible or liable in any manner with
respect to the Mortgaged Property or the use, occupancy, enjoyment or operation
of all or any portion thereof. Upon the occurrence of any Event of Default, this
shall constitute a direction to and full authority to each lessee under any
Lease and each guarantor of any Lease to pay all Rents and Profits to
Beneficiary without proof of the default relied upon. Trustor hereby irrevocably
authorizes each lessee and guarantor to rely upon and comply with any notice or
demand by Beneficiary for the payment to Beneficiary of any Rents and Profits
due or to become due.
(b) Trustor shall apply the Rents and Profits to the payment of all
necessary and reasonable operating costs and expenses of the Mortgaged Property,
debt service on the indebtedness secured hereby, and a reasonable reserve for
future expenses, repairs and replacements for the Mortgaged Property, before
using the Rents and Profits for Trustor's personal use or any other purpose not
for the direct benefit of the Mortgaged Property.
(c) Trustor warrants as to each Lease now covering all or any part of the
Mortgaged Property: (1) that each Lease is in full force and effect; (2) that no
default exists on the part of the lessees or Trustor under Leases constituting
more than 5%, in the aggregate, of all units in the Mortgaged Property; (3) that
no rent has been collected more than one month in advance; (4) that no Lease or
any interest therein has been previously assigned or pledged; (5) that no lessee
under any Lease has any defense, setoff or counterclaim against Trustor; (6)
that all rent due to date under each Lease has been collected and no concession
has been granted to any lessee in the form of a waiver, release, reduction,
discount or other alteration of rent due or to become due; and (7) that the
interest of the lessee under each Lease is as lessee only, with no options to
purchase or rights of first refusal. All the foregoing warranties shall be
deemed to be reaffirmed and to continue until performance in full of the
obligations under this Deed of Trust.
(d) Trustor shall at all times perform the obligations of lessor under all
such Leases. Trustor shall not execute any further assignment of any of the
Rents and Profits or any interest therein or suffer or permit any such
assignment to occur by operation of law. Trustor shall at any time or from time
to time, upon request of Beneficiary, transfer and assign to Beneficiary in such
form as may be satisfactory to Beneficiary, Trustor's interest in any Lease,
subject to and upon the condition, however, that prior to the occurrence of any
Event of Default hereunder Trustor shall have a license to collect and receive
all Rents and Profits under such Lease upon accrual, but not prior thereto, as
set forth in subsection (a) above. Whenever requested by Beneficiary, Trustor
shall furnish to Beneficiary a certificate of Trustor setting forth the names of
all lessees under any Leases, the terms of their respective Leases, the space
occupied, the rents payable thereunder, and the dates through which any and all
rents have been paid.
(e) Without the prior written consent of Beneficiary, Trustor shall not (1)
accept prepayments of rent exceeding one month under any Leases of any part of
the Mortgaged Property; (2) take any action under or with respect to any such
Leases which would decrease the monetary obligations of the lessee thereunder or
otherwise materially decrease the obligations of the lessee or the rights or
remedies of the lessor, including, without limitation, any reduction in rent or
granting of an option to renew for a term greater than one year; (3) modify or
amend any such Leases or, except where the lessee is in default, cancel or
terminate the same or accept a surrender of the leased premises, provided,
however, that Trustor may renew, modify or amend Leases in the ordinary course
of business so long as such actions do not decrease the monetary obligations of
the lessee thereunder, or otherwise decrease the obligations of the lessee or
the rights and remedies of the lessor; (4) consent to the assignment or
subletting of the whole or any portion of the lessee's interest under any Lease
which has a term of more than five years; (5) create or permit any lien or
encumbrance which, upon foreclosure, would be superior to any such Leases; or
(6) in any other manner impair Beneficiary's rights and interest with respect to
the Rents and Profits.
(f) Each Lease, or any part thereof, shall make provision for the
attornment of the lessee thereunder to any person succeeding to the interest of
Trustor as the result of any foreclosure or transfer in lieu of foreclosure
hereunder, said provision to be in form and substance approved by Beneficiary.
If any Lease provides for the abatement of rent during repair of the demised
premises by reason of fire or other casualty, Trustor shall furnish rental
insurance to Beneficiary, the policies to be in amount and form and written by
such companies as shall be satisfactory to Beneficiary. Each Lease shall remain
in full force and effect despite any merger of the interest of Trustor and any
lessee thereunder.
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(g) Beneficiary shall be deemed to be the creditor of each lessee in
respect of any assignments for the benefit of creditors and any bankruptcy,
arrangement, reorganization, insolvency, dissolution, receivership or other
debtor-relief proceedings affecting such lessee (without obligation on the part
of Beneficiary, however, to file timely claims in such proceedings or otherwise
pursue creditor's rights therein). Beneficiary shall have the right to assign
Trustor's right, title and interest in any Leases to any subsequent holder of
this Deed of Trust or any participating interest therein or to any person
acquiring title to all or any part of the Mortgaged Property through foreclosure
or otherwise. Any subsequent assignee shall have all the rights and powers
herein provided to Beneficiary. Beneficiary shall have the authority, as
Trustor's attorney-in-fact, such authority being coupled with an interest and
irrevocable, to sign the name of Trustor and to bind Trustor on all papers and
documents relating to the operation, leasing and maintenance of the Mortgaged
Property.
1.07 Security Agreement.
(a) This Deed of Trust is intended to be a security agreement pursuant to
the California Uniform Commercial Code for (a) any and all items of personal
property specified above as part of the Mortgaged Property which, under
applicable law, may be subject to a security interest pursuant to the California
Uniform Commercial Code and which are not herein effectively made part of the
real property, (b) any and all items of property specified above as part of the
Mortgaged Property which, under applicable law, constitute fixtures and may be
subject to a security interest under Section 9-313 of the California Uniform
Commercial Code; and (c) all rights of Trustor in and to that certain account in
the name of Trustor and maintained with Builders Control at PO Box 856, Oakland,
California 94604-0856, created pursuant to the Holdback Agreement, and all funds
held by Beneficiary on behalf of Trustor in the "Loan in Process Account"
created by the Holdback, together with all interest and proceeds thereof; and
Trustor hereby grants Beneficiary a security interest in said property, all of
which is referred to herein as "Personal Property," and in all additions
thereto, substitutions therefor and proceeds thereof, for the purpose of
securing all indebtedness and other obligations of Trustor now or hereafter
secured by this Deed of Trust, which shall be a paramount and superior lien on
all such Personal Property at all times. Trustor agrees to execute and deliver
financing and continuation statements covering the Personal Property from time
to time and in such form as Beneficiary may require to perfect and continue the
perfection of Beneficiary's lien or security interest with respect to said
property. Trustor shall pay all costs of filing such statements and renewals and
releases thereof and shall pay all reasonable costs and expenses of any record
searches for financing statements Beneficiary may reasonably require. Upon the
occurrence of any default of Trustor hereunder, Beneficiary shall have the
rights and remedies of a secured party under California Uniform Commercial Code,
including, Section 9501(4) thereof, as well as all other rights and remedies
available at law or in equity, and, at Beneficiary's option, Beneficiary may
also invoke the remedies provided in Article IV of this Deed of Trust as to such
property.
1.08 Acceleration.
(a) Trustor acknowledges that in making the loan evidenced by the Note and
this Deed of Trust (the "Loan"), Beneficiary has relied upon: (1) Trustor's
credit rating; (2) Trustor's financial stability; and (3) Trustor's experience
in owning and operating real property comparable to the Mortgaged Property.
Without limiting the obligations of Trustor or the rights and remedies of
Beneficiary, Beneficiary shall have the right, at its option, to declare any
indebtedness and obligations under the Note and this Deed of Trust, irrespective
of the maturity date specified therein, due and payable in full if: (1) Trustor
or any one or more of the tenants-in-common, joint tenants, or other persons
comprising Trustor sells, enters into a contract of sale, conveys, alienates or
encumbers the Mortgaged Property or any portion thereof or any fractional
undivided interest therein, or suffers Trustor's title or any interest therein
to be divested or encumbered, whether voluntarily or involuntarily, or leases
with an option to sell, or changes or permits to be changed the character or use
of the Mortgaged Property, or drills or extracts or enters into a lease for the
drilling for or extracting of oil, gas or other hydrocarbon substances or any
mineral of any kind or character on the Mortgaged Property; (2) The interest of
any general partner of Trustor (or the interest of any general partner in a
partnership that is a partner) is assigned or transferred; (3) More than
twenty-five percent (25%) of the corporate stock of Trustor (or of any corporate
partner or other corporation comprising Trustor) is sold, transferred or
assigned; (4) There is a change in beneficial ownership with respect to more
than twenty-five percent (25%) of Trustor (if Trustor is a partnership, limited
liability company, trust or other legal entity) or of any partner or
tenant-in-common of Trustor which is a partnership, limited liability company,
trust or other legal entity; (5) a default has occurred hereunder or under the
Note or any Related Agreements and is continuing. In such case, Beneficiary or
other holder of the Note may exercise any and all of the rights and remedies and
recourses set forth in Article IV herein, and as granted by law.
(b) In order to allow Beneficiary to determine whether enforcement of the
foregoing provisions is desirable, Trustor agrees to notify Beneficiary promptly
in writing of any transaction or event described in Clauses 1.08(a) above. In
addition to other damages and costs resulting from the breach by Trustor of its
obligations under this subsection (b), Trustor acknowledges that failure to give
such notice may damage Beneficiary in an amount equal to not less than the
difference between the interest payable on the indebtedness specified herein,
and the interest and loan fees which Beneficiary could obtain on said sum on the
date that the event of acceleration occurred and was enforceable by Beneficiary
under applicable law. Trustor shall pay to Beneficiary all damages Beneficiary
sustains by reason of the breach of the covenant of notice set forth in this
subsection (b) and the amount thereof shall be added to the principal of the
Note and shall bear interest and shall be secured by this Deed of Trust.
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(c) Notwithstanding subsection 1.08(a) above, Trustor may from time to time
replace items of personal property and fixtures constituting a part of the
Mortgaged Property, provided that: (1) the replacements for such items of
personal property or fixtures are of equivalent value and quality; and (2)
Trustor has good and clear title to such replacement property free and clear of
any and all liens, encumbrances, security interests, ownership interests, claims
of title (contingent or otherwise), or charges of any kind, or the rights of any
conditional sellers, vendors or any other third parties in or to such
replacement property have been expressly subordinated at no cost to Beneficiary
to the lien of this Deed of Trust in a manner satisfactory to Beneficiary; and
(3) at the option of Beneficiary, Trustor provides at no cost to Beneficiary a
satisfactory opinion of counsel to the effect that this Deed of Trust
constitutes a valid and subsisting second lien on and security interest in such
replacement property and is not subject to being subordinated or the priority
thereof affected under any applicable law, including, but not limited, to the
provisions of Section 9-313 of the California Uniform Commercial Code.
1.09 Preservation and Maintenance of Mortgaged Property.
Trustor shall keep the Mortgaged Property and every part thereof in good
condition and repair, and shall not permit or commit any waste, impairment, or
deterioration of the Mortgaged Property, or commit, suffer or permit any act
upon or use of the Mortgaged Property in violation of law or applicable order of
any governmental authority, whether now existing or hereafter enacted and
whether foreseen or unforeseen, or in violation of any covenants, conditions or
restrictions affecting the Mortgaged Property, or bring or keep any article upon
any of the Mortgaged Property or cause or permit any condition to exist thereon
which would be prohibited by or could invalidate any insurance coverage
maintained, or required hereunder to be maintained, by Trustor on or with
respect to any part of the Mortgaged Property, and Trustor further shall do all
other acts which from the character or use of the Mortgaged Property may be
reasonably necessary to protect the Mortgaged Property. Trustor shall underpin
and support, when necessary, any building, structure or other improvement
situated on the Mortgaged Property and shall not remove or demolish any building
on the Mortgaged Property. Trustor shall complete or restore and repair promptly
and in a good workmanlike manner any building, structure or improvement which
may be constructed, damaged or destroyed thereon and pay when due all claims for
labor performed and materials furnished therefor, whether or not insurance or
other proceeds are available to cover in whole or in part the costs of any such
completion, restoration or repair; provided, however, that Trustor shall not
demolish, remove, expand or extend any building, structure or improvement on the
Mortgaged Property, nor construct, restore, add to or alter any such building,
structure or improvement, nor consent to or permit any of the foregoing to be
done, without in each case obtaining the prior written consent of Beneficiary
thereto.
If this Deed of Trust is on a condominium or a cooperative apartment or
planned development project, Trustor shall perform all of Trustor's obligations
under any applicable declaration of condominium or master deed, or any
declaration of covenants, conditions and restrictions pertaining to any such
project, or any by-laws or regulations of the project or owners' association or
constituent documents.
Trustor shall not drill or extract or enter into any lease for the drilling
for or extraction of oil, gas or other hydrocarbon substances or any mineral of
any kind or character on or from the Mortgaged Property or any part thereof
without first obtaining Beneficiary's written consent.
Unless required by applicable law or unless Beneficiary has otherwise first
agreed in writing, Trustor shall not make or allow to be made any changes in the
nature of the occupancy or use of the Mortgaged Property or any part thereof for
which the Mortgaged Property or such part was intended at the time this Deed of
Trust was delivered.
1.10 Financial Statements; Offset Certificates.
(a) Trustor, without expense to Beneficiary, shall, upon receipt of written
request from Beneficiary, furnish to Beneficiary (1) an annual statement of the
operation of the Mortgaged Property prepared and certified by Trustor, showing
in reasonable detail satisfactory to Beneficiary total rents or other proceeds
received and total expenses together with an annual balance sheet and profits
and loss statement, within one hundred twenty (120) days after the close of each
fiscal year of Trustor, beginning with the fiscal year first ending after the
date of delivery of this Deed of Trust, (2) within 30 days after the end of each
calendar quarter (March 31, June 30, September 30, December 31) interim
statements of the operation of the Mortgaged Property showing in reasonable
detail satisfactory to Beneficiary total rents and income received and total
expenses, for the previous quarter, certified by Trustor, and (3) copies of
Trustor's annual state and federal income tax filing within thirty (30) days of
filing. Trustor shall keep accurate books and records, and allow Beneficiary,
its representatives and agents, upon demand, at any time during normal business
hours, access to such books and records, including any supporting or related
vouchers or papers, shall allow Beneficiary to make extracts or copies of any
thereof, and shall furnish to Beneficiary and its agents convenient facilities
for the audit of any such statements, books and records.
(b) Trustor, within three (3) days upon request in person or within five
(5) days upon request by mail, shall furnish a written statement duly
acknowledged of all amounts due on any indebtedness secured hereby, whether for
principal or interest on the Note or otherwise, and stating whether any offsets
or defenses exist against the indebtedness secured by this Deed of Trust and
covering such other matters with respect to any such indebtedness as Beneficiary
may reasonably require.
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1.11 Trustee's Costs and Expenses; Governmental Charges.
Trustor shall pay all costs, fees and expenses of Trustee, its agents and
counsel in connection with the performance of its duties under this Deed of
Trust, including, without limitation, the cost of any trustee's sale guaranty or
other title insurance coverage ordered in connection with any sale or
foreclosure proceedings hereunder, and shall pay all taxes (except federal and
state income taxes) or other governmental charges or impositions imposed by any
governmental authority on Trustee or Beneficiary by reason of its interest in
the Note, or any note evidencing a Future Advance, or this Deed of Trust.
1.12 Protection of Security; Costs and Expenses.
Trustor agrees that, at any time and from time to time, it will execute and
deliver all such further documents and do all such other acts and things as
Beneficiary may reasonably request in writing in order to protect the security
and priority of the lien created hereby. Trustor further agrees that it will
execute such additional documents or amendments to this Deed of Trust, the Note
or the Related Agreements as Beneficiary may reasonably request to insure that
such documents reflect the party's agreement with regard to the business terms
agreed upon by the parties hereto. Trustor shall appear in and defend any action
or proceeding purporting to affect the security hereof or the rights or powers
of the Beneficiary or Trustee, and shall pay all costs and expenses, including,
without limitation, cost of evidence of title and reasonable attorneys' fees, in
any such action or proceeding in which Beneficiary or Trustee may appear, and in
any suit brought by Beneficiary to foreclose this Deed of Trust or to enforce or
establish any other rights or remedies of Beneficiary hereunder. If Trustor
fails to perform any of the covenants or agreements contained in this Deed of
Trust, or if any action or proceeding is commenced which affects Beneficiary's
interest in the Mortgaged Property or any part thereof, including, but not
limited to, eminent domain, code enforcement, or proceedings of any nature
whatsoever under any federal or state law, whether now existing or hereafter
enacted or amended, relating to bankruptcy, insolvency, arrangement,
reorganization or other form of debtor relief, or to a decedent, then
Beneficiary or Trustee may, but without obligation to do so and without notice
to or demand upon Trustor and without releasing Trustor from any obligation
hereunder, make such appearances, commence, defend or appear in any such action
or proceeding affecting the Mortgaged Property, pay, contest or compromise any
encumbrance, charge or lien which affects the Mortgaged Property, disburse such
sums and take such action as Beneficiary or Trustee deems necessary or
appropriate to protect Beneficiary's interest, including, but not limited to,
disbursement of reasonable attorneys' fees, entry upon the Mortgaged Property to
make repairs or take other action to protect the security hereof, and payment,
purchase, contest or compromise of any encumbrance, charge or lien which in the
judgment of either Beneficiary or Trustee appears to be prior or superior
hereto. Trustor further agrees to pay all reasonable expenses of Beneficiary
(including fees and disbursements of counsel) incident to the protection of the
rights of Beneficiary hereunder, or to enforcement or collection of payment of
the Note or any Future Advances, whether by judicial or nonjudicial proceedings,
or in connection with any bankruptcy, insolvency, arrangement, reorganization or
other debtor relief proceeding of Trustor, or otherwise. Any amounts disbursed
by Beneficiary or Trustee pursuant to this Section 1.12 shall be additional
indebtedness of Trustor secured by this Deed of Trust and each of the Related
Agreements as of the date of disbursement and shall bear interest at the rate
set forth in the Note. All such amounts shall be payable by Trustor immediately
without demand. Nothing contained in this Section 1.12 shall be construed to
require Beneficiary or Trustee to incur any expense, make any appearance, or
take any other action.
1.13 Fixture Filing.
This Deed of Trust constitutes a financing statement filed as a fixture
filing in the Official Records of the County Recorder of the county in which the
Mortgaged Property is located with respect to any and all fixtures included
within the term "Mortgaged Property" as used herein and with respect to any
goods or other personal property that may now be or hereafter become such
fixtures.
1.14 Notify Lender of Default.
Trustor shall notify Beneficiary in writing within five (5) days of the
occurrence of any Event of Default or other event which, upon the giving of
notice or the passage of time or both, would constitute an Event of Default.
1.15 Management of Mortgaged Property.
Trustor shall manage the Mortgaged Property through its own personnel or a
third party manager approved by Beneficiary, and shall not hire, retain or
contract with any other third party for property management services without the
prior written approval by Beneficiary of such party and the terms of its
contract for management services; provided, however, Beneficiary shall not
withhold approval of a new manager if the new manager has a reputation and
experience in managing properties similar to the Mortgaged Property which are
greater than or equal to the present experience and reputation of the current
manager.
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1.16 Miscellaneous.
Trustor shall: (a) make or permit no termination or material amendment of
any agreement between Trustor and a third party relating to the Mortgaged
Property or the loan secured hereby (including, without limitation, the Leases)
(the "Third Party Agreements") without the prior written approval of
Beneficiary, except amendments to Leases permitted by Section 1.06 hereof, (b)
perform Trustor's obligations under each Third Party Agreement, and (c) comply
promptly with all governmental requirements relating to Trustor, the loan
secured hereby and the Mortgaged Property.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
To induce the Beneficiary to make the loan secured hereby, Trustor
represents and warrants to Beneficiary, in addition to any representations and
warranties in the Note or any Related Agreements, that as of the date hereof and
throughout the term of the loan secured hereby until the Note is paid in full
and all obligations under this Deed of Trust are performed:
2.01 Power and Authority.
Trustor is duly organized and validly existing, qualified to do business
and in good standing in the State of California and has full power and due
authority to execute, deliver and perform this Deed of Trust, the Note, and any
Related Agreements in accordance with their terms. Such execution, delivery and
performance has been duly authorized by all necessary trust action and approved
by each required governmental authority or other party.
2.02 No Default or Violations.
No Event of Default (as defined hereafter) or event which, with notice or
passage of time or both, would constitute an Event of Default ("Unmatured Event
of Default") has occurred and is continuing under this Deed of Trust, the Note,
or any of the Related Agreements. Trustor is not in violation of any
governmental requirement (including, without limitation, any applicable
securities law) or in default under any agreement to which it is bound, or which
affects it or any of its property, and the execution, delivery and performance
of this Deed of Trust, the Note, or any of the Related Agreements in accordance
with their terms and the use and occupancy of the Mortgaged Property will not
violate any governmental requirement (including, without limitation, any
applicable usury law), or conflict with, be inconsistent with or result in any
default under, any of the provisions of any deed of trust, easement, restriction
of record, contract, document, agreement or instrument of any kind to which any
of the foregoing is bound or which affects it or any of its property, except as
identified in writing and approved by Beneficiary.
2.03 No Limitation or Governmental Controls.
There are no proceedings of any kind pending, or, to the knowledge of
Trustor, threatened against or affecting Trustor, the Mortgaged Property
(including any attempt or threat by any governmental authority to condemn or
rezone all or any portion of the Mortgaged Property), any party constituting
Trustor or any general partner in any such party, or involving the validity,
enforceability or priority of this Deed of Trust, the Note or any of the Related
Agreements or enjoining or preventing or threatening to enjoin or prevent the
use and occupancy of the Mortgaged Property or the performance by Beneficiary of
its obligations hereunder, and there are no rent controls, governmental
moratoria or environment controls presently in existence, or, to the knowledge
of Trustor, threatened or affecting the Mortgaged Property, except as identified
in writing to, and approved by, Beneficiary.
2.04 Liens.
Title to the Mortgaged Property, or any part thereof, is not subject to any
liens, encumbrances or defects of any nature whatsoever, whether or not of
record, and whether or not customarily shown on title insurance policies, except
as identified in writing and approved by Beneficiary.
2.05 Financial and Operating Statements.
All financial and operating statements submitted to Beneficiary in
connection with this loan secured hereby are true and correct in all respects,
have been prepared in accordance with generally accepted accounting principles
(applied, in the case of any unaudited statement, on a basis consistent with
that of the preceding fiscal year) and fairly present the respective financial
conditions of the subjects thereof and the results of their operations as of the
respective dates shown thereon. No materially adverse changes have occurred in
the financial conditions and operations reflected therein since their respective
dates, and no additional borrowings have been made since the date thereof other
than the borrowing made under this Deed of Trust and any other borrowing
approved in writing by Beneficiary.
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2.06 Other Statements to Beneficiary.
Neither this Deed of Trust, the Note, any Related Agreement, nor any
document, agreement, report, schedule, notice or other writing furnished to the
Beneficiary by or on behalf of any party constituting Trustor, or any general
partner of any such party, contains any omission or misleading or untrue
statement of any fact material to any of the foregoing.
2.07 Third Party Agreements.
Each Third Party Agreement is unmodified and in full force and effect and
free from default on the part of each party thereto, and all conditions required
to be (or which by their nature can be) satisfied by any party to date have been
satisfied. Trustor has not done or said or omitted to do or say anything which
would give to any obligor on any Third Party Agreement any basis for any claims
against Beneficiary or any counterclaim to any claim which might be made by
Beneficiary against such obligor on the basis of any Third Party Agreement.
ARTICLE III
EVENTS OF DEFAULT
Each of the following shall constitute an event of default ("Event of
Default") hereunder:
3.01 Failure to make any payment of principal or interest on the Note or
any Future Advance, when and as the same shall become due and payable, whether
at maturity or by acceleration or as part of any prepayment or otherwise, or
default in the performance of any of the covenants or agreements of Trustor
contained herein, or default in the performance of any of the covenants or
agreements of Trustor contained in the Note, or in any note evidencing a Future
Advance, or in any of the Related Agreements, after the expiration of the period
of time, if any, permitted for cure of such default thereunder.
3.02 The appointment, pursuant to an order of a court of competent
jurisdiction, of a trustee, receiver or liquidator of the Mortgaged Property or
any part thereof, or of Trustor, or any termination or voluntary suspension of
the transaction of business of Trustor, or any attachment, execution or other
judicial seizure of all or any substantial portion of Trustor's assets which
attachment, execution or seizure is not discharged within thirty (30) days.
3.03 Trustor, any trustee of Trustor, any general partner of Trustor, or
any trustee of a general partner of Trustor (each of which shall constitute
"Trustor" for purposes of this Section 3.03 and Sections 3.04 and 3.05 below)
shall file a voluntary case under any applicable bankruptcy, insolvency, debtor
relief, or other similar law now or hereafter in effect, or shall consent to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or similar official) of the Trustor or for any
part of the Mortgaged Property or any substantial part of Trustor's property, or
shall make any general assignment for the benefit of Trustor's creditors, or
shall fail generally to pay Trustor's debts as they become due or shall take any
action in furtherance of any of the foregoing.
3.04 A court having jurisdiction shall enter a decree or order for relief
in respect of the Trustor, in any involuntary case brought under any bankruptcy,
insolvency, debtor relief, or similar law now or hereafter in effect, or Trustor
shall consent to or shall fail to oppose any such proceeding, or any such court
shall enter a decree or order appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Trustor or for any
part of the Mortgaged Property or any substantial part of the Trustor's
property, or ordering the winding up or liquidation of the affairs of the
Trustor, and such decree or order shall not be dismissed within sixty (60) days
after the entry thereof.
3.05 Default under the terms of any agreement of guaranty relating to the
indebtedness evidenced by the Note or relating to any Future Advance, or the
occurrence of any of the events enumerated in Sections 3.02, 3.03 or 3.04 with
regard to any guarantor of the Note or any Future Advance, or the revocation,
limitation or termination of the obligations of any guarantor of the Note or any
Future Advance, except in accordance with the express written terms of the
instrument of guaranty.
3.06 The occurrence of any event or transaction described in subsection
1.08(a) above without the prior written consent of Beneficiary.
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3.07 Without the prior written consent of Beneficiary in each case, (a) the
dissolution or termination of existence of Trustor, voluntarily or
involuntarily; (b) the amendment or modification in any respect of Trustor's
partnership agreement or its partnership resolutions relating to this
transaction; or (c) the distribution of any of the Trustor's capital, except for
distribution of the proceeds of the loan secured hereby and cash from
operations; as used herein, cash from operations shall mean any cash of the
Trustor earned from operation of the Mortgaged Property, but not from a sale or
refinancing of the Mortgaged Property or from borrowing, available after paying
all ordinary and necessary current expenses of the Trustor, including expenses
incurred in the maintenance of the Mortgaged Property, and after establishing
reserves to meet current or reasonably expected obligations of the Trustor.
3.08 The imposition of a tax, other than a state or federal income tax, on
or payable by Trustee or Beneficiary by reason of its ownership of the Note, or
its ownership of any note evidencing a Future Advance, or this Deed of Trust,
and Trustor not promptly paying said tax, or it being illegal for Trustor to pay
said tax.
3.09 Any representation, warranty, or disclosure made to Beneficiary by
Trustor or any guarantor of any indebtedness secured hereby in connection with
or as an inducement to the making of the loan evidenced by the Note or in
connection with or as an inducement to the making of any Future Advance, or this
Deed of Trust (including, without limitation, the representations and warranties
contained in Article II of this Deed of Trust), or any of the Related
Agreements, proving to be false or misleading in any material respect as of the
time the same was made, whether or not any such representation or disclosure
appears as part of this Deed of Trust.
3.10 Any other event occurring which, under this Deed of Trust, or under
the Note or any note evidencing a Future Advance, or under any of the Related
Agreements constitutes a default by Trustor hereunder or thereunder or gives
Beneficiary the right to accelerate the maturity of the indebtedness, or any
part thereof, secured hereby.
ARTICLE IV
REMEDIES
Upon the occurrence of any Event of Default, Trustee and Beneficiary shall
have the following rights and remedies:
4.01 Acceleration.
Beneficiary may declare the entire principal amount of the Note and/or any
Future Advances then outstanding (if not then due and payable), and accrued and
unpaid interest thereon, and all other sums or payments required thereunder, to
be due and payable immediately, and notwithstanding the stated maturity in the
Note, or any note evidencing any Future Advance, the principal amount of the
Note and/or any Future Advance and the accrued and unpaid interest thereon and
all other sums or payments required thereunder shall thereupon become and be
immediately due and payable.
4.02 Entry.
Irrespective of whether Beneficiary exercises the option provided in
Section 4.01 above, Beneficiary in person or by agent or by court-appointed
receiver may enter upon, take possession of, manage and operate the Mortgaged
Property or any part thereof and do all things necessary or appropriate in
Beneficiary's sole discretion in connection therewith, including, without
limitation, making and enforcing, and if the same be subject to modification or
cancellation, modifying or canceling Leases upon such terms or conditions as
Beneficiary deems proper, obtaining and evicting tenants, and fixing or
modifying rents, contracting for and making repairs and alterations, and doing
any and all other acts which Beneficiary deems proper to protect the security
hereof; and either with or without so taking possession, in its own name or in
the name of Trustor, sue for or otherwise collect and receive the Rents and
Profits, including those past due and unpaid, and apply the same less costs and
expenses of operation and collection, including reasonable attorneys' fees, upon
any indebtedness secured hereby, and in such order as Beneficiary may determine.
Upon request of Beneficiary, Trustor shall assemble and make available to
Beneficiary at the site of the real property covered hereby any of the Mortgaged
Property which has been removed therefrom. The entering upon and taking
possession of the Mortgaged Property, or any part thereof, and the collection of
any Rents and Profits and the application thereof as aforesaid shall not cure or
waive any default theretofore or thereafter occurring or affect any notice or
default hereunder or invalidate any act done pursuant to any such default or
notice, and, notwithstanding continuance in possession of the Mortgaged Property
or any part thereof by Beneficiary, Trustor or a receiver, and the collection,
receipt and application of the Rents and Profits, Beneficiary shall be entitled
to exercise every right provided for in this Deed of Trust or by law or in
equity upon or after the occurrence of a default, including, without limitation,
the right to exercise the power of sale. Any of the actions referred to in this
Section 4.02 may be taken by Beneficiary irrespective of whether any notice of
default or election to sell has been given hereunder and without regard to the
adequacy of the security for the indebtedness hereby secured.
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4.03 Judicial Action.
Beneficiary may bring an action in any court of competent jurisdiction to
foreclose this instrument or to enforce any of the covenants and agreements
hereof.
4.04 Power of Sale.
Beneficiary may elect to cause the Mortgaged Property or any part thereof
to be sold under the power of sale herein granted in any manner permitted by
applicable law. In connection with any sale or sales hereunder, Beneficiary may
elect to treat any of the Mortgaged Property which consists of a right in action
or which is property that can be severed from the real property covered hereby
or any improvements thereon without causing structural damage thereto as if the
same were personal property, and dispose of the same in accordance with
applicable law, separate and apart from the sale of real property. Sales
hereunder of any personal property only shall be conducted in any manner
permitted by the California Uniform Commercial Code. Where the Mortgaged
Property consists of real property and personal property located on or within
the real property, Beneficiary may elect in its discretion to dispose of both
the real and personal property together in one sale pursuant to real property
law as permitted by Section 9-501(4) of the California Uniform Commercial Code.
Should Beneficiary elect to sell the Mortgaged Property, or any part thereof,
which is real property or which Beneficiary has elected to treat as real
property as provided above, Beneficiary or Trustee shall give such notice of
default and election to sell as may then be required by law. Thereafter, upon
the expiration of such time and the giving of such notice of sale as may then be
required by law, and without the necessity of any demand on Trustor, Trustee, at
the time and place specified in the notice of sale, shall sell said real
property or part thereof at public auction to the highest bidder for cash in
lawful money of the United States. Trustee may, and upon request of Beneficiary
shall, from time to time, postpone any sale hereunder by public announcement
thereof at the time and place noticed therefor. If the Mortgaged Property
consists of several lots, parcels or items of property, Beneficiary may: (a)
designate the order in which such lots, parcels or items shall be offered for
sale or sold, or (b) elect to sell such lots, parcels or items through a single
sale, or through two or more successive sales, or in any other manner
Beneficiary deems in its best interest. Any person, including Trustor, Trustee
or Beneficiary, may purchase at any sale hereunder, and Beneficiary shall have
the right to purchase at any sale hereunder by crediting upon the bid price the
amount of all or any part of the indebtedness hereby secured. Should Beneficiary
desire that more than one sale or other disposition of the Mortgaged Property be
conducted, Beneficiary may, at its option, cause the same to be conducted
simultaneously, or successively, on the same day, or at such different days or
times and in such order as Beneficiary may deem to be in its best interests, and
no such sale shall terminate or otherwise affect the lien of this Deed of Trust
on any part of the Mortgaged Property not sold until all indebtedness secured
hereby has been fully paid. In the event Beneficiary elects to dispose of the
Mortgaged Property through more than one sale, Trustor agrees to pay the costs
and expenses of each such sale and of any judicial proceedings wherein the same
may be made, including reasonable compensation to Trustee and Beneficiary, their
agents and counsel, and to pay all expenses, liabilities and advances made or
incurred by Trustee in connection with such sale or sales, together with
interest on all such advances made by Trustee at the lower of the rate set forth
in the Note, or the maximum rate permitted by law to be charged by Trustee. Upon
any sale hereunder, Trustee shall execute and deliver to the purchaser or
purchasers a deed or deeds conveying the property so sold, but without any
covenant or warranty whatsoever, express or implied, whereupon such purchaser or
purchasers shall be let into immediate possession; and the recitals in any such
deed or deeds of facts, such as default, the giving of notice of default and
notice of sale, and other facts affecting the regularity or validity of such
sale or disposition, shall be conclusive proof of the truth of such facts and
any such deed or deeds shall be conclusive against all persons as to such facts
recited therein.
4.05 Environmental Default and Remedies.
In the event that any portion of the Mortgaged Property is determined to be
"environmentally impaired" (as "environmentally impaired" is defined in
California Code of Civil Procedure Section 726.5(e)(3)) or to be an "affected
parcel" (as "affected parcel" is defined in California Code of Civil Procedure
Section 726.5(e)(1)), then, without otherwise limiting or in any way affecting
Beneficiary's or Trustee's rights and remedies under this Deed of Trust,
Beneficiary may elect to exercise its right under California Code of Civil
Procedure Section 726.5(a) to (1) waive its lien on such environmentally
impaired or affected portion of the Mortgaged Property and (2) exercise (i) the
rights and remedies of an unsecured creditor, including reduction of its claim
against Trustor to judgment, and (ii) any other rights and remedies permitted by
law. For purposes of determining Beneficiary's right to proceed as an unsecured
creditor under California Code of Civil Procedure Section 726.5(a), Trustor
shall be deemed to have willfully permitted or acquiesced in a release or
threatened release of hazardous materials, within the meaning of California Code
of Civil Procedure Section 726.5(d)(1), if the release or threatened release of
hazardous materials was knowingly or negligently caused or contributed to by any
lessee, occupant or user of any portion of the Mortgaged Property and Trustor
knew or should have known of the activity by such lessee, occupant or user which
caused or contributed to the release or threatened release. All costs and
expenses, including, but not limited to, attorneys' fees, incurred by
Beneficiary in connection with any action commenced under this Section 4.05,
including any action required by California Code of Civil Procedure Section
726.5(b) to determine the degree to which the Mortgaged Property is
environmentally impaired, plus interest thereon at the rate specified in the
Note, shall be added to the indebtedness secured by this Deed of Trust and shall
be due and payable to Beneficiary upon its demand made at any time following the
conclusion of such action.
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4.06 Proceeds of Sale.
The proceeds of any sale made under or by virtue of this Article IV,
together with all other sums which then may be held by Trustee or Beneficiary
under this Deed of Trust, whether under the provisions of this Article IV or
otherwise, shall be applied as follows:
FIRST: To the payment of costs and expenses of sale and of any judicial
proceedings wherein the same may be made, including reasonable compensation to
Trustee and Beneficiary, their agents and counsel, and to the payment of all
expenses, liabilities and advances made or incurred by Trustee under this Deed
of Trust, together with interest on all advances made by Trustee at the lower of
the interest rate set forth in the Note or the maximum rate permitted by law to
be charged by Trustee.
SECOND: To the payment of any and all sums expended by Beneficiary under
the terms of this Deed of Trust, not then repaid, with accrued interest at the
rate set forth in the Note, and all other sums (except advances of principal and
interest thereon) required to be paid by Trustor pursuant to any provisions of
this Deed of Trust, or the Note, or any note evidencing any Future Advance, or
any of the Related Agreements, including but not limited to all expenses,
liabilities and advances made or incurred by Beneficiary under this Deed of
Trust or in connection with the enforcement thereof, together with interest
thereon as herein provided except for any amounts incurred under or as a result
of the Environmental Agreement.
THIRD: To the payment of the entire amount then due, owing or unpaid for
principal and interest upon the Note and any notes evidencing any Future
Advances, with interest on the unpaid principal at the rate set forth therein
from the date of advancement thereof until the same is paid in full.
FOURTH: To the payment of any and all expenses, liabilities and advances
made or incurred by Beneficiary under this Deed of Trust or otherwise in
connection with the Environmental Agreement or in connection with the
enforcement thereof, together with interest thereon as herein provided.
FIFTH: The remainder, if any, to the person or persons legally entitled
thereto.
4.07 Waiver of Marshaling.
Trustor, for itself and for all persons hereafter claiming through or under
it or who may at any time hereafter become holders of liens junior to the lien
of this Deed of Trust, hereby expressly waives and releases all rights to direct
the order in which any of the Mortgaged Property shall be sold in the event of
any sale or sales pursuant hereto and to have any of the Mortgaged Property
and/or any other property now or hereafter constituting security for any of the
indebtedness secured by this Deed of Trust marshaled upon any foreclosure of
this Deed of Trust or of any other security for any of said indebtedness.
4.08 Remedies Cumulative.
No remedy herein conferred upon or reserved to Trustee or Beneficiary is
intended to be exclusive of any other remedy herein or by law provided, but each
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute. No
delay or omission of Trustee or Beneficiary to exercise any right or power
accruing upon any Event of Default shall impair any right or power or shall be
construed to be a waiver of any Event of Default or any acquiescence therein;
and every power and remedy given by this Deed of Trust to Trustee or Beneficiary
may be exercised from time to time as often as may be deemed expedient by
Trustee or Beneficiary. If there exists additional security for the performance
of the obligations secured hereby, the holder of the Note, at its sole option,
and without limiting or affecting any of its rights or remedies hereunder, may
exercise any of the rights and remedies to which it may be entitled hereunder
either concurrently with whatever rights and remedies it may have in connection
with such other security or in such order as it may determine. Any application
of any amounts or any portion thereof held by Beneficiary at any time as
additional security hereunder, whether pursuant to Section 1.03 or Section 1.05
hereof or otherwise, to any indebtedness secured hereby shall not extend or
postpone the due dates of any payments due from Trustor to Beneficiary hereunder
or under the Note, any Future Advances or any of the Related Agreements, or
change the amounts of any such payments or otherwise be construed to cure or
waive any default or notice of default hereunder or invalidate any act done
pursuant to any such default or notice.
ARTICLE V
MISCELLANEOUS
5.01 Severability.
In the event any one or more of the provisions contained in this Deed of
Trust shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Deed of Trust, but this Deed of Trust shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
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5.02 Certain Charges.
Trustor agrees to pay Beneficiary for each statement of Beneficiary as to
the obligations secured hereby, furnished at Trustor's request, the maximum fee
allowed by law, or if there be no maximum fee, then such reasonable fee as is
charged by Beneficiary as of the time said statement is furnished. Trustor
further agrees to pay the charges of Beneficiary for any other service rendered
Trustor, or on its behalf, connected with this Deed of Trust or the indebtedness
secured hereby, including, without limitation, the delivery to an escrow holder
of a request for full or partial reconveyance of this Deed of Trust,
transmitting to an escrow holder moneys secured hereby, changing its records
pertaining to this Deed of Trust and indebtedness secured hereby to show a new
owner of the Mortgaged Property, and replacing an existing policy of insurance
held hereunder with another such policy.
5.03 Notices.
All notices expressly provided hereunder to be given by Beneficiary to
Trustor and all notices and demands of any kind or nature whatsoever which
Trustor may be required or may desire to give to or serve on Beneficiary shall
be in writing and shall be served in person or by first class or certified mail.
Any such notice or demand so served by first class or certified mail shall be
deposited in the United States mail, with postage thereon fully prepaid and
addressed to the party so to be served at its address above stated or at such
other address of which said party shall have theretofore notified in writing, as
provided above, the party giving such notice. Service of any such notice or
demand so made shall be deemed effective on the day of actual delivery as shown
by the addressee's return receipt or the expiration of three business days after
the date of mailing, whichever is the earlier in time, except that service of
any notice of default or notice of sale provided or required by law shall, if
mailed, be deemed effective on the date of mailing.
5.04 Trustor Not Released.
Extension of the time for payment or modification of the terms of payment
of any sums secured by this Deed of Trust granted by Beneficiary to any
successor in interest of Trustor shall not operate to release, in any manner,
the liability of the original Trustor. Beneficiary shall not be required to
commence proceedings against such successor or refuse to extend time for payment
or otherwise modify the terms of payment of the sums secured by this Deed of
Trust by reason of any demand made by the original Trustor. Without affecting
the liability of any person, including Trustor, for the payment of any
indebtedness secured hereby, or the lien of this Deed of Trust on the remainder
of the Mortgaged Property for the full amount of any such indebtedness and
liability unpaid, Beneficiary and Trustee are respectively empowered as follows:
Beneficiary may from time to time and without notice (a) release any person
liable for the payment of any of the indebtedness, (b) extend the time or
otherwise alter the terms of payment of any of the indebtedness, (c) accept
additional real or personal property of any kind as security therefor, whether
evidenced by deeds of trust, mortgages, security agreement or any other
instruments of security, or (d) alter, substitute or release any property
securing the indebtedness; Trustee may, at any time, and from time to time, upon
the written request of Beneficiary, which Beneficiary may withhold in its sole
discretion (1) consent to the making of any map or plat of the Mortgaged
Property or any part thereof, (2) join in granting any easement or creating any
restriction thereon, (3) join in any subordination or other agreement affecting
this Deed of Trust or the lien or charge hereof, or (4) reconvey, without any
warranty, all or part of the Mortgaged Property.
5.05 Inspection.
Beneficiary may at any reasonable time or times make or cause to be made
entry upon and inspection of the Mortgaged Property or any part thereof in
person or by agent.
5.06 Reconveyance.
Upon the payment in full of all sums secured by this Deed of Trust,
Beneficiary shall request Trustee to reconvey the Mortgaged Property and shall
surrender this Deed of Trust and all notes evidencing indebtedness secured by
this Deed of Trust to Trustee. Upon payment of its fees and any other sums owing
to it under this Deed of Trust, Trustee shall reconvey the Mortgaged Property
without warranty to the person or persons legally entitled thereto. Trustor
shall pay all costs of recordation, if any. The recitals in such conveyance of
any matters of facts shall be conclusive proof of the truthfulness thereof. The
grantee in such reconveyance may be described as "the person or persons legally
entitled thereto." Five years after issuance of such full reconveyance, Trustee
may destroy said notes and this Deed of Trust unless otherwise directed by
Beneficiary.
5.07 Statute of Limitations.
The pleading of any statute of limitations as a defense to any and all
obligations secured by this Deed of Trust is hereby waived to the fullest extent
permitted by law.
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5.08 Interpretation.
Wherever used in this Deed of Trust, unless the context otherwise indicates
a contrary intent, or unless otherwise specifically provided herein, the word
"Trustor" shall mean and include both Trustor and any subsequent owner or owners
of the Mortgaged Property, and the word "Beneficiary" shall mean and include not
only the original Beneficiary hereunder but also any future owner and holder,
including pledgees, of the Note secured hereby. In this Deed of Trust whenever
the context so requires, the masculine gender includes the feminine and/or
neuter, and the neuter includes the feminine and/or masculine, and the singular
number includes the plural and conversely. In this Deed of Trust, the use of the
word "including" shall not be deemed to limit the generality of the term or
clause to which it has reference, whether or not non-limiting language (such as
"without limitation," or "but not limited to," or words of similar import) is
used with reference thereto, but rather shall be deemed to include any word
which could reasonably fall within the broadest possible scope of such general
statement, term or matter. The captions and headings of the Articles and
Sections of this Deed of Trust are for convenience only and are not to be used
to interpret, define or limit the provisions of this Deed of Trust.
5.09 Consent; Delegation to Sub-Agents.
The granting or withholding of consent by Beneficiary to any transaction as
required by the terms hereof shall not be deemed a waiver of the right to
require consent to future or successive transactions. Wherever a power of
attorney is conferred upon Beneficiary hereunder, it is understood and agreed
that such power is conferred with full power of substitution, and Beneficiary
may elect in its sole discretion to exercise such power itself or to delegate
such power, or any part thereof, to one or more sub-agents.
5.10 Successors and Assigns.
All of the grants, obligations, covenants, agreements, terms, provisions
and conditions herein shall run with the land and shall apply to, bind and inure
to the benefit of, the heirs, administrators, executors, legal representatives,
and warranties contained herein as well as the obligations arising therefrom are
and shall be joint and several as to each such party.
5.11 Governing Law.
The loan secured by this Deed of Trust is made pursuant to, and shall be
construed and governed by, the laws of the State of California and the rules and
regulations promulgated thereunder.
5.12 Substitution of Trustee.
Beneficiary may remove Trustee at any time or from time to time and appoint
a successor trustee, and upon such appointment, all powers, rights, duties and
authority of Trustee, as aforesaid, shall thereupon become vested in such
successor. Such substitute trustee shall be appointed by written instrument duly
recorded in the county or counties where the real property covered hereby is
located, which appointment may be executed by any authorized agent of
Beneficiary or in any other manner permitted by applicable law.
5.13 No Waiver.
No failure or delay by Beneficiary in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. No waiver, consent or approval of any kind by Beneficiary shall be
effective unless contained in writing signed and delivered by Beneficiary. No
notice to or demand on Trustor in any case shall entitle Trustor to any other
notice or demand in similar or other circumstances, nor shall such notice or
demand constitute a waiver of the rights of Beneficiary to any other or further
actions.
5.14 Beneficiary Not Partner of Trustor; Trustor to Indemnify Beneficiary.
The exercise by Beneficiary of any of its rights, privileges or remedies
conferred hereunder or under the Note or any other Related Agreements or under
applicable law, shall not be deemed to render Beneficiary a partner or a
co-venturer with the Trustor or with any other person. Any and all of such
actions will be exercised by Beneficiary solely in furtherance of its role as a
secured lender advancing funds for use by the Trustor as provided in this Deed
of Trust. Trustor shall indemnify Beneficiary against any claim by any third
party for any injury, damage or liability of any kind arising out of any failure
of Trustor to perform its obligations in this transaction, shall notify
Beneficiary of any lawsuit based on such claim, and at Beneficiary's election,
shall defend Beneficiary therein at Trustor's own expense by counsel
satisfactory to Beneficiary or shall pay the Beneficiary's cost and attorneys'
fees if Beneficiary chooses to defend itself on any such claim.
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5.15 Time of Essence.
Time is declared to be of the essence in this Deed of Trust, the Note and
any Related Agreements and of every part hereof and thereof.
5.16 Entire Agreement.
Once the Note, this Deed of Trust, and all of the other Related Agreements,
if any, have been executed, all of the foregoing constitutes the entire
agreement between the parties hereto and none of the foregoing may be modified
or amended in any manner other than by supplemental written agreement executed
by the parties hereto; provided, however, that all written and oral
representations of Trustor, and of any partner, principal or agent of Trustor,
previously made to Beneficiary shall be deemed to have been made to induce
Beneficiary to make the loan secured hereby and to enter into the transaction
evidenced hereby and by the Note and the Related Agreements, and shall survive
the execution hereof and the closing pursuant hereto. This Deed of Trust cannot
be changed or modified except by written agreement signed by both Trustor and
Beneficiary.
5.17 No Third Party Benefits.
This Deed of Trust, the Note and the other Related Agreements, if any, are
made for the sole benefit of Trustor and Beneficiary and their successors and
assigns, and convey no other legal interest to any party under or by reason of
any of the foregoing. Whether or not Beneficiary elects to employ any or all of
the rights, powers or remedies available to it under any of the foregoing,
Beneficiary shall have no obligation or liability of any kind to any third party
by reason of any of the foregoing or any of Beneficiary's actions or omissions
pursuant thereto or otherwise in connection with this transaction.
5.18 Junior Deed of Trust.
(a) Notwithstanding anything herein to the contrary, the parties
acknowledge that this Deed of Trust is a second lien on the Mortgaged Property
subject to the prior deed of trust in favor of _________________________________
dated ________________, 19___ and recorded on __________________, 19___ in the
Official Records of _______________________ County, California (the "Superior
Deed of Trust"). It is a covenant hereof that Trustor shall faithfully and fully
observe and perform each and every term, covenant and condition of any and all
Superior Deed of Trust and of any and all loan agreements, notes, Superior Deed
of Trust (the "Superior Financing Documents"), and shall not permit any of such
Superior Financing Documents to go into default. Trustor shall immediately
notify Beneficiary of any default or delinquency under any of the Superior
Financing Documents, and shall provide Beneficiary with a copy of any notice of
default or delinquency received by Trustor pursuant to any of the Superior
Financing Documents. A default or delinquency under any one of the Superior
Financing Documents shall automatically and immediately constitute an Event of
Default under this Deed of Trust, and in consequence thereof, Beneficiary may
avail itself of any remedies it may have for an Event of Default hereunder,
including, without limitation, acceleration of the Note.
(b) Beneficiary is hereby expressly authorized to advance at its option all
sums necessary to keep any of the Superior Financing Documents in good standing,
and all sums so advanced, together with interest thereon at the default rates
(as defined in the Note), shall be repayable on demand to Beneficiary and shall
be secured by the lien of this Deed of Trust, as in the case of other advances
made by Beneficiary hereunder.
(c) Trustor agrees that Trustor shall not make any agreement with the
holder of any Superior Financing Documents which shall in any way modify,
change, alter or extend any of the terms or conditions of any such Superior
Financing Documents, nor shall Trustor request or accept any future advances
under such Superior Financing Documents without the express written consent of
Beneficiary.
REQUEST FOR NOTICES
Trustor hereby requests that a copy of any Notice of Default and Notice of
Sale as may be required by law be mailed to Trustor at its address above stated.
IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the day
and year first hereinabove written.
TRUSTOR:
---------------------------------
---------------------------------
302
EXHIBIT A
DESCRIPTION OF THE PROPERTY
303
STATE OF CALIFORNIA
COUNTY OF ______________________)
On __________________, 20___ before me, ___________________________, a
Notary Public in and for said State, personally appeared ______________________
______________________________________________ personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------
(Signature)
(SEAL)
STATE OF CALIFORNIA
COUNTY OF ___________________________)
On __________________, 20___ before me, ___________________________, a
Notary Public in and for said State, personally appeared ______________________
_______________________________________________ personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------
(Signature)
(SEAL)
304
EXHIBIT 10.4 (b)
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
Redwood Mortgage Corp.
900 Veterans Blvd., Suite 500
Redwood City, California 94063-1394
Attn: Michael Burwell
- ----------------------------------------------------------
LOAN NO.:
DEED OF TRUST, ASSIGNMENT
OF LEASES AND RENTS, SECURITY
AGREEMENT AND FIXTURE FILING
THIS DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND
FIXTURE FILING (this "Deed of Trust") is made as of ______________, 19___, by
_______________________________, the owner(s) of the property described below,
whose address is ____________________________________, (herein "Trustor"), to
PLM LENDER SERVICES, INC., a California corporation, whose address is 577 Salmar
Avenue, Suite #100, Campbell, California 95008, (herein "Trustee"), in favor of
_________________________________________________, whose address is 900 Veterans
Blvd., Suite 500, Redwood City, California 94063-1394 (herein "Beneficiary").
Trustor, in consideration of the indebtedness described by this Deed of
Trust, irrevocably grants, conveys, transfers and assigns to Trustee, its
successors and assigns, in trust, with power of sale and right of entry and
possession, all of Trustor's present and future estate, right, title and
interest in and to the following (which shall hereafter be referred to as the
"Mortgaged Property"):
(a) Land. That certain real property located in the City of
________________, County of _______________, State of California, more
particularly described in Exhibit A attached hereto and incorporated herein by
this reference (the "Land");
(b) Improvements. All buildings and other improvements now or hereafter
located on the Land, including, but not limited to, the Fixtures (as defined
below) (collectively, the "Improvements");
(c) Fixtures. All fixtures (goods that are or become so related to the Land
or Improvements that an interest in them arises under real estate law) now or
hereafter located on, attached to, installed in or used in connection with the
Land and Improvements;
(d) Intellectual Property Rights, Other Personal Property. All intangible
property and rights relating to the Land or the operation thereof, or used in
connection therewith, including, without limitation, tradenames and trademarks;
all machinery, equipment, building materials, appliances and goods of every
nature whatsoever (herein collectively called "equipment" and other "personal
property") now or hereafter located in, or on, attached or affixed to, or used
or intended to be used in connection with, the Land and the Improvements,
including, but without limitation, all heating, lighting, laundry, incinerating,
gas, electric and power equipment, engines, pipes, pumps, tanks, motors,
conduits, switchboards, plumbing, lifting, cleaning, fire prevention, fire
extinguishing, refrigerating, ventilating and communications apparatus, air
cooling and air conditioning apparatus, elevators and escalators and related
machinery and equipment, pool and pool operation and maintenance equipment and
apparatus, shades, awnings, blinds, curtains, drapes, attached floor coverings,
including rugs and carpeting, television, radio and music cable antennae and
systems, screens, storm doors and windows, stoves, refrigerators, dishwashers
and other installed appliances, attached cabinets, partitions, ducts and
compressors, furnishings and furniture, and trees, plants and other items of
landscaping (except that the foregoing equipment and other personal property
covered hereby shall not include machinery, apparatus, equipment, fittings and
articles of personal property used in the business of Trustor (commonly referred
to as "trade fixtures") whether the same are annexed to said real property or
not, unless the same are also used in the operation of any building or other
improvement located thereon or unless the same cannot be removed without
materially damaging said real property or any such building or other
improvement), all of which, including replacements and additions thereto, shall,
to the fullest extent permitted by law and for the purposes of this Deed of
Trust, be deemed to be part and parcel of, and appropriated to the use of, said
real property and, whether affixed or annexed thereto or not, be deemed
conclusively to be real property and conveyed by this Deed of Trust, and all
proceeds and products of any and all thereof;
(e) Contracts, Permits, Plans, Easements. All now or hereafter existing
plans and specifications prepared for construction of Improvements on the Land
and all studies, data and drawings related thereto, and also all contracts and
agreements of Trustor relating to the plans and specifications or to the
305
studies, data and drawings, or to the construction of Improvements on the Land
(the "Plans and Specifications"); all contracts, permits, certificates, plans,
studies, data, drawings, licenses, approvals, entitlements and authorizations,
however, characterized, issued or in any way furnished for the acquisition,
construction, operation and use of the Land or the Improvements, including
building permits, environmental certificates, licenses, certificates of
operation, warranties and guaranties; all easements, rights and appurtenances
thereto or used in connection with the above-described Land or Improvements;
(f) Interest in Leases. All existing and future Leases (as defined in
Section 1.03 (b) (1) below) relating to the Land and Improvements or any
interest in them;
(g) Proceeds. All rents, royalties, issues, profits, revenues, income,
remittances, payments and other benefits arising or derived from the use or
enjoyment of all or any portion of the Land or Improvements, or derived from any
Lease, sublease, license, or agreement relating to the use or enjoyment of the
Land or Improvements (subject to the rights given below to Trustor to collect
and apply such rents, royalties, issues, profits, revenues, income, remittances,
payments and other benefits);
(h) Additional Proceeds. All Trustor's other existing or future estates,
easements, licenses, interests, rights, titles, homestead or other claims or
demands, both in law and in equity in the Mortgaged Property including, without
limitation, (1) all damages or awards made to Trustor related to the Mortgaged
Property, including without limitation, for the partial or complete taking by
eminent domain, or by an proceeding or purchase in lieu of eminent domain, of
the Mortgaged Property, and (2) all proceeds of any insurance covering the
Mortgaged Property. Trustor agrees to execute and deliver, from time to time,
such further instruments and documents as may be required by Beneficiary to
confirm the lien of this Deed of Trust on any of the foregoing.
FOR THE PURPOSE OF SECURING, in such order of priority as Beneficiary may
elect:
(a) The repayment of the indebtedness evidenced by Trustor's promissory
note of even date herewith payable to the order of Beneficiary in the original
principal sum of _____________________________________________________
($_____________), with interest thereon, as provided therein, and all prepayment
charges, late charges and loan fees required thereunder, and all extensions,
renewals, modifications, amendments and replacements thereof (herein "Note");
(b) The payment of all other sums which may be advanced by or otherwise be
due to Trustee or Beneficiary under any provision of this Deed of Trust or under
any other instrument or document referred to in subsection (c) below, with
interest thereon at the rate provided herein or therein;
(c) The performance of each and every of the covenants and agreements of
Trustor contained in (1) this Deed of Trust and the Note, and in any note
evidencing a Future Advance (as hereinafter defined), (2) in the Environmental
Agreement and Indemnity executed by Trustor concurrently herewith, and in any
and all pledge agreements, supplemental agreements, assignments and all
instruments of indebtedness or security now or hereafter executed by Trustor in
connection with any indebtedness referred to in subsection (a) above or
subsection (d) below or for the purpose of supplementing or amending this Deed
of Trust or any instrument secured hereby (all of the foregoing in Clause (2),
as the same may be amended, modified or supplemented from time to time, being
referred to hereinafter as "Related Agreements"); and
(d) The repayment of any other loans or advances, with interest thereon,
hereafter made to Trustor (or any successor in interest to Trustor as the owner
of the Mortgaged Property or any part thereof) by Beneficiary when the
promissory note evidencing the loan or advance specifically states that said
note is secured by this Deed of Trust, together with all extensions, renewals,
modifications, amendments and replacements thereof (herein "Future Advance").
ARTICLE I
COVENANTS OF TRUSTOR
To protect the security of this Deed of Trust, Trustor covenants and agrees
as follows:
1.01 Performance of Obligations Secured.
Trustor shall promptly pay when due the principal of and interest on the
indebtedness evidenced by the Note, the principal of and interest on any Future
Advances, and any prepayment, late charges and loan fees provided for in the
Note or in any note evidencing a Future Advance or provided for herein, and
shall further perform fully and in a timely manner all other obligations of
Trustor contained herein or in the Note or in any note evidencing a Future
Advance or in any of the Related Agreements. All sums payable by Trustor
hereunder shall be paid without demand, counterclaim, offset, deduction or
defense and Trustor waives all rights now or hereinafter conferred by statute or
otherwise to any such demand, counterclaim, offset, deduction or defense.
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1.02 Insurance.
Trustor shall keep the Mortgaged Property insured with an all-risk policy
insuring against loss or damage by fire and earthquake with extended coverage
and against any other risks or hazards which, in the opinion of Beneficiary,
should be insured against, in an amount not less than 100% of the full insurable
value thereof on a replacement cost basis, with an inflation guard endorsement,
with a company or companies and in such form and with such endorsements as may
be approved or required by Beneficiary, including, if applicable, boiler
explosion coverage and sprinkler leakage coverage. All losses under said
insurance, and any other insurance obtained by Trustor with respect to the
Mortgaged Property whether or not required by Beneficiary, shall be payable to
Beneficiary and shall be applied in the manner provided in Section 1.03 hereof.
Trustor shall also carry comprehensive general public liability insurance and
twelve (12) months' rent loss insurance in such form and amounts and with such
companies as are satisfactory to Beneficiary. Trustor shall also carry insurance
against flood if required by the Federal Flood Disaster Protection Act of 1973
and regulations issued thereunder. All hazard, flood and rent loss insurance
policies shall be endorsed with a standard noncontributory mortgagee clause in
favor of and in form acceptable to Beneficiary, and may be canceled or modified
only upon not less than thirty (30) days' prior written notice to Beneficiary.
All of the above-mentioned insurance policies or certificates of such insurance
satisfactory to Beneficiary, together with receipts for the payment of premiums
thereon, shall be delivered to and held by Beneficiary, which delivery shall
constitute assignment to Beneficiary of all return premiums to be held as
additional security hereunder. All renewal and replacement policies shall be
delivered to Beneficiary at least thirty (30) days before the expiration of the
expiring policies. Beneficiary shall not by the fact of approving, disapproving,
accepting, preventing, obtaining or failing to obtain any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of insurance contracts, solvency of insurance companies, or
payment or defense of lawsuits, and Trustor hereby expressly assumes full
responsibility therefor and all liability, if any, with respect thereto.
1.03 Condemnation and Insurance Proceeds.
(a) The proceeds of any award or claim for damages, direct or
consequential, in connection with any condemnation or other taking of or damage
or injury to the Mortgaged Property, or any part thereof, or for conveyance in
lieu of condemnation, are hereby assigned to and shall be paid to Beneficiary.
In addition, all causes of action, whether accrued before or after the date of
this Deed of Trust, of all types for damages or injury to the Mortgaged Property
or any part thereof, or in connection with any transaction financed by funds
loaned to Trustor by Beneficiary and secured hereby, or in connection with or
affecting the Mortgaged Property or any part thereof, including, without
limitation, causes of action arising in tort or contract and causes of action
for fraud or concealment of a material fact, are hereby assigned to Beneficiary
as additional security, and the proceeds thereof shall be paid to Beneficiary.
Beneficiary may at its option appear in and prosecute in its own name any action
or proceeding to enforce any such cause of action and may make any compromise or
settlement thereof. Trustor, immediately upon obtaining knowledge of any
casualty damage to the Mortgaged Property or damage in any other manner in
excess of $25,000.00 or knowledge of the institution of any proceedings relating
to condemnation or other taking of or damage or injury to the Mortgaged Property
or any portion thereof, will immediately notify Beneficiary in writing.
Beneficiary, in its sole discretion, may participate in any such proceedings and
may join Trustor in adjusting any loss covered by insurance.
(b) All compensation, awards, proceeds, damages, claims, insurance
recoveries, rights of action and payments which Trustor may receive or to which
Trustor may become entitled with respect to the Mortgaged Property in the event
of any damage or injury to or a partial condemnation or other partial taking of
the Mortgaged Property shall be paid over to Beneficiary and shall be applied
first toward reimbursement of all costs and expenses of Beneficiary in
connection with recovery of the same, and then shall be applied, as follows:
(1) Beneficiary shall consent to the application of such payments to the
restoration of the Mortgaged Property so damaged if and only if Trustor fulfills
all of the following conditions (a breach of any one of which shall constitute
an Event of Default under this Deed of Trust and shall entitle Beneficiary to
exercise all rights and remedies Beneficiary may have in such event): (a) that
no default or Event of Default is then outstanding under this Deed of Trust, the
Note, or any Related Agreement; (b) that Trustor is not in default under any of
the terms, covenants and conditions of any of the Leases (hereinafter defined);
(c) that the Leases shall continue in full force and effect; (d) that Trustor
has in force rental continuation and business interruption insurance covering
the Mortgaged Property for the longer of twelve (12) months or the time
Beneficiary reasonably estimates will be necessary to complete such restoration
and rebuilding; (e) Beneficiary is satisfied that during the period from the
time of damage or taking until restoration and rebuilding of the Mortgaged
Property is completed (the "Gap Period") Trustor's net income from (1) all
leases, subleases, licenses and other occupancy agreements affecting the
Mortgaged Property (the "Leases") which may continue without abatement of rent
during such Gap Period, plus (2) all Leases in effect during the Gap Period
without abatement of rent which Trustor may obtain in substitution for any of
the same which did not continue during such Gap Period, plus (3) the proceeds of
rental continuation and business interruption insurance, is sufficient to
satisfy Trustor's obligations under this Deed of Trust as they come due; (f)
Beneficiary is satisfied that the insurance or award proceeds shall be
sufficient to fully restore and rebuild the Mortgaged Property free and clear of
all liens except the lien of this Deed of Trust, or, in the event that such
proceeds are in Beneficiary's sole judgment insufficient to restore and rebuild
307
the Mortgaged Property, then Trustor shall deposit promptly with Beneficiary
funds which, together with the insurance or award proceeds, shall be sufficient
in Beneficiary's sole judgment to restore and rebuild the Mortgaged Property;
(g) construction and completion of restoration and rebuilding of the Mortgaged
Property shall be completed in accordance with plans and specifications and
drawings submitted to and approved by Beneficiary, which plans, specifications
and drawings shall not be substantially modified, changed or revised without the
Beneficiary's prior written consent; (h) Beneficiary shall also have approved
all prime and subcontractors, and the general contract or contracts the Trustor
proposes to enter into with respect to the restoration and rebuilding; and (i)
any and all monies which are made available for restoration and rebuilding
hereunder shall be disbursed through Beneficiary, the Trustee or a title
insurance and trust company satisfactory to Beneficiary, in accord with standard
construction lending practice, including, if requested by Beneficiary, monthly
lien waivers and title insurance datedowns, and the provision of payment and
performance bonds by Trustor, or in any other manner approved by Beneficiary in
Beneficiary's sole discretion; or
(2) If less than all of conditions (a) through (i) in subsection (1) above
are satisfied, then such payments shall be applied in the sole and absolute
discretion of Beneficiary (a) to the payment or prepayment with any applicable
prepayment premium of any indebtedness secured hereby in such order as
Beneficiary may determine, or (b) to the reimbursement of Trustor's expenses
incurred in the rebuilding and restoration of the Mortgaged Property. In the
event Beneficiary elects under this subsection (2) to make any monies available
to restore the Mortgaged Property, then all of conditions (a) through (i) in
subsection (1) above shall apply, except such conditions which Beneficiary, in
its sole discretion, may waive.
(c) If any material part of the Mortgaged Property is damaged or destroyed
and the loss is not adequately covered by insurance proceeds collected or in the
process of collection, Trustor shall deposit, within ten (10) days of the
Beneficiary's request therefor, the amount of the loss not so covered.
(d) All compensation, awards, proceeds, damages, claims, insurance
recoveries, rights of action and payments which Trustor may receive or to which
Trustor may become entitled with respect to the Mortgaged Property in the event
of a total condemnation or other total taking of the Mortgaged Property shall be
paid over to Beneficiary and shall be applied first toward reimbursement of all
costs and expenses of Beneficiary in connection with recovery of the same, and
then shall be applied to the payment or prepayment with any applicable
prepayment premium of any indebtedness secured hereby in such order as
Beneficiary may determine, until the indebtedness secured hereby has been paid
and satisfied in full. Any surplus remaining after payment and satisfaction of
the indebtedness secured hereby shall be paid to Trustor as its interest may
then appear.
(e) Any application of such amounts or any portion thereof to any
indebtedness secured hereby shall not be construed to cure or waive any default
or notice of default hereunder or invalidate any act done pursuant to any such
default or notice.
(f) If any part of any automobile parking areas included within the
Mortgaged Property is taken by condemnation or before such areas are otherwise
reduced, Trustor shall provide parking facilities in kind, size and location to
comply with all Leases, and before making any contract for such substitute
parking facilities, Trustor shall furnish to Beneficiary satisfactory assurance
of completion thereof, free of liens and in conformity with all governmental
zoning, land use and environmental regulations.
1.04 Taxes, Liens and Other Items.
Trustor shall pay at least ten days before delinquency, all taxes, bonds,
assessments, special assessments, common area charges, fees, liens, charges,
fines, penalties, impositions and any and all other items which are attributable
to or affect the Mortgaged Property and which may attain a priority over this
Deed of Trust by making payment prior to delinquency directly to the payee
thereof, unless Trustor shall be required to make payment to Beneficiary on
account of such items pursuant to Section 1.05 hereof. Prior to the delinquency
of any such taxes or other items, Trustor shall furnish Beneficiary with
receipts indicating such taxes and other items have been paid. Trustor shall
promptly discharge any lien which has attained or may attain priority over this
Deed of Trust. In the event of the passage after the date of this Deed of Trust
of any law deducting from the value of real property for the purposes of
taxation any lien thereon, or changing in any way the laws for the taxation of
deeds of trust or debts secured by deeds of trust for state, federal or any
other purposes, or the manner of the collection of any such taxes, so as to
affect this Deed of Trust, the Beneficiary and holder of the debt which it
secures shall have the right to declare the principal sum and the interest due
on a date to be specified by not less than thirty (30) days written notice to be
given to Trustor by Beneficiary; provided, however, that such election shall be
ineffective if Trustor is permitted by law to pay the whole of such tax in
addition to all other payments required hereunder and if, prior to such
specified date, does pay such taxes and agrees to pay any such tax when
hereafter levied or assessed against the Mortgaged Property, and such agreement
shall constitute a modification of this Deed of Trust.
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1.05 Funds for Taxes and Insurance.
If an Event of Default has occurred under this Deed of Trust or under any
of the Related Agreements, regardless of whether the same has been cured, then
thereafter at any time Beneficiary may, at its option to be exercised upon
thirty (30) days' written notice to Trustor, require the deposit with
Beneficiary or its designee by Trustor, at the time of each payment of an
installment of interest or principal under the Note, of an additional amount
sufficient to discharge the obligations of Trustor under Sections 1.02 and 1.04
hereof as and when they become due. The determination of the amount payable and
of the fractional part thereof to be deposited with Beneficiary shall be made by
Beneficiary in its sole discretion. These amounts shall be held by Beneficiary
or its designee not in trust and not as agent of Trustor and shall not bear
interest, and shall be applied to the payment of the obligations in such order
or priority as Beneficiary shall determine. If at any time within thirty (30)
days prior to the due date of any of the aforementioned obligations the amounts
then on deposit therefor shall be insufficient for the payment of such
obligation in full, Trustor shall within ten (10) days after demand deposit the
amount of the deficiency with Beneficiary. If the amounts deposited are in
excess of the actual obligations for which they were deposited, Beneficiary may
refund any such excess, or, at its option, may hold the same in a reserve
account, not in trust and not bearing interest, and reduce proportionately the
required monthly deposits for the ensuing year. Nothing herein contained shall
be deemed to affect any right or remedy of Beneficiary under any other provision
of this Deed of Trust or under any statute or rule of law to pay any such amount
and to add the amount so paid to the indebtedness hereby secured.
All amounts so deposited shall be held by Beneficiary or its designee as
additional security for the sums secured by this Deed of Trust and upon the
occurrence of an Event of Default hereunder Beneficiary may, in its sole and
absolute discretion and without regard to the adequacy of its security
hereunder, apply such amounts or any portion thereof to any part of the
indebtedness secured hereby. Any such application of said amounts or any portion
thereof to any indebtedness secured hereby shall not be construed to cure or
waive any default or notice of default hereunder.
If Beneficiary requires deposits to be made pursuant to this Section 1.05,
Trustor shall deliver to Beneficiary all tax bills, bond and assessment
statements, statements of insurance premiums, and statements for any other
obligations referred to above as soon as such documents are received by Trustor.
If Beneficiary sells or assigns this Deed of Trust, Beneficiary shall have
the right to transfer all amounts deposited under this Section 1.05 to the
purchaser or assignee, and Beneficiary shall thereupon be released and have no
further liability hereunder for the application of such deposits, and Trustor
shall look solely to such purchaser or assignee for such application and for all
responsibility relating to such deposits.
1.06 Assignment of Rents and Profits.
(a) All of Trustor's interest in any Leases or other occupancy agreements
pertaining to the Mortgaged Property now existing or hereafter entered into, and
all of the rents, royalties, issues, profits, revenue, income and other benefits
of the Mortgaged Property arising from the use or enjoyment of all or any
portion thereof or from any Lease or agreement pertaining to occupancy of any
portion of the Mortgaged Property now existing or hereafter entered into whether
now due, past due, or to become due, including all prepaid rents and security
deposits, and including without limitation all present or future rights of
Trustor in and to all operating revenues derived from the operation of the
Mortgaged Property (the "Rents and Profits"), are hereby absolutely, presently
and unconditionally assigned, transferred and conveyed to Beneficiary to be
applied by Beneficiary in payment of the principal and interest and all other
sums payable on the Note, and of all other sums payable under this Deed of Trust
subject to the rights of residential tenants under California Civil Code Section
1950.5(d). Prior to the occurrence of any Event of Default (hereinafter
defined), Trustor shall have a license to collect and receive all Rents and
Profits, which license shall be terminable at the sole option of Beneficiary,
without regard to the adequacy of its security hereunder and without notice to
or demand upon Trustor, upon the occurrence of any Event of Default. It is
understood and agreed that neither the foregoing assignment of Rents and Profits
to Beneficiary nor the exercise by Beneficiary of any of its rights or remedies
under Article IV hereof shall be deemed to make Beneficiary a
"mortgagee-in-possession" or otherwise responsible or liable in any manner with
respect to the Mortgaged Property or the use, occupancy, enjoyment or operation
of all or any portion thereof, unless and until Beneficiary, in person or by
agent, assumes actual possession thereof. Nor shall appointment of a receiver
for the Mortgaged Property by any court at the request of Beneficiary or by
agreement with Trustor, or the entering into possession of the Mortgaged
Property or any part thereof by such receiver, be deemed to make Beneficiary a
mortgagee-in-possession or otherwise responsible or liable in any manner with
respect to the Mortgaged Property or the use, occupancy, enjoyment or operation
of all or any portion thereof. Upon the occurrence of any Event of Default, this
shall constitute a direction to and full authority to each lessee under any
Lease and each guarantor of any Lease to pay all Rents and Profits to
Beneficiary without proof of the default relied upon. Trustor hereby irrevocably
authorizes each lessee and guarantor to rely upon and comply with any notice or
demand by Beneficiary for the payment to Beneficiary of any Rents and Profits
due or to become due.
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(b) Trustor shall apply the Rents and Profits to the payment of all
necessary and reasonable operating costs and expenses of the Mortgaged Property,
debt service on the indebtedness secured hereby, and a reasonable reserve for
future expenses, repairs and replacements for the Mortgaged Property, before
using the Rents and Profits for Trustor's personal use or any other purpose not
for the direct benefit of the Mortgaged Property.
(c) Trustor warrants as to each Lease now covering all or any part of the
Mortgaged Property: (1) that each Lease is in full force and effect; (2) that no
default exists on the part of the lessees or Trustor under Leases constituting
more than 5%, in the aggregate, of all units in the Mortgaged Property; (3) that
no rent has been collected more than one month in advance; (4) that no Lease or
any interest therein has been previously assigned or pledged; (5) that no lessee
under any Lease has any defense, setoff or counterclaim against Trustor; (6)
that all rent due to date under each Lease has been collected and no concession
has been granted to any lessee in the form of a waiver, release, reduction,
discount or other alteration of rent due or to become due; and (7) that the
interest of the lessee under each Lease is as lessee only, with no options to
purchase or rights of first refusal. All the foregoing warranties shall be
deemed to be reaffirmed and to continue until performance in full of the
obligations under this Deed of Trust.
(d) Trustor shall at all times perform the obligations of lessor under all
such Leases. Trustor shall not execute any further assignment of any of the
Rents and Profits or any interest therein or suffer or permit any such
assignment to occur by operation of law. Trustor shall at any time or from time
to time, upon request of Beneficiary, transfer and assign to Beneficiary in such
form as may be satisfactory to Beneficiary, Trustor's interest in any Lease,
subject to and upon the condition, however, that prior to the occurrence of any
Event of Default hereunder Trustor shall have a license to collect and receive
all Rents and Profits under such Lease upon accrual, but not prior thereto, as
set forth in subsection (a) above. Whenever requested by Beneficiary, Trustor
shall furnish to Beneficiary a certificate of Trustor setting forth the names of
all lessees under any Leases, the terms of their respective Leases, the space
occupied, the rents payable thereunder, and the dates through which any and all
rents have been paid.
(e) Without the prior written consent of Beneficiary, Trustor shall not (1)
accept prepayments of rent exceeding one month under any Leases of any part of
the Mortgaged Property; (2) take any action under or with respect to any such
Leases which would decrease the monetary obligations of the lessee thereunder or
otherwise materially decrease the obligations of the lessee or the rights or
remedies of the lessor, including, without limitation, any reduction in rent or
granting of an option to renew for a term greater than one year; (3) modify or
amend any such Leases or, except where the lessee is in default, cancel or
terminate the same or accept a surrender of the leased premises, provided,
however, that Trustor may renew, modify or amend Leases in the ordinary course
of business so long as such actions do not decrease the monetary obligations of
the lessee thereunder, or otherwise decrease the obligations of the lessee or
the rights and remedies of the lessor; (4) consent to the assignment or
subletting of the whole or any portion of the lessee's interest under any Lease
which has a term of more than five years; (5) create or permit any lien or
encumbrance which, upon foreclosure, would be superior to any such Leases; or
(6) in any other manner impair Beneficiary's rights and interest with respect to
the Rents and Profits.
(f) Each Lease, or any part thereof, shall make provision for the
attornment of the lessee thereunder to any person succeeding to the interest of
Trustor as the result of any foreclosure or transfer in lieu of foreclosure
hereunder, said provision to be in form and substance approved by Beneficiary.
If any Lease provides for the abatement of rent during repair of the demised
premises by reason of fire or other casualty, Trustor shall furnish rental
insurance to Beneficiary, the policies to be in amount and form and written by
such companies as shall be satisfactory to Beneficiary. Each Lease shall remain
in full force and effect despite any merger of the interest of Trustor and any
lessee thereunder.
(g) Beneficiary shall be deemed to be the creditor of each lessee in
respect of any assignments for the benefit of creditors and any bankruptcy,
arrangement, reorganization, insolvency, dissolution, receivership or other
debtor-relief proceedings affecting such lessee (without obligation on the part
of Beneficiary, however, to file timely claims in such proceedings or otherwise
pursue creditor's rights therein). Beneficiary shall have the right to assign
Trustor's right, title and interest in any Leases to any subsequent holder of
this Deed of Trust or any participating interest therein or to any person
acquiring title to all or any part of the Mortgaged Property through foreclosure
or otherwise. Any subsequent assignee shall have all the rights and powers
herein provided to Beneficiary. Beneficiary shall have the authority, as
Trustor's attorney-in-fact, such authority being coupled with an interest and
irrevocable, to sign the name of Trustor and to bind Trustor on all papers and
documents relating to the operation, leasing and maintenance of the Mortgaged
Property.
1.07 Security Agreement.
This Deed of Trust is intended to be a security agreement pursuant to the
California Uniform Commercial Code for (a) any and all items of personal
property specified above as part of the Mortgaged Property which, under
applicable law, may be subject to a security interest pursuant to the California
Uniform Commercial Code and which are not herein effectively made part of the
real property, and (b) any and all items of property specified above as part of
the Mortgaged Property which, under applicable law, constitute fixtures and may
be subject to a security interest under Section 9-313 of the California Uniform
Commercial Code; and Trustor hereby grants Beneficiary a security interest in
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said property, all of which is referred to herein as "Personal Property," and in
all additions thereto, substitutions therefor and proceeds thereof, for the
purpose of securing all indebtedness and other obligations of Trustor now or
hereafter secured by this Deed of Trust, which shall be a paramount and superior
lien on all such Personal Property at all times. Trustor agrees to execute and
deliver financing and continuation statements covering the Personal Property
from time to time and in such form as Beneficiary may require to perfect and
continue the perfection of Beneficiary's lien or security interest with respect
to said property. Trustor shall pay all costs of filing such statements and
renewals and releases thereof and shall pay all reasonable costs and expenses of
any record searches for financing statements Beneficiary may reasonably require.
Upon the occurrence of any default of Trustor hereunder, Beneficiary shall have
the rights and remedies of a secured party under California Uniform Commercial
Code, including, Section 9501(4) thereof, as well as all other rights and
remedies available at law or in equity, and, at Beneficiary's option,
Beneficiary may also invoke the remedies provided in Article IV of this Deed of
Trust as to such property.
1.08 Acceleration.
(a) Trustor acknowledges that in making the loan evidenced by the Note and
this Deed of Trust (the "Loan"), Beneficiary has relied upon: (1) Trustor's
credit rating; (2) Trustor's financial stability; and (3) Trustor's experience
in owning and operating real property comparable to the Mortgaged Property.
Without limiting the obligations of Trustor or the rights and remedies of
Beneficiary, Beneficiary shall have the right, at its option, to declare any
indebtedness and obligations under the Note and this Deed of Trust, irrespective
of the maturity date specified therein, due and payable in full if: (1) Trustor
or any one or more of the tenants-in-common, joint tenants, or other persons
comprising Trustor sells, enters into a contract of sale, conveys, alienates or
encumbers the Mortgaged Property or any portion thereof or any fractional
undivided interest therein, or suffers Trustor's title or any interest therein
to be divested or encumbered, whether voluntarily or involuntarily, or leases
with an option to sell, or changes or permits to be changed the character or use
of the Mortgaged Property, or drills or extracts or enters into a lease for the
drilling for or extracting of oil, gas or other hydrocarbon substances or any
mineral of any kind or character on the Mortgaged Property; (2) The interest of
any general partner of Trustor (or the interest of any general partner in a
partnership that is a partner) is assigned or transferred; (3) If Trustor is a
corporation or a partnership, more than twenty-five percent (25%) of the
corporate stock of Trustor (or of any corporate partner or other corporation
comprising Trustor) is sold, transferred or assigned; (4) There is a change in
beneficial ownership with respect to more than twenty-five percent (25%) of
Trustor (if Trustor is a partnership, limited liability company, trust or other
legal entity) or of any partner or tenant-in-common of Trustor which is a
partnership, limited liability company, trust or other legal entity; (5) a
default has occurred hereunder or under any document executed in connection with
this Deed of Trust and is continuing. In such case, Beneficiary or other holder
of the Note may exercise any and all of the rights and remedies and recourses
set forth in Article IV herein, and as granted by law.
(b) In order to allow Beneficiary to determine whether enforcement of the
foregoing provisions is desirable, Trustor agrees to notify Beneficiary promptly
in writing of any transaction or event described in Clauses 1.08(a) above. In
addition to other damages and costs resulting from the breach by Trustor of its
obligations under this subsection (b), Trustor acknowledges that failure to give
such notice may damage Beneficiary in an amount equal to not less than the
difference between the interest payable on the indebtedness specified herein,
and the interest and loan fees which Beneficiary could obtain on said sum on the
date that the event of acceleration occurred and was enforceable by Beneficiary
under applicable law. Trustor shall pay to Beneficiary all damages Beneficiary
sustains by reason of the breach of the covenant of notice set forth in this
subsection (b) and the amount thereof shall be added to the principal of the
Note and shall bear interest and shall be secured by this Deed of Trust.
(c) Notwithstanding subsection 1.08(a) above, Trustor may from time to time
replace items of personal property and fixtures constituting a part of the
Mortgaged Property, provided that: (1) the replacements for such items of
personal property or fixtures are of equivalent value and quality; and (2)
Trustor has good and clear title to such replacement property free and clear of
any and all liens, encumbrances, security interests, ownership interests, claims
of title (contingent or otherwise), or charges of any kind, or the rights of any
conditional sellers, vendors or any other third parties in or to such
replacement property have been expressly subordinated at no cost to Beneficiary
to the lien of this Deed of Trust in a manner satisfactory to Beneficiary; and
(3) at the option of Beneficiary, Trustor provides at no cost to Beneficiary a
satisfactory opinion of counsel to the effect that this Deed of Trust
constitutes a valid and subsisting second lien on and security interest in such
replacement property and is not subject to being subordinated or the priority
thereof affected under any applicable law, including, but not limited, to the
provisions of Section 9-313 of the California Uniform Commercial Code.
1.09 Preservation and Maintenance of Mortgaged Property.
Trustor shall keep the Mortgaged Property and every part thereof in good
condition and repair, and shall not permit or commit any waste, impairment, or
deterioration of the Mortgaged Property, or commit, suffer or permit any act
upon or use of the Mortgaged Property in violation of law or applicable order of
any governmental authority, whether now existing or hereafter enacted and
whether foreseen or unforeseen, or in violation of any covenants, conditions or
restrictions affecting the Mortgaged Property, or bring or keep any article upon
any of the Mortgaged Property or cause or permit any condition to exist thereon
which would be prohibited by or could invalidate any insurance coverage
maintained, or required hereunder to be maintained, by Trustor on or with
respect to any part of the Mortgaged Property, and Trustor further shall do all
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other acts which from the character or use of the Mortgaged Property may be
reasonably necessary to protect the Mortgaged Property. Trustor shall underpin
and support, when necessary, any building, structure or other improvement
situated on the Mortgaged Property and shall not remove or demolish any building
on the Mortgaged Property. Trustor shall complete or restore and repair promptly
and in a good workmanlike manner any building, structure or improvement which
may be constructed, damaged or destroyed thereon and pay when due all claims for
labor performed and materials furnished therefor, whether or not insurance or
other proceeds are available to cover in whole or in part the costs of any such
completion, restoration or repair; provided, however, that Trustor shall not
demolish, remove, expand or extend any building, structure or improvement on the
Mortgaged Property, nor construct, restore, add to or alter any such building,
structure or improvement, nor consent to or permit any of the foregoing to be
done, without in each case obtaining the prior written consent of Beneficiary
thereto.
If this Deed of Trust is on a condominium or a cooperative apartment or
planned development project, Trustor shall perform all of Trustor's obligations
under any applicable declaration of condominium or master deed, or any
declaration of covenants, conditions and restrictions pertaining to any such
project, or any by-laws or regulations of the project or owners' association or
constituent documents.
Trustor shall not drill or extract or enter into any lease for the drilling
for or extraction of oil, gas or other hydrocarbon substances or any mineral of
any kind or character on or from the Mortgaged Property or any part thereof
without first obtaining Beneficiary's written consent.
Unless required by applicable law or unless Beneficiary has otherwise first
agreed in writing, Trustor shall not make or allow to be made any changes in the
nature of the occupancy or use of the Mortgaged Property or any part thereof for
which the Mortgaged Property or such part was intended at the time this Deed of
Trust was delivered.
1.10 Financial Statements; Offset Certificates.
(a) Trustor, without expense to Beneficiary, shall, upon receipt of written
request from Beneficiary, furnish to Beneficiary (1) an annual statement of the
operation of the Mortgaged Property prepared and certified by Trustor, showing
in reasonable detail satisfactory to Beneficiary total rents or other proceeds
received and total expenses together with an annual balance sheet and profits
and loss statement, within one hundred twenty (120) days after the close of each
fiscal year of Trustor, beginning with the fiscal year first ending after the
date of delivery of this Deed of Trust, (2) within 30 days after the end of each
calendar quarter (March 31, June 30, September 30, December 31) interim
statements of the operation of the Mortgaged Property showing in reasonable
detail satisfactory to Beneficiary total rents and income received and total
expenses, for the previous quarter, certified by Trustor, and (3) copies of
Trustor's annual state and federal income tax filing within thirty (30) days of
filing. Trustor shall keep accurate books and records, and allow Beneficiary,
its representatives and agents, upon demand, at any time during normal business
hours, access to such books and records, including any supporting or related
vouchers or papers, shall allow Beneficiary to make extracts or copies of any
thereof, and shall furnish to Beneficiary and its agents convenient facilities
for the audit of any such statements, books and records.
(b) Trustor, within three (3) days upon request in person or within five
(5) days upon request by mail, shall furnish a written statement duly
acknowledged of all amounts due on any indebtedness secured hereby, whether for
principal or interest on the Note or otherwise, and stating whether any offsets
or defenses exist against the indebtedness secured by this Deed of Trust and
covering such other matters with respect to any such indebtedness as Beneficiary
may reasonably require.
1.11 Trustee's Costs and Expenses; Governmental Charges.
Trustor shall pay all costs, fees and expenses of Trustee, its agents and
counsel in connection with the performance of its duties under this Deed of
Trust, including, without limitation, the cost of any trustee's sale guaranty or
other title insurance coverage ordered in connection with any sale or
foreclosure proceedings hereunder, and shall pay all taxes (except federal and
state income taxes) or other governmental charges or impositions imposed by any
governmental authority on Trustee or Beneficiary by reason of its interest in
the Note, or any note evidencing a Future Advance, or this Deed of Trust.
1.12 Protection of Security; Costs and Expenses.
Trustor agrees that, at any time and from time to time, it will execute and
deliver all such further documents and do all such other acts and things as
Beneficiary may reasonably request in writing in order to protect the security
and priority of the lien created hereby. Trustor further agrees that it will
execute such additional documents or amendments to this Deed of Trust, the Note
or the Related Agreements as Beneficiary may reasonably request to insure that
such documents reflect the party's agreement with regard to the business terms
agreed upon by the parties hereto. Trustor shall appear in and defend any action
or proceeding purporting to affect the security hereof or the rights or powers
of the Beneficiary or Trustee, and shall pay all costs and expenses, including,
without limitation, cost of evidence of title and reasonable attorneys' fees, in
any such action or proceeding in which Beneficiary or Trustee may appear, and in
any suit brought by Beneficiary to foreclose this Deed of Trust or to enforce or
establish any other rights or remedies of Beneficiary hereunder. If Trustor
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fails to perform any of the covenants or agreements contained in this Deed of
Trust, or if any action or proceeding is commenced which affects Beneficiary's
interest in the Mortgaged Property or any part thereof, including, but not
limited to, eminent domain, code enforcement, or proceedings of any nature
whatsoever under any federal or state law, whether now existing or hereafter
enacted or amended, relating to bankruptcy, insolvency, arrangement,
reorganization or other form of debtor relief, or to a decedent, then
Beneficiary or Trustee may, but without obligation to do so and without notice
to or demand upon Trustor and without releasing Trustor from any obligation
hereunder, make such appearances, commence, defend or appear in any such action
or proceeding affecting the Mortgaged Property, pay, contest or compromise any
encumbrance, charge or lien which affects the Mortgaged Property, disburse such
sums and take such action as Beneficiary or Trustee deems necessary or
appropriate to protect Beneficiary's interest, including, but not limited to,
disbursement of reasonable attorneys' fees, entry upon the Mortgaged Property to
make repairs or take other action to protect the security hereof, and payment,
purchase, contest or compromise of any encumbrance, charge or lien which in the
judgment of either Beneficiary or Trustee appears to be prior or superior
hereto. Trustor further agrees to pay all reasonable expenses of Beneficiary
(including fees and disbursements of counsel) incident to the protection of the
rights of Beneficiary hereunder, or to enforcement or collection of payment of
the Note or any Future Advances, whether by judicial or nonjudicial proceedings,
or in connection with any bankruptcy, insolvency, arrangement, reorganization or
other debtor relief proceeding of Trustor, or otherwise. Any amounts disbursed
by Beneficiary or Trustee pursuant to this Section 1.12 shall be additional
indebtedness of Trustor secured by this Deed of Trust and each of the Related
Agreements as of the date of disbursement and shall bear interest at the rate
set forth in the Note. All such amounts shall be payable by Trustor immediately
without demand. Nothing contained in this Section 1.12 shall be construed to
require Beneficiary or Trustee to incur any expense, make any appearance, or
take any other action.
1.13 Fixture Filing.
This Deed of Trust constitutes a financing statement filed as a fixture
filing in the Official Records of the County Recorder of the county in which the
Mortgaged Property is located with respect to any and all fixtures included
within the term "Mortgaged Property" as used herein and with respect to any
goods or other personal property that may now be or hereafter become such
fixtures.
1.14 Notify Lender of Default.
Trustor shall notify Beneficiary in writing within five (5) days of the
occurrence of any Event of Default or other event which, upon the giving of
notice or the passage of time or both, would constitute an Event of Default.
1.15 Management of Mortgaged Property.
Trustor shall manage the Mortgaged Property through its own personnel or a
third party manager approved by Beneficiary, and shall not hire, retain or
contract with any other third party for property management services without the
prior written approval by Beneficiary of such party and the terms of its
contract for management services; provided, however, Beneficiary shall not
withhold approval of a new manager if the new manager has a reputation and
experience in managing properties similar to the Mortgaged Property which are
greater than or equal to the present experience and reputation of the current
manager.
1.16 Miscellaneous.
Trustor shall: (a) make or permit no termination or material amendment of
any agreement between Trustor and a third party relating to the Mortgaged
Property or the loan secured hereby (including, without limitation, the Leases)
(the "Third Party Agreements") without the prior written approval of
Beneficiary, except amendments to Leases permitted by Section 1.06 hereof, (b)
perform Trustor's obligations under each Third Party Agreement, and (c) comply
promptly with all governmental requirements relating to Trustor, the loan
secured hereby and the Mortgaged Property.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
To induce the Beneficiary to make the loan secured hereby, Trustor
represents and warrants to Beneficiary, in addition to any representations and
warranties in the Note or any Related Agreements, that as of the date hereof and
throughout the term of the loan secured hereby until the Note is paid in full
and all obligations under this Deed of Trust are performed:
2.01 Power and Authority.
Trustor is duly organized and validly existing, qualified to do business
and in good standing in the State of California and has full power and due
authority to execute, deliver and perform this Deed of Trust, the Note, and any
Related Agreements in accordance with their terms. Such execution, delivery and
performance has been duly authorized by all necessary trust action and approved
by each required governmental authority or other party.
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2.02 No Default or Violations.
No Event of Default (as defined hereafter) or event which, with notice or
passage of time or both, would constitute an Event of Default ("Unmatured Event
of Default") has occurred and is continuing under this Deed of Trust, the Note,
or any of the Related Agreements. Trustor is not in violation of any
governmental requirement (including, without limitation, any applicable
securities law) or in default under any agreement to which it is bound, or which
affects it or any of its property, and the execution, delivery and performance
of this Deed of Trust, the Note, or any of the Related Agreements in accordance
with their terms and the use and occupancy of the Mortgaged Property will not
violate any governmental requirement (including, without limitation, any
applicable usury law), or conflict with, be inconsistent with or result in any
default under, any of the provisions of any deed of trust, easement, restriction
of record, contract, document, agreement or instrument of any kind to which any
of the foregoing is bound or which affects it or any of its property, except as
identified in writing and approved by Beneficiary.
2.03 No Limitation or Governmental Controls.
There are no proceedings of any kind pending, or, to the knowledge of
Trustor, threatened against or affecting Trustor, the Mortgaged Property
(including any attempt or threat by any governmental authority to condemn or
rezone all or any portion of the Mortgaged Property), any party constituting
Trustor or any general partner in any such party, or involving the validity,
enforceability or priority of this Deed of Trust, the Note or any of the Related
Agreements or enjoining or preventing or threatening to enjoin or prevent the
use and occupancy of the Mortgaged Property or the performance by Beneficiary of
its obligations hereunder, and there are no rent controls, governmental
moratoria or environment controls presently in existence, or, to the knowledge
of Trustor, threatened or affecting the Mortgaged Property, except as identified
in writing to, and approved by, Beneficiary.
2.04 Liens.
Title to the Mortgaged Property, or any part thereof, is not subject to any
liens, encumbrances or defects of any nature whatsoever, whether or not of
record, and whether or not customarily shown on title insurance policies, except
as identified in writing and approved by Beneficiary.
2.05 Financial and Operating Statements.
All financial and operating statements submitted to Beneficiary in
connection with this loan secured by this Deed of Trust are true and correct in
all respects, have been prepared in accordance with generally accepted
accounting principles (applied, in the case of any unaudited statement, on a
basis consistent with that of the preceding fiscal year) and fairly present the
respective financial conditions of the subjects thereof and the results of their
operations as of the respective dates shown thereon. No materially adverse
changes have occurred in the financial conditions and operations reflected
therein since their respective dates, and no additional borrowings have been
made since the date thereof other than the borrowing made under this Deed of
Trust and any other borrowing approved in writing by Beneficiary.
2.06 Other Statements to Beneficiary.
Neither this Deed of Trust, the Note, any Related Agreement, nor any
document, agreement, report, schedule, notice or other writing furnished to the
Beneficiary by or on behalf of any party constituting Trustor, or any general
partner of any such party, contains any omission or misleading or untrue
statement of any fact material to any of the foregoing.
2.07 Third Party Agreements.
Each Third Party Agreement is unmodified and in full force and effect and
free from default on the part of each party thereto, and all conditions required
to be (or which by their nature can be) satisfied by any party to date have been
satisfied. Trustor has not done or said or omitted to do or say anything which
would give to any obligor on any Third Party Agreement any basis for any claims
against Beneficiary or any counterclaim to any claim which might be made by
Beneficiary against such obligor on the basis of any Third Party Agreement.
ARTICLE III
EVENTS OF DEFAULT
Each of the following shall constitute an event of default ("Event of
Default") hereunder:
3.01 Failure to make any payment of principal or interest on the Note or
any Future Advance, when and as the same shall become due and payable, whether
at maturity or by acceleration or as part of any prepayment or otherwise, or
default in the performance of any of the covenants or agreements of Trustor
contained herein, or default in the performance of any of the covenants or
agreements of Trustor contained in the Note, or in any note evidencing a Future
Advance, or in any of the Related Agreements, after the expiration of the period
of time, if any, permitted for cure of such default thereunder.
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3.02 The appointment, pursuant to an order of a court of competent
jurisdiction, of a trustee, receiver or liquidator of the Mortgaged Property or
any part thereof, or of Trustor, or any termination or voluntary suspension of
the transaction of business of Trustor, or any attachment, execution or other
judicial seizure of all or any substantial portion of Trustor's assets which
attachment, execution or seizure is not discharged within thirty (30) days.
3.03 Trustor, any trustee of Trustor, any general partner of Trustor, or
any trustee of a general partner of Trustor (each of which shall constitute
"Trustor" for purposes of this Section 3.03 and Sections 3.04 and 3.05 below)
shall file a voluntary case under any applicable bankruptcy, insolvency, debtor
relief, or other similar law now or hereafter in effect, or shall consent to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or similar official) of the Trustor or for any
part of the Mortgaged Property or any substantial part of Trustor's property, or
shall make any general assignment for the benefit of Trustor's creditors, or
shall fail generally to pay Trustor's debts as they become due or shall take any
action in furtherance of any of the foregoing.
3.04 A court having jurisdiction shall enter a decree or order for relief
in respect of the Trustor, in any involuntary case brought under any bankruptcy,
insolvency, debtor relief, or similar law now or hereafter in effect, or Trustor
shall consent to or shall fail to oppose any such proceeding, or any such court
shall enter a decree or order appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Trustor or for any
part of the Mortgaged Property or any substantial part of the Trustor's
property, or ordering the winding up or liquidation of the affairs of the
Trustor, and such decree or order shall not be dismissed within sixty (60) days
after the entry thereof.
3.05 Default under the terms of any agreement of guaranty relating to the
indebtedness evidenced by the Note or relating to any Future Advance, or the
occurrence of any of the events enumerated in Sections 3.02, 3.03 or 3.04 with
regard to any guarantor of the Note or any Future Advance, or the revocation,
limitation or termination of the obligations of any guarantor of the Note or any
Future Advance, except in accordance with the express written terms of the
instrument of guaranty.
3.06 The occurrence of any event or transaction described in subsection
1.08(a) above without the prior written consent of Beneficiary.
3.07 Without the prior written consent of Beneficiary in each case, (a) the
dissolution or termination of existence of Trustor, or any party constituting
Trustor, voluntarily or involuntarily; (b) the amendment or modification in any
respect of Trustor's partnership agreement or its partnership resolutions
relating to this transaction; or (c) the distribution of any of the Trustor's
capital, or of any party constituting Trustor, except for distribution of the
proceeds of the loan secured hereby and cash from operations; as used herein,
cash from operations shall mean any cash of the Trustor earned from operation of
the Mortgaged Property, but not from a sale or refinancing of the Mortgaged
Property or from borrowing, available after paying all ordinary and necessary
current expenses of the Trustor, including expenses incurred in the maintenance
of the Mortgaged Property, and after establishing reserves to meet current or
reasonably expected obligations of the Trustor.
3.08 The imposition of a tax, other than a state or federal income tax, on
or payable by Trustee or Beneficiary by reason of its ownership of the Note, or
its ownership of any note evidencing a Future Advance, or this Deed of Trust,
and Trustor not promptly paying said tax, or it being illegal for Trustor to pay
said tax.
3.09 Any representation, warranty, or disclosure made to Beneficiary by
Trustor or any guarantor of any indebtedness secured hereby in connection with
or as an inducement to the making of the loan evidenced by the Note or in
connection with or as an inducement to the making of any Future Advance, or this
Deed of Trust (including, without limitation, the representations and warranties
contained in Article II of this Deed of Trust), or any of the Related
Agreements, proving to be false or misleading in any material respect as of the
time the same was made, whether or not any such representation or disclosure
appears as part of this Deed of Trust.
3.10 Any other event occurring which, under this Deed of Trust, or under
the Note or any note evidencing a Future Advance, or under any of the Related
Agreements constitutes a default by Trustor hereunder or thereunder or gives
Beneficiary the right to accelerate the maturity of the indebtedness, or any
part thereof, secured hereby.
ARTICLE IV
REMEDIES
Upon the occurrence of any Event of Default, Trustee and Beneficiary shall
have the following rights and remedies:
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4.01 Acceleration.
Beneficiary may declare the entire principal amount of the Note and/or any
Future Advances then outstanding (if not then due and payable), and accrued and
unpaid interest thereon, and all other sums or payments required thereunder, to
be due and payable immediately, and notwithstanding the stated maturity in the
Note, or any note evidencing any Future Advance, the principal amount of the
Note and/or any Future Advance and the accrued and unpaid interest thereon and
all other sums or payments required thereunder shall thereupon become and be
immediately due and payable.
4.02 Entry.
Irrespective of whether Beneficiary exercises the option provided in
Section 4.01 above, Beneficiary in person or by agent or by court-appointed
receiver may enter upon, take possession of, manage and operate the Mortgaged
Property or any part thereof and do all things necessary or appropriate in
Beneficiary's sole discretion in connection therewith, including, without
limitation, making and enforcing, and if the same be subject to modification or
cancellation, modifying or canceling Leases upon such terms or conditions as
Beneficiary deems proper, obtaining and evicting tenants, and fixing or
modifying rents, contracting for and making repairs and alterations, and doing
any and all other acts which Beneficiary deems proper to protect the security
hereof; and either with or without so taking possession, in its own name or in
the name of Trustor, sue for or otherwise collect and receive the Rents and
Profits, including those past due and unpaid, and apply the same less costs and
expenses of operation and collection, including reasonable attorneys' fees, upon
any indebtedness secured hereby, and in such order as Beneficiary may determine.
Upon request of Beneficiary, Trustor shall assemble and make available to
Beneficiary at the site of the real property covered hereby any of the Mortgaged
Property which has been removed therefrom. The entering upon and taking
possession of the Mortgaged Property, or any part thereof, and the collection of
any Rents and Profits and the application thereof as aforesaid shall not cure or
waive any default theretofore or thereafter occurring or affect any notice or
default hereunder or invalidate any act done pursuant to any such default or
notice, and, notwithstanding continuance in possession of the Mortgaged Property
or any part thereof by Beneficiary, Trustor or a receiver, and the collection,
receipt and application of the Rents and Profits, Beneficiary shall be entitled
to exercise every right provided for in this Deed of Trust or by law or in
equity upon or after the occurrence of a default, including, without limitation,
the right to exercise the power of sale. Any of the actions referred to in this
Section 4.02 may be taken by Beneficiary irrespective of whether any notice of
default or election to sell has been given hereunder and without regard to the
adequacy of the security for the indebtedness hereby secured.
4.03 Judicial Action.
Beneficiary may bring an action in any court of competent jurisdiction to
foreclose this instrument or to enforce any of the covenants and agreements
hereof.
4.04 Power of Sale.
Beneficiary may elect to cause the Mortgaged Property or any part thereof
to be sold under the power of sale herein granted in any manner permitted by
applicable law. In connection with any sale or sales hereunder, Beneficiary may
elect to treat any of the Mortgaged Property which consists of a right in action
or which is property that can be severed from the real property covered hereby
or any improvements thereon without causing structural damage thereto as if the
same were personal property, and dispose of the same in accordance with
applicable law, separate and apart from the sale of real property. Sales
hereunder of any personal property only shall be conducted in any manner
permitted by the California Uniform Commercial Code. Where the Mortgaged
Property consists of real property and personal property located on or within
the real property, Beneficiary may elect in its discretion to dispose of both
the real and personal property together in one sale pursuant to real property
law as permitted by Section 9-501(4) of the California Uniform Commercial Code.
Should Beneficiary elect to sell the Mortgaged Property, or any part thereof,
which is real property or which Beneficiary has elected to treat as real
property as provided above, Beneficiary or Trustee shall give such notice of
default and election to sell as may then be required by law. Thereafter, upon
the expiration of such time and the giving of such notice of sale as may then be
required by law, and without the necessity of any demand on Trustor, Trustee, at
the time and place specified in the notice of sale, shall sell said real
property or part thereof at public auction to the highest bidder for cash in
lawful money of the United States. Trustee may, and upon request of Beneficiary
shall, from time to time, postpone any sale hereunder by public announcement
thereof at the time and place noticed therefor. If the Mortgaged Property
consists of several lots, parcels or items of property, Beneficiary may: (a)
designate the order in which such lots, parcels or items shall be offered for
sale or sold, or (b) elect to sell such lots, parcels or items through a single
sale, or through two or more successive sales, or in any other manner
Beneficiary deems in its best interest. Any person, including Trustor, Trustee
or Beneficiary, may purchase at any sale hereunder, and Beneficiary shall have
the right to purchase at any sale hereunder by crediting upon the bid price the
amount of all or any part of the indebtedness hereby secured. Should Beneficiary
desire that more than one sale or other disposition of the Mortgaged Property be
conducted, Beneficiary may, at its option, cause the same to be conducted
simultaneously, or successively, on the same day, or at such different days or
times and in such order as Beneficiary may deem to be in its best interests, and
no such sale shall terminate or otherwise affect the lien of this Deed of Trust
316
on any part of the Mortgaged Property not sold until all indebtedness secured
hereby has been fully paid. In the event Beneficiary elects to dispose of the
Mortgaged Property through more than one sale, Trustor agrees to pay the costs
and expenses of each such sale and of any judicial proceedings wherein the same
may be made, including reasonable compensation to Trustee and Beneficiary, their
agents and counsel, and to pay all expenses, liabilities and advances made or
incurred by Trustee in connection with such sale or sales, together with
interest on all such advances made by Trustee at the lower of the rate set forth
in the Note, or the maximum rate permitted by law to be charged by Trustee. Upon
any sale hereunder, Trustee shall execute and deliver to the purchaser or
purchasers a deed or deeds conveying the property so sold, but without any
covenant or warranty whatsoever, express or implied, whereupon such purchaser or
purchasers shall be let into immediate possession; and the recitals in any such
deed or deeds of facts, such as default, the giving of notice of default and
notice of sale, and other facts affecting the regularity or validity of such
sale or disposition, shall be conclusive proof of the truth of such facts and
any such deed or deeds shall be conclusive against all persons as to such facts
recited therein.
4.05 Environmental Default and Remedies.
In the event that any portion of the Mortgaged Property is determined to be
"environmentally impaired" (as "environmentally impaired" is defined in
California Code of Civil Procedure Section 726.5(e)(3)) or to be an "affected
parcel" (as "affected parcel" is defined in California Code of Civil Procedure
Section 726.5(e)(1)), then, without otherwise limiting or in any way affecting
Beneficiary's or Trustee's rights and remedies under this Deed of Trust,
Beneficiary may elect to exercise its right under California Code of Civil
Procedure Section 726.5(a) to (1) waive its lien on such environmentally
impaired or affected portion of the Mortgaged Property and (2) exercise (i) the
rights and remedies of an unsecured creditor, including reduction of its claim
against Trustor to judgment, and (ii) any other rights and remedies permitted by
law. For purposes of determining Beneficiary's right to proceed as an unsecured
creditor under California Code of Civil Procedure Section 726.5(a), Trustor
shall be deemed to have willfully permitted or acquiesced in a release or
threatened release of hazardous materials, within the meaning of California Code
of Civil Procedure Section 726.5(d)(1), if the release or threatened release of
hazardous materials was knowingly or negligently caused or contributed to by any
lessee, occupant or user of any portion of the Mortgaged Property and Trustor
knew or should have known of the activity by such lessee, occupant or user which
caused or contributed to the release or threatened release. All costs and
expenses, including, but not limited to, attorneys' fees, incurred by
Beneficiary in connection with any action commenced under this Section 4.05,
including any action required by California Code of Civil Procedure Section
726.5(b) to determine the degree to which the Mortgaged Property is
environmentally impaired, plus interest thereon at the rate specified in
Paragraph 2(b) of the Note, shall be added to the indebtedness secured by this
Deed of Trust and shall be due and payable to Beneficiary upon its demand made
at any time following the conclusion of such action.
4.06 Proceeds of Sale.
The proceeds of any sale made under or by virtue of this Article IV,
together with all other sums which then may be held by Trustee or Beneficiary
under this Deed of Trust, whether under the provisions of this Article IV or
otherwise, shall be applied as follows:
FIRST: To the payment of costs and expenses of sale and of any judicial
proceedings wherein the same may be made, including reasonable compensation to
Trustee and Beneficiary, their agents and counsel, and to the payment of all
expenses, liabilities and advances made or incurred by Trustee under this Deed
of Trust, together with interest on all advances made by Trustee at the lower of
the interest rate set forth in the Note or the maximum rate permitted by law to
be charged by Trustee.
SECOND: To the payment of any and all sums expended by Beneficiary under
the terms of this Deed of Trust, not then repaid, with accrued interest at the
rate set forth in the Note, and all other sums (except advances of principal and
interest thereon) required to be paid by Trustor pursuant to any provisions of
this Deed of Trust, or the Note, or any note evidencing any Future Advance, or
any of the Related Agreements, including but not limited to all expenses,
liabilities and advances made or incurred by Beneficiary under this Deed of
Trust or in connection with the enforcement thereof, together with interest
thereon as herein provided except for any amounts incurred under or as a result
of the Environmental Agreement.
THIRD: To the payment of the entire amount then due, owing or unpaid for
principal and interest upon the Note and any notes evidencing any Future
Advances, with interest on the unpaid principal at the rate set forth therein
from the date of advancement thereof until the same is paid in full.
FOURTH: To the payment of any and all expenses, liabilities and advances
made or incurred by Beneficiary under this Deed of Trust or otherwise in
connection with the Environmental Agreement or in connection with the
enforcement thereof, together with interest thereon as herein provided.
317
FIFTH: The remainder, if any, to the person or persons legally entitled
thereto.
4.07 Waiver of Marshaling.
Trustor, for itself and for all persons hereafter claiming through or under
it or who may at any time hereafter become holders of liens junior to the lien
of this Deed of Trust, hereby expressly waives and releases all rights to direct
the order in which any of the Mortgaged Property shall be sold in the event of
any sale or sales pursuant hereto and to have any of the Mortgaged Property
and/or any other property now or hereafter constituting security for any of the
indebtedness secured by this Deed of Trust marshaled upon any foreclosure of
this Deed of Trust or of any other security for any of said indebtedness.
4.08 Remedies Cumulative.
No remedy herein conferred upon or reserved to Trustee or Beneficiary is
intended to be exclusive of any other remedy herein or by law provided, but each
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute. No
delay or omission of Trustee or Beneficiary to exercise any right or power
accruing upon any Event of Default shall impair any right or power or shall be
construed to be a waiver of any Event of Default or any acquiescence therein;
and every power and remedy given by this Deed of Trust to Trustee or Beneficiary
may be exercised from time to time as often as may be deemed expedient by
Trustee or Beneficiary. If there exists additional security for the performance
of the obligations secured hereby, the holder of the Note, at its sole option,
and without limiting or affecting any of its rights or remedies hereunder, may
exercise any of the rights and remedies to which it may be entitled hereunder
either concurrently with whatever rights and remedies it may have in connection
with such other security or in such order as it may determine. Any application
of any amounts or any portion thereof held by Beneficiary at any time as
additional security hereunder, whether pursuant to Section 1.03 or Section 1.05
hereof or otherwise, to any indebtedness secured hereby shall not extend or
postpone the due dates of any payments due from Trustor to Beneficiary hereunder
or under the Note, any Future Advances or any of the Related Agreements, or
change the amounts of any such payments or otherwise be construed to cure or
waive any default or notice of default hereunder or invalidate any act done
pursuant to any such default or notice.
ARTICLE V
MISCELLANEOUS
5.01 Severability.
In the event any one or more of the provisions contained in this Deed of
Trust shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Deed of Trust, but this Deed of Trust shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
5.02 Certain Charges.
Trustor agrees to pay Beneficiary for each statement of Beneficiary as to
the obligations secured hereby, furnished at Trustor's request, the maximum fee
allowed by law, or if there be no maximum fee, then such reasonable fee as is
charged by Beneficiary as of the time said statement is furnished. Trustor
further agrees to pay the charges of Beneficiary for any other service rendered
Trustor, or on its behalf, connected with this Deed of Trust or the indebtedness
secured hereby, including, without limitation, the delivery to an escrow holder
of a request for full or partial reconveyance of this Deed of Trust,
transmitting to an escrow holder moneys secured hereby, changing its records
pertaining to this Deed of Trust and indebtedness secured hereby to show a new
owner of the Mortgaged Property, and replacing an existing policy of insurance
held hereunder with another such policy.
5.03 Notices.
All notices expressly provided hereunder to be given by Beneficiary to
Trustor and all notices and demands of any kind or nature whatsoever which
Trustor may be required or may desire to give to or serve on Beneficiary shall
be in writing and shall be served in person or by first class or certified mail.
Any such notice or demand so served by first class or certified mail shall be
deposited in the United States mail, with postage thereon fully prepaid and
addressed to the party so to be served at its address above stated or at such
other address of which said party shall have theretofore notified in writing, as
provided above, the party giving such notice. Service of any such notice or
demand so made shall be deemed effective on the day of actual delivery as shown
by the addressee's return receipt or the expiration of three business days after
the date of mailing, whichever is the earlier in time, except that service of
any notice of default or notice of sale provided or required by law shall, if
mailed, be deemed effective on the date of mailing.
318
5.04 Trustor Not Released.
Extension of the time for payment or modification of the terms of payment
of any sums secured by this Deed of Trust granted by Beneficiary to any
successor in interest of Trustor shall not operate to release, in any manner,
the liability of the original Trustor. Beneficiary shall not be required to
commence proceedings against such successor or refuse to extend time for payment
or otherwise modify the terms of payment of the sums secured by this Deed of
Trust by reason of any demand made by the original Trustor. Without affecting
the liability of any person, including Trustor, for the payment of any
indebtedness secured hereby, or the lien of this Deed of Trust on the remainder
of the Mortgaged Property for the full amount of any such indebtedness and
liability unpaid, Beneficiary and Trustee are respectively empowered as follows:
Beneficiary may from time to time and without notice (a) release any person
liable for the payment of any of the indebtedness, (b) extend the time or
otherwise alter the terms of payment of any of the indebtedness, (c) accept
additional real or personal property of any kind as security therefor, whether
evidenced by deeds of trust, mortgages, security agreement or any other
instruments of security, or (d) alter, substitute or release any property
securing the indebtedness; Trustee may, at any time, and from time to time, upon
the written request of Beneficiary, which Beneficiary may withhold in its sole
discretion (1) consent to the making of any map or plat of the Mortgaged
Property or any part thereof, (2) join in granting any easement or creating any
restriction thereon, (3) join in any subordination or other agreement affecting
this Deed of Trust or the lien or charge hereof, or (4) reconvey, without any
warranty, all or part of the Mortgaged Property.
5.05 Inspection.
Beneficiary may at any reasonable time or times make or cause to be made
entry upon and inspection of the Mortgaged Property or any part thereof in
person or by agent.
5.06 Reconveyance.
Upon the payment in full of all sums secured by this Deed of Trust,
Beneficiary shall request Trustee to reconvey the Mortgaged Property and shall
surrender this Deed of Trust and all notes evidencing indebtedness secured by
this Deed of Trust to Trustee. Upon payment of its fees and any other sums owing
to it under this Deed of Trust, Trustee shall reconvey the Mortgaged Property
without warranty to the person or persons legally entitled thereto. Trustor
shall pay all costs of recordation, if any. The recitals in such conveyance of
any matters of facts shall be conclusive proof of the truthfulness thereof. The
grantee in such reconveyance may be described as "the person or persons legally
entitled thereto." Five years after issuance of such full reconveyance, Trustee
may destroy said notes and this Deed of Trust unless otherwise directed by
Beneficiary.
5.07 Statute of Limitations.
The pleading of any statute of limitations as a defense to any and all
obligations secured by this Deed of Trust is hereby waived to the fullest extent
permitted by law.
5.08 Interpretation.
Wherever used in this Deed of Trust, unless the context otherwise indicates
a contrary intent, or unless otherwise specifically provided herein, the word
"Trustor" shall mean and include both Trustor and any subsequent owner or owners
of the Mortgaged Property, and the word "Beneficiary" shall mean and include not
only the original Beneficiary hereunder but also any future owner and holder,
including pledgees, of the Note secured hereby. In this Deed of Trust whenever
the context so requires, the masculine gender includes the feminine and/or
neuter, and the neuter includes the feminine and/or masculine, and the singular
number includes the plural and conversely. In this Deed of Trust, the use of the
word "including" shall not be deemed to limit the generality of the term or
clause to which it has reference, whether or not non-limiting language (such as
"without limitation," or "but not limited to," or words of similar import) is
used with reference thereto, but rather shall be deemed to include any word
which could reasonably fall within the broadest possible scope of such general
statement, term or matter. The captions and headings of the Articles and
Sections of this Deed of Trust are for convenience only and are not to be used
to interpret, define or limit the provisions of this Deed of Trust.
5.09 Consent; Delegation to Sub-Agents.
The granting or withholding of consent by Beneficiary to any transaction as
required by the terms hereof shall not be deemed a waiver of the right to
require consent to future or successive transactions. Wherever a power of
attorney is conferred upon Beneficiary hereunder, it is understood and agreed
that such power is conferred with full power of substitution, and Beneficiary
may elect in its sole discretion to exercise such power itself or to delegate
such power, or any part thereof, to one or more sub-agents.
319
5.10 Successors and Assigns.
All of the grants, obligations, covenants, agreements, terms, provisions
and conditions herein shall run with the land and shall apply to, bind and inure
to the benefit of, the heirs, administrators, executors, legal representatives,
successors and assigns of Trustor and the successors in trust of Trustee and the
endorsees, transferees, successors and assigns of Beneficiary. In the event
Trustor is composed of more than one party, the obligations, covenants,
agreements, and warranties contained herein as well as the obligations arising
therefrom are and shall be joint and several as to each such party.
5.11 Governing Law.
The loan secured by this Deed of Trust is made pursuant to, and shall be
construed and governed by, the laws of the State of California and the rules and
regulations promulgated thereunder.
5.12 Substitution of Trustee.
Beneficiary may remove Trustee at any time or from time to time and appoint
a successor trustee, and upon such appointment, all powers, rights, duties and
authority of Trustee, as aforesaid, shall thereupon become vested in such
successor. Such substitute trustee shall be appointed by written instrument duly
recorded in the county or counties where the real property covered hereby is
located, which appointment may be executed by any authorized agent of
Beneficiary or in any other manner permitted by applicable law.
5.13 No Waiver.
No failure or delay by Beneficiary in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. No waiver, consent or approval of any kind by Beneficiary shall be
effective unless contained in writing signed and delivered by Beneficiary. No
notice to or demand on Trustor in any case shall entitle Trustor to any other
notice or demand in similar or other circumstances, nor shall such notice or
demand constitute a waiver of the rights of Beneficiary to any other or further
actions.
5.14 Beneficiary Not Partner of Trustor; Trustor to Indemnify Beneficiary.
The exercise by Beneficiary of any of its rights, privileges or remedies
conferred hereunder or under the Note or any other Related Agreements or under
applicable law, shall not be deemed to render Beneficiary a partner or a
co-venturer with the Trustor or with any other person. Any and all of such
actions will be exercised by Beneficiary solely in furtherance of its role as a
secured lender advancing funds for use by the Trustor as provided in this Deed
of Trust. Trustor shall indemnify Beneficiary against any claim by any third
party for any injury, damage or liability of any kind arising out of any failure
of Trustor to perform its obligations in this transaction, shall notify
Beneficiary of any lawsuit based on such claim, and at Beneficiary's election,
shall defend Beneficiary therein at Trustor's own expense by counsel
satisfactory to Beneficiary or shall pay the Beneficiary's cost and attorneys'
fees if Beneficiary chooses to defend itself on any such claim.
5.15 Time of Essence.
Time is declared to be of the essence in this Deed of Trust, the Note and
any Related Agreements and of every part hereof and thereof.
5.16 Entire Agreement.
Once the Note, this Deed of Trust, and all of the other Related Agreements,
if any, have been executed, all of the foregoing constitutes the entire
agreement between the parties hereto and none of the foregoing may be modified
or amended in any manner other than by supplemental written agreement executed
by the parties hereto; provided, however, that all written and oral
representations of Trustor, and of any partner, principal or agent of Trustor,
previously made to Beneficiary shall be deemed to have been made to induce
Beneficiary to make the loan secured hereby and to enter into the transaction
evidenced hereby and by the Note and the Related Agreements, and shall survive
the execution hereof and the closing pursuant hereto. This Deed of Trust cannot
be changed or modified except by written agreement signed by both Trustor and
Beneficiary.
320
5.17 No Third Party Benefits.
This Deed of Trust, the Note and the other Related Agreements, if any, are
made for the sole benefit of Trustor and Beneficiary and their successors and
assigns, and convey no other legal interest to any party under or by reason of
any of the foregoing. Whether or not Beneficiary elects to employ any or all of
the rights, powers or remedies available to it under any of the foregoing,
Beneficiary shall have no obligation or liability of any kind to any third party
by reason of any of the foregoing or any of Beneficiary's actions or omissions
pursuant thereto or otherwise in connection with this transaction.
5.18 Junior Deed of Trust.
(a) Notwithstanding anything herein to the contrary, the parties
acknowledge that this Deed of Trust is a second lien on the Mortgaged Property
subject to the prior deed of trust in favor of
___________________________________________ dated ________________, 20___ and
recorded on __________________, 20___ in the Official Records of
_______________________ County, California (the "Superior Deed of Trust"). It is
a covenant hereof that Trustor shall faithfully and fully observe and perform
each and every term, covenant and condition of any and all Superior Deed of
Trust and of any and all loan agreements, notes, Superior Deed of Trust (the
"Superior Financing Documents"), and shall not permit any of such Superior
Financing Documents to go into default. Trustor shall immediately notify
Beneficiary of any default or delinquency under any of the Superior Financing
Documents, and shall provide Beneficiary with a copy of any notice of default or
delinquency received by Trustor pursuant to any of the Superior Financing
Documents. A default or delinquency under any one of the Superior Financing
Documents shall automatically and immediately constitute an Event of Default
under this Deed of Trust, and in consequence thereof, Beneficiary may avail
itself of any remedies it may have for an Event of Default hereunder, including,
without limitation, acceleration of the Note.
(b) Beneficiary is hereby expressly authorized to advance at its option all
sums necessary to keep any of the Superior Financing Documents in good standing,
and all sums so advanced, together with interest thereon at the default rates
(as defined in the Note), shall be repayable on demand to Beneficiary and shall
be secured by the lien of this Deed of Trust, as in the case of other advances
made by Beneficiary hereunder.
(c) Trustor agrees that Trustor shall not make any agreement with the
holder of any Superior Financing Documents which shall in any way modify,
change, alter or extend any of the terms or conditions of any such Superior
Financing Documents, nor shall Trustor request or accept any future advances
under such Superior Financing Documents without the express written consent of
Beneficiary.
REQUEST FOR NOTICES
Trustor hereby requests that a copy of any Notice of Default and Notice of
Sale as may be required by law be mailed to Trustor at its address above stated.
IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the day
and year first hereinabove written.
TRUSTOR:
-------------------------------
-------------------------------
321
EXHIBIT A
DESCRIPTION OF THE PROPERTY
322
STATE OF CALIFORNIA
COUNTY OF ______________________)
On __________________, 20___ before me, ___________________________, a
Notary Public in and for said State, personally appeared ______________________
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------
(Signature)
(SEAL)
STATE OF CALIFORNIA
COUNTY OF ___________________________)
On __________________, 20___ before me, ___________________________, a
Notary Public in and for said State, personally appeared ______________________
_______________________________________________ personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------
(Signature)
(SEAL)
323
RECORDING REQUESTED BY
AND WHEN RECORDED, MAIL TO
-- --
Name REDWOOD MORTGAGE CORP.
P.O. BOX 5096
Address REDWOOD CITY, CA 94063-0096
-- --
Title Order No. Escrow No.
---------- -----------------
- -------------------------------------------------------------------------------
SPACE ABOVE THIS LINE FOR RECORDER'S USE
Loan No.:
DEED OF TRUST AND ASSIGNMENT OF RENTS
BY THIS DEED OF TRUST, made this day of , 2002, between
, herein called Trustor, whose address is,
and PLM LENDER SERVICES, INC., a California Corporation,
,herein called Trustee, and
,herein called Beneficiary,
Trustor grants, transfers, and assigns to Trustee, in trust, with power of sale,
that property in City of County, California, described as:
324
Trustor also assigns to Beneficiary all rents, issues and profits of said
realty reserving the right to collect and use the same except during continuance
of default hereunder and during continuance of such default authorizing
Beneficiary to collect and enforce the same by any lawful means in the name of
any party hereto.
For the purpose of securing:
(1) Payment of the indebtedness by one promissory note in the principal sum
of $ of even date herewith, payable to Beneficiary, and any extensions or
renewals thereof;
(2) the payment of any money that may be advanced by the Beneficiary to
Trustor, or his successors, with interest thereon, evidenced by additional notes
(indicating they are so secured) or by endorsement on the original note,
executed by Trustor or his successor;
(3) performance of each agreement of Trustor incorporated by reference or
contained herein.
325
On October 25, 1973, identical fictitious Deeds of Trust were recorded in
the offices of the County Recorders of the Counties of the State of California,
the first page thereof appearing in the book and at the page of the records of
the respective County Recorder as follows:
COUNTY BOOK PAGE COUNTY BOOK PAGE COUNTY BOOK PAGE
Alameda 3540 89 Marin 2736 463 Santa Barbara 2486 1244
Alpine 18 753 Mariposa 143 717 Santa Clara 0623 713
Amador 250 243 Mendocino 942 242 Santa Cruz 2358 744
Butte 1870 678 Merced 1940 361 Shasta 1195 293
Calaveras 368 92 Modoc 225 668 Sierra 59 439
Colusa 409 347 Mono 160 215 Siskiyou 697 407
Contra Costa 7077 178 Monterey 877 243 Solano 1860 581
Del Norte 174 526 Napa 922 96 Sonoma 2810 975
El Dorado 1229 594 Nevada 665 303 Stanislaus 2587 332
Fresno 6227 411 Orange 10961 398 Sutter 817 182
Glenn 565 290 Placer 1528 440 Tehema 630 522
Humboldt 1213 31 Plumas 227 443 Trinity 161 393
Imperial 1355 801 Riverside 1973 139405 Tulare 3137 567
Inyo 205 660 Sacramento 731025 59 Tuolumne 396 309
Kern 4809 2351 San Benito 386 94 Ventura 4182 662
Kings 1018 394 San Bernadino 8294 877 Yolo 1081 335
Lake 743 552 San Francisco B820 585 Yuba 564 163
Lassen 271 367 San Joaquin 3813 6 San Diego File No.
Los Angeles T8512 751 San Luis Obispo 1750 491 73-
Madera 1176 234 San Mateo 6491 600 299568
The provisions contained in Section A, including paragraphs 1 through 5,
and the provisions contained in Section B, including paragraphs 1 through 9 of
said fictitious Deeds of Trust are incorporated herein as fully as though set
forth at length and in full herein, except certain amendments to the fictitious
Deed of Trust are set forth on an amendment attached hereto and incorporated
herein.
The undersigned Trustor requests that a copy of any notice of default and
any notice of sale hereunder be mailed to Trustor at the address hereinabove set
forth, being the address designed for the purpose of receiving such notice. The
Note securing this Deed of Trust provides as follows: Borrower's required
repayment in full before scheduled date A. In the event of any sale or
conveyance of any part of the real property described in the Deed of Trust
securing this Note, then the Note Holder may demand payment in full of all
amounts that I owe under this Note, as allowed by law.
TRUSTOR:
- ------------------------------------ -----------------------------------
- ------------------------------------ -----------------------------------
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AMENDMENT TO FICTITIOUS DEED OF TRUST RECORDED IN _________ COUNTY AT BOOK
____, PAGE ___, AND ADDENDUM TO THAT CERTAIN DEED OF TRUST DATED _______________
BETWEEN ________________________, TRUSTOR, PLM LENDER SERVICES, INC., A
CALIFORNIA CORPORATION, TRUSTEE, AND _________________________________,
BENEFICIARY.
Paragraph 5, Section A, is deleted and instead the following applies:
5) To pay immediately and without demand all sums so expended by
Beneficiary or Trustee, with interest from date of expenditure at the rate
provided for in the note securing the within Deed of Trust, and to pay for any
statement provided for by law regarding the obligations secured hereby in the
amount demanded by Beneficiary, not exceeding the maximum amount permitted by
law at the time of the request therefore.
The third paragraph of Paragraph 5, Section B, is deleted and instead the
following applies:
After deducting all costs, fees and expenses of Trustee and of this Trust,
including cost of evidence of title in connection with sale, Trustee shall apply
the proceeds of sale to payment of: all sums expended under the terms hereof,
not then repaid, with accrued interest at the rate provided for in the note
securing the within Deed of Trust; all other sums then secured hereby; and the
reminder, if any, to the person legally entitled thereto.
The following is added as Paragraph 10, Section B:
10) Nothing in this instrument shall be interpreted to confer rights or
obligations which are prohibited by the California Business and Professions Code
and Beneficiary and Trustee waives any right inconsistent herewith.
TRUSTOR:
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327
EXHIBIT 10.6
AGREEMENT TO SEEK A LENDER
(Agency Agreement)
DATE: Loan No.:
I engage REDWOOD MORTGAGE CORP. (the Broker) to act as my exclusive agent
to find a lender or lenders willing to loan money to me in the principal amount
of $__________ bearing interest at ______ percent (__%) per annum according to
the terms of the Mortgage Loan Disclosure Statement/Good Faith Estimate (the
Disclosure Statement) I have executed with Broker, a copy of which is attached
to this Agreement, or upon other terms and conditions as I approve. The loan is
to be secured by a Deed of Trust on real property owned entirely or in part by
me at ______________.
I agree to pay a brokerage commission, processing charges and fees for
arranging the loan in accordance with the Disclosure Statement.
If my loan application is approved by Broker in its sole discretion, Broker
shall use its best efforts to obtain a lender or lenders willing to loan the
requested funds to me. The Broker shall have the exclusive right to act as my
agent in this regard for a period of sixty (60) days from the date the loan
application is approved, except that if this loan application is for a loan
which is subject to California Business and Professions Code 10243, then the
period of agency shall be forty five (45) days from the date the loan
application is approved.
I recognize that in addition to acting as my agent, Broker may also be
acting as agent for lenders seeking borrowers such as private parties,
institutional lenders or government agencies, including the lender which
ultimately lends me money. I agree that Broker may act as dual agent for me and
for any lender to me. In addition, I recognize that Broker may, if it so
chooses, lend me its own funds or funds which it controls.
Broker shall incur no liability to me if it is unable to obtain a lender
interested in loaning money to me, and Broker has no obligation to loan me its
own funds.
If loan funds are not disbursed because of any information I fail to
disclose accurately, for instance the existence and terms of any lien affecting
the property which will be security for this loan, or actual title to such
property, I understand that Broker has performed its duties and may incur
expenses and liabilities to other parties. Therefore, I agree to pay Broker the
commission and all other expenses incurred in arranging the loan as listed in
the Disclosure Statement as may be provided by law.
I hereby authorize Broker to deliver to a prospective lender credit
information available to Broker, including reports received from Credit
Reporting Agencies.
If applicable, Broker shall retain possession of original Note and original
Deed of Trust, and forward them in accordance with the instructions of the
lender.
I recognize and agree that this agreement may be terminated by Broker at
any time before funding of the loan to me. I further recognize and agree that
this agreement shall automatically terminate when the loan funds are disbursed
to me and that Broker has no further obligations to me at that time and that
Broker may continue to act as agent for lender during the time the loan to me is
outstanding. I agree that all claims or disputes between me and Broker arising
out of or relating to the loan, including Broker's arranging of the loan and my
disclosure of information to Broker shall be determined by binding arbitration
in accordance with the rules of the American Arbitration Association and that
the judgment of the arbitrators may be entered in a court of law. I UNDERSTAND
THAT BY SIGNING THIS AGREEMENT I AM GIVING UP THE RIGHT TO A JURY OR COURT TRIAL
AND AGREEING TO HAVE DISPUTES DECIDED BY NEUTRAL ARBITRATORS. I have read the
above Agreement and I do agree.
- -------------------------------------- ---------------------
Name (Date)
- -------------------------------------- ---------------------
Name (Date)
THE REAL PROPERTY WHICH WILL SECURE THE REQUESTED LOAN IS MY RESIDENCE
Yes ______ No _______
(BORROWER INITIAL YES OR NO)
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EXHIBIT 10.7
FORMATION LOAN
PROMISSORY NOTE
Up to a Maximum of $6,750,000 Effective as of ________, 2003
San Francisco, California
For value received, and in connection with an offering (the "Offering") of
up to $75,000,000 in units of limited partnership in Redwood Mortgage Investors
VIII, a California limited partnership (the "Holder"), Redwood Mortgage Corp., a
California corporation (the "Borrower") promises to pay to Holder up to the
principal sum of SIX MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS and No/100ths
($6,750,000), or so much thereof as shall have been advanced by Holder to
Borrower (the "Principal Amount") under this promissory note (this "Note") on or
before the termination date of the Offering (the "Termination Date"). This Note
shall be effective as of ___________, 2003, the effective date of the Offering,
and does not supersede, replace, amend or modify any other notes made by the
Borrower in favor of the Holder or other obligations of the Borrower to the
Holder. Prior to the Termination Date, and upon Borrower's written request to
Holder, Holder agrees to make advances of up to the Principal Amount (the
"Advances") to Borrower so long as no Event of Default (as defined below) has
occurred under this Note. Holder acknowledges and agrees that all Advances under
this Note shall memorialized on a written addendum hereto, as supplemented from
time to time, with each Advance memorialized on the addendum being initialed by
the Borrower when and as made. The Principal Amount, or any portion thereof that
is advanced under this Note, shall not accrue any interest.
1. The Principal Amount advanced to Borrower hereunder shall be used by
Borrower for the sole and exclusive purpose of paying selling commissions owed
by Borrower in connection with the offer and sale of units of limited
partnership interests in the Holder, and all amount payable in connection with
unsolicited orders for units received by Borrower, all in accordance with
Section 10.9 of the Fifth Amended and Restated Limited Partnership Agreement of
the Holder, dated July 9, 2003 (the "Partnership Agreement").
2. All payments of the Principal Amount (or such portion thereof that has
been advanced to Borrower under this Note) shall be in lawful money of the
United States of America and shall be paid to Holder at its principal office
located at 900 Veterans Blvd., Suite 500, Redwood City, California 94063. Prior
to the Termination Date, all payments of the Principal Amount owing hereunder
shall be paid in annual installments equal to 1/10 of the Principal Amount
outstanding as of December 31 of each year, reduced by the amount of any
withdrawal penalties received by the Holder in accordance with Section 8.1 of
the Partnership Agreement due to the early withdrawal of investors from the
Holder. Each payment of the Principal Amount prior to the Termination Date shall
be made on or before December 31 of the following year. Upon the Termination
Date, the Principal Amount outstanding shall be amortized over ten years, with
payments being made on or before December 31 of each year in equal annual
installments of 1/10 of the Principal Amount outstanding as of the Termination
Date, reduced by the amount of any withdrawal penalties received by the Holder
in accordance with Section 8.1 of the Partnership Agreement due to the early
withdrawal of investors from the Holder. Each payment of the Principal Amount
after the Termination Date shall be made on or before December 31 of the
following year. Any balance owing under this Note shall be due and payable on or
before December 31 of the year immediately following the ten year anniversary of
the Termination Date (the "Maturity Date"). The Borrower may prepay all or any
part of the Principal Amount owing under this Note at any time without any
penalty or interest.
3. The Borrower agrees to pay on demand all reasonable, actual costs and
expenses, if any (including, without limitation, reasonable counsel fees and
expenses), of the Holder in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Note and all related
agreements and the other certificates or documents to be delivered hereunder,
including, without limitation, reasonable counsel fees and expenses in
connection with the enforcement of rights under this Note. The obligations of
the Borrower under this Section 3 shall survive the termination of this Note and
the repayment of the Principal Amount.
4. This Note shall be unsecured.
5. The Borrower hereby waives demand, notice, presentment, protest and
notice of dishonor.
6. Any of the following shall constitute an "Event of Default" under this
Note, and shall give rise to the remedies provided in Section 7 below:
(a) Any failure by the Borrower to pay when due all or any portion of the
Principal Amount owing under this Note;
(a) Borrower's use of the Principal Amount for any purpose other than as
permitted in Section 1, above.
(c) If the Borrower (i) admits in writing its inability to pay generally
its debts as they mature, or (ii) makes a general assignment for the benefit of
creditors, or (iii) is adjudicated a bankrupt or insolvent, or (iv) files a
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voluntary petition in bankruptcy, or (v) takes advantage, as against its
creditors, of any bankruptcy law or statute of the United States of America or
any state or subdivision thereof now or hereafter in effect, or (vi) has a
petition or proceeding filed against it under any provision of any bankruptcy or
insolvency law or statute of the United States of America or any state or
subdivision thereof, which petition or proceeding is not dismissed within thirty
(30) days after the date of the commencement thereof, (vii) has a receiver,
liquidator, trustee, custodian, conservator, sequestrator or other such person
appointed by any court to take charge of its affairs or assets or business and
such appointment is not vacated or discharged within thirty (30) days
thereafter, or (viii) takes any action in furtherance of any of the foregoing.
7. If any Event of Default shall occur and be continuing, Holder shall, in
addition to any and all other available rights and remedies, have the right, at
Holder's option, to: (a) declare the entire unpaid principal balance of this
Note and all other sums due by Borrower hereunder, without notice to Borrower,
to be immediately due and payable; and (b) pursue any and all available remedies
for the collection of such principal to enforce its rights as described herein;
and in such case Holder may also recover all costs of suit and other expenses in
connection therewith, including reasonable attorney's fees for collection and
the right to equitable relief (including, but not limited to, injunctions) to
enforce Holder's rights as set forth herein (as described herein).
8. In the event that all or any one or more of Michael R. Burwell, Gymno
Corporation, a California corporation or Redwood Mortgage Corp., a California
corporation (collectively, the "Initial General Partners") are removed as
general partner(s) of the Holder by the vote of a majority of limited partners
of the Holder, and a successor or additional general partner(s) is thereafter
designated, and if such successor or additional general partner(s) begins using
any other loan brokerage firm for its placement of mortgage loans, the Borrower
will be immediately released from an further obligation under the formation loan
(except for a proportionate share of the principal installment due at the end of
that year, pro rated according to the number of days elapsed). In addition, if
all of the Initial General Partners are removed, no successor general partners
are elected, the Holder is liquidated and the Borrower is no longer receiving
any payments for services rendered, the amounts owing under this Note shall be
forgiven and the Borrower shall be released and held harmless from any further
obligation under this Note.
9. The terms of this Note shall be construed in accordance with the laws of
the State of California, as applied to contracts entered into by California
residents within the State of California, which contracts are to be performed
entirely within the State of California.
10. Any term of this Note may be amended or waived with the written consent
of the Borrower and Holder. This Note may not be assigned without the prior
written consent of the Borrower, which shall not be unreasonably withheld or
delayed.
Redwood Mortgage Corp., a California corporation
By:
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Name:
----------------------------------------
Title:
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330
ADVANCES AND PAYMENT OF PRINCIPAL*
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Date Amount of Amount of Principal Unpaid Principal Notation Made By
Advance Paid or Prepaid Amount
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* Continue on separate sheet if necessary
331
EXHIBIT 10.8
LINE OF CREDIT
CREDIT AND SECURITY AGREEMENT
This Credit and Security Agreement ("Agreement") is entered into as of June
27, 2000, by and between Redwood Mortgage Investors VIII, a California limited
partnership ("Borrower"), and City National Bank, a national banking association
("CNB").
1. DEFINITIONS. As used herein, the following terms have the meanings
indicated:
1.1 "Acceptable Accountant" shall mean Capriccio, Cropper & Larson, LLP,
unless CNB notifies Borrower, in writing, that such accountant is not
acceptable, and any other accountants CNB notifies borrower, in writing, are
acceptable.
1.2 "Borrowing Base" shall mean:
1.2.1 For Wholly-Owned Eligible Mortgage, fifty percent (50%) of the net
principal amount owed by the Mortgage Debtor on the Eligible Mortgage; plus
1.2.2 For Fractional Eligible Mortgage, Borrower's interest in the
Fractional Eligible Mortgage times twenty five percent (25%) of the net
principal amount owed by the Mortgage Debtor on the Eligible Mortgage.
Provided, however, no Eligible Mortgage as to which has occurred a Loss of
Collateral Value shall be included within the Borrowing Base.
In no event shall (i) the portion of the Borrowing Base composed of
Fractional Eligible Mortgages exceed twenty five percent (25%)of the portion of
the Borrowing Base composed of Wholly-Owned Eligible Mortgages, or (ii) the
Borrowing Base exceed the Revolving Credit Commitment.
1.3 "Borrower's Loan Account" means the statement of daily balances on the
books of CNB in which will be recorded Revolving Credit Loans made by CNB to
Borrower, payments made on such loans, and other appropriate debits and credits
as provided by this Agreement. CNB will provide a statement of account for
Borrower's Loan Account at least once each month on a date established by CNB,
which statement will be accepted by and conclusively binding upon Borrower
unless it notifies CNB in writing to the contrary, within five (5) days of
receipt of such statement, or ten (10) days after sending of such statement if
Borrower does not notify CNB of its non-receipt of the statement. Statements
regarding other credit extended to Borrower will be provided separately.
1.4 "Borrowing Base Certificate" shall be in form and substance
satisfactory to CNB.
1.5 "Business Day" shall mean a day that CNB is open for business.
1.6 "Code" shall mean the California Uniform Commercial Code, except where
the Uniform Commercial Code of another state governs the perfection of a
security interest in Collateral located in that state.
1.7 "Collateral" shall mean all property securing the Obligations and as
described in Section 8 hereof.
1.8 "Commitment Fee" shall be $18,750.00.
1.9 "Debt" shall mean, at any date, the aggregate amount of, without
duplication, (a) all obligations of Borrower for borrowed money; (b) all
obligations of Borrower evidenced by bonds, debentures, notes or other similar
instruments; (c) all obligations of Borrower to pay the deferred purchase price
of property or services; (d) all capitalized lease obligations of Borrower (e)
all obligations or liabilities of others secured by a lien on any asset of
Borrower whether or not such obligation or liability is assumed; (f) all
obligations guaranteed by Borrower (g) all obligations of Borrower direct or
indirect, for letters of credit; and (h) any other obligations or liabilities
which are required by generally accepted accounting principles to be shown as
debt on the balance sheet of Borrower.
1.10 "Eligible Mortgage" means a loan secured by a first or second lien on
California real property, upon which is constructed a residential or commercial
building, whether or not such loan is included within the Borrowing Base.
1.11 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations and published
interpretations thereunder.
332
1.12 "Event of Default" shall mean an event described in Section 9.1 of
this Agreement.
1.13 "Fractional Eligible Mortgage" means an Eligible Mortgage which is
less than one hundred percent (100%) owned by Borrower.
1.14 "Guaranty" shall each have the meaning set forth in Section 2.4
hereof.
1.15 "Guarantors" shall mean Redwood Mortgage Corp. and Michael Burwell.
Only a Guarantor shall have personal liability hereunder irrespective of any
Persons status as a general partner of Borrower.
1.16 "Loan" or "Loans" shall mean one or more of the Loans extended by CNB
to Borrower pursuant to Section 2 hereof.
1.17 "Loan Documents" means, individually and collectively, this Agreement,
any guaranty, security or pledge agreement, financing statement and all other
contracts, instruments addenda and documents executed in connection with or
related to extensions of credit under this Agreement or under any Eligible
Mortgage.
1.18 "Loss of Collateral Value" shall mean, with respect to an Eligible
Mortgage, the occurrence of any of the following:
1.18.1 Failure of the Mortgage Debtor to make a periodic payment of
principal or interest within sixty (60) days of its original due date, except as
such original due date may have been extended by written agreement between the
Mortgage Debtor and the Borrower;
1.18.2 The filing of a Notice of Default; or
1.18.3 The filing of a bankruptcy proceeding with respect to the Mortgage
Debtor.
1.19 "Mortgage Debtor" shall mean the Person or entity obligated on an
Eligible Mortgage.
1.20 "Net Income" shall mean net income, as determined in accord with GAAP,
after taxes.
1.21 "Obligations" shall mean all present and future liabilities and
obligations of Borrower to CNB hereunder and all other liabilities and
obligations of Borrower to CNB of every kind and description, now existing or
hereafter owing, matured or unmatured, direct or indirect, absolute or
contingent, joint or several, including any extensions and renewals thereof and
substitutions therefor.
1.22 "Partner's Capital" shall mean the total of all assets appearing on a
balance sheet prepared in accordance with generally accepted accounting
principles consistently applied for Borrower, minus (a) all intangible assets,
including, without limitation, unarmortized debt discount, Affiliate, employee
and officer receivables or advances, goodwill, research and development costs,
patents, trademarks, the excess of purchase price over underlying values of
acquired companies, any covenants not to compete, deferred charges, copyrights,
franchises and appraisal surplus; minus (b) all obligations which are required
by generally accepted accounting principles consistently applied to be reflected
as a liability on the balance sheet of Borrower; minus (c) deferred income and
reserves not otherwise reflected as a liability on the balance sheet of
Borrower.
1.23 "Person" shall mean and include natural persons, corporations, limited
partnerships, general partnerships, joint ventures, associations, joint stock
companies, companies, trusts, banks, trust companies, business trusts or other
organizations, whether or not legal entities, and governments and agencies and
political subdivisions thereof.
1.24 "Potential Event of Default" shall mean any condition existing during
any applicable cure period, that with the giving of notice or passage of time or
both would, unless cured or waived, become an Event of Default.
1.25 "Prime Rate" shall mean the rate most recently announced by CNB at its
principal office in Beverly Hills as its "Prime Rate." Any change in the
interest rate resulting from a change in such Prime Rate shall become effective
on the Business Day on which each change in Prime Rate is announced by CNB.
1.26 "Property" means the real property which is the subject of the
Eligible Mortgage.
1.27 "Revolving Credit Commitment" shall mean, CNB's commitment, in
accordance with the terms of this Agreement, to make Revolving Credit Loans in
the aggregate principal amount at any one time of up to Fifteen Million Dollars
($15,000,000).
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1.28 "Revolving Credit Loans" shall have the meaning set forth in Section
2.1 hereof.
1.29 "Subordinated Debt" shall mean Debt of Borrower the repayment of
principal and interest of which is subordinated, on terms satisfactory to CNB,
to the Obligations.
1.30 "Termination Date" shall mean June 30, 2002, unless the Revolving
Credit Commitment shall have been renewed for an additional term by CNB giving
Borrower prior written notice of such renewal, in which event the Termination
Date shall mean such renewed maturity date of the Revolving Credit Commitment,
as set forth in the notice. Notwithstanding the foregoing, CNB may, at its
option, terminate this Agreement pursuant to Section 9.3 hereof; the date of any
termination under Section 9.3 shall thereupon become the Termination Date as
that term is used in this Agreement.
1.31 "Wholly-Owned Eligible Mortgage" means an Eligible Mortgage which is
one hundred percent (100%) owned by Borrower.
2. LOANS.
2.1 Revolving Credit Loans. Subject to the terms and conditions of this
Agreement, CNB agrees to make loans ("Revolving Credit Loans") to Borrower from
the date of this Agreement to, but not including, the Termination Date, at such
times as Borrower may request, up to the amount of the Borrowing Base, which
Revolving Credit Loans may be repaid and reborrowed at any time up to the
Termination Date. Subject to Borrower's option set forth in Section 3.3, the
aggregate unpaid principal amount of all Revolving Credit Loans shall be paid by
Borrower to CNB on the Termination Date.
2.1.1 Interest on Revolving Credit Loans. The Revolving Credit Loans shall
bear interest on the principal amount thereof from time to time outstanding
until repaid at an annual fluctuating rate equal to the Prime Rate, from time to
time in effect, plus one quarter of one percent (1/4%) per annum. Interest on
the Revolving Credit Loans shall be payable monthly in arrears on the last day
of each month, and on the date such Revolving Credit Loans are paid in full.
2.1.2 Application Procedure for Revolving Credit Loans. Each Revolving
Credit Loan shall be made by CNB at the written request of anyone who is
authorized in writing by Borrower to so request. Any such written request shall
be made by a transmittal letter executed by the Borrower accompanied by the
following documents, with respect to any Eligible Mortgage Borrower proposes to
include within the Borrowing Base:
2.1.2.1 With respect to a Wholly-Owned Eligible Mortgage:
2.1.2.1.1 Original note executed by the Mortgage Debtor,
2.1.2.1.2 Original assignment of note by Borrower to CNB,
2.1.2.1.3 Original trust deed executed by Mortgage Debtor, and
2.1.2.1.4 Original (unrecorded) assignment of trust deed to CNB.
334
2.1.2.2 With respect to a Fractional Eligible Mortgage:
2.1.2.2.1 Borrower certified copy of original note executed by the Mortgage
Debtor,
2.1.2.2.2 Original assignment of note by Borrower to CNB,
2.1.2.2.3 Borrower certified copy of original trust deed executed by
Mortgage Debtor, and
2.1.2.2.4 Original (unrecorded) assignment of trust deed to CNB.
2.1.3 Payment for Amounts Exceeding Borrowing Base. Borrower will,
immediately upon demand, repay the amount by which the unpaid principal amount
of Revolving Credit Loans exceed the amount CNB has agreed to lend under Section
2.1. The portion of Revolving Credit Loans exceeding the Borrowing Base will
bear additional interest of three percent (3%) per year over the rate set forth
in Section 2.1.1, commencing ten (10) days after demand if the unpaid principal
amount of Revolving Credit Loans continues to exceed the amount CNB has agreed
to lend under Section 2.1.
2.2 Payments. All payments hereunder shall be in United States Dollars and
in immediately available funds. All interest shall be computed on the basis of a
360-day year and actual days elapsed. Any payment which falls on a non-Business
Day shall be rescheduled to the next Business Day and interest shall continue to
accrue to such rescheduled Business Day. All payments of principal interest,
fees and other charges incurred under this Agreement will be made by charging,
and Borrower hereby authorizes CNB to charge, Borrower's demand deposit account
or Borrower's Loan Account. Borrower also authorizes CNB to charge to Borrower's
demand deposit account or Borrower's Loan Account any payment credited against
the Obligations which is dishonored by the drawee or maker thereof.
2.3 Interest on Overdue Payments. Overdue payments of principal (and of
interest to the extent permitted by law) on the Loans shall bear additional
interest from and after written notice by CNB to Borrower of the occurrence of
an Event of Default (and without constituting a waiver of such Event of Default)
at a fluctuating rate per annum equal to five percent (5.0%) per annum higher
than the interest rate as determined in Section 2.1.1 until such unpaid amount
has been paid in full commencing, ten (10) days after such written notice if
such Event of Default remains uncured. All interest provided for in this Section
2.3 shall be payable on demand. Except as aforestated in this Section 2.3, the
Loans shall bear interest (whether before or after any breach of this Agreement)
at the rate of interest specified in Section 2.1.1.
2.4 Guaranties. Guarantors shall guarantee full repayment of Borrower's
Obligations to CNB, and shall execute and deliver to CNB their Continuing
Guaranties ("Guaranty") in the form customarily used by CNB.
3. TERM AND TERMINATION.
3.1 Establishment of Termination Date. The term of this Agreement will
begin as of the date hereof and continue until the Termination Date, unless the
term is renewed for an additional period by CNB giving Borrower prior written
notice, in which event the Termination Date will mean the renewed maturity date
set forth in such notice. Notwithstanding the foregoing, CNB may, at its option,
terminate this Agreement pursuant to Section 9.3; the date of any such
termination will become the Termination Date as that term is used in this
Agreement. Upon renewal, CNB shall bill Borrower or its general partner, Redwood
Mortgage Corp., for the amount of the Commitment Fee.
3.2 Obligations Upon the Termination Date. Borrower will, upon the
Termination Date:
3.2.1 Subject to Borrower's option to extend repayment set forth in Section
3.3, below, repay the amount of the balance due as set forth in Borrower's Loan
Account plus any accrued interest, fees and charges; and
3.2.2 Pay the amounts due on all other Obligations owing to CNB. In this
connection, and notwithstanding anything to the contrary contained in the
instruments evidencing such Obligations, the Termination Date hereunder will
constitute the maturity date of such other Obligations.
3.3 Option to Extend Repayment. In the event CNB fails to give Borrower
notice of its election to extend the Termination Date as provided herein, and
there does not exist any Event or Potential Event of Default on the Termination
Date, Borrower may elect to repay the balance due as set forth in Borrower's
Loan Account in thirty six (36) equal monthly installments, each equal to 1/36th
of the amount set forth for principal in Borrower's Loan Account, plus interest
thereon, commencing on the first day of the month following the Termination
Date.
335
3.4 Survival of Rights. Any termination of this Agreement will not affect
the rights, liabilities and obligations of the parties with respect to any
Obligations outstanding on the date of such termination. Until all Obligations
have been fully repaid, CNB will retain its security interest in all existing
Collateral and Collateral arising thereafter, and Borrower will continue to
assign all Accounts to CNB and to immediately turn over to CNB, in kind, all
collections received on the Accounts.
4. CONDITIONS PRECEDENT.
4.1 Extension of Credit. The obligation of CNB to make the first Loan
hereunder is subject to the fulfillment to CNB's satisfaction of each of the
following conditions:
4.1.1 CNB shall have received the Guaranties referred to in Section 2.4,
above;
4.1.2 CNB shall have received (a) a copy of Borrower's Partnership
Agreement, as amended to date; (b) a Partnership Authorization of Borrower
approving and authorizing the execution, delivery and performance of this
Agreement and any other documents required pursuant to this Agreement;
4.1.3 CNB shall have received (a) a copy of the Corporate Guarantor's
Articles of Incorporation as amended to date; (b) a Resolution of the Corporate
Guarantor's Board of Directors approving and authorizing the execution, delivery
and performance of this Agreement and any other documents required pursuant to
this Agreement, certified by the Corporate Guarantor's corporate secretary; and
(c) a copy of the last certificate filed on behalf of the Corporate Guarantor
containing the information required by California Corporations Code ss. 1502(a);
4.1.4 CNB shall have received evidence, in form and substance acceptable to
CNB, that all filings, recordings and other actions that are necessary or
advisable, in the opinion of CNB, in order to establish, protect, preserve and
perfect CNB's security interests and liens as legal, valid and enforceable first
security interests and liens in the Collateral, have been effected;
4.1.5 CNB shall have received the Commitment Fee, and
4.1.6 CNB shall have received evidence that the insurance required by
Section 6.8 hereof is in effect.
4.2 Conditions to Each Extension of All Loans. The obligation of CNB to
make any Loan shall be subject to the fulfillment of each of the following
conditions to CNB's satisfaction:
4.2.1 The representations and warranties of Borrower set forth in Section 5
hereof shall be true and correct on the date of the making of each Loan with the
same effect as though such representations and warranties had been made on and
as of such date;
4.2.2 There shall be in full force and effect in favor of CNB a legal,
valid and enforceable security interest in, and a valid and binding first lien
on the Collateral, apart from Fractional Eligible Mortgages, and CNB shall have
received evidence, in form and substance acceptable to CNB, that all filings,
recordings and other actions that are necessary or advisable, in the opinion of
CNB, in order to establish, protect, preserve and perfect CNB's security
interests and liens as legal, valid and enforceable security interests and liens
in the Collateral have been effected;
4.2.3 There shall have occurred no Event of Default or Potential Event of
Default; and
4.2.4 All other documents and legal matters in connection with the
transactions contemplated by this Agreement, shall be satisfactory in form and
substance to CNB.
5. REPRESENTATIONS AND WARRANTIES. To induce CNB to enter into this
Agreement, Borrower makes the following representations and warranties which
shall survive the making and repayment of the Loans.
5.1 Partnership Existence. Borrower is duly organized, validly existing and
in good standing under the laws of the state of California, and is duly
qualified to conduct business as a foreign partnership in all jurisdictions
where the failure to do so would have a material adverse effect on its business.
5.2 Corporate Existence of Guarantor. The Corporate Guarantor is duly
organized, validly existing and in good standing under the laws of its state of
incorporation, and is duly qualified to conduct business as a foreign
corporation in all jurisdictions where the failure to do so would have a
material adverse effect on its business.
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5.3 Requisite Power. Borrower has all requisite partnership power to borrow
the sums provided for in this Agreement, and to execute and deliver this
Agreement and each other document, contract and instrument delivered to CNB in
connection with this Agreement to which Borrower is required hereunder to be a
party. The execution, delivery and performance of this Agreement have been duly
authorized by the Partnership Authorization of Borrower and do not require any
consent or approval of the limited partners of Borrower.
5.4 Binding Agreement. This Agreement, will constitute the valid and
legally binding obligations of Borrower, enforceable against Borrower in
accordance with their terms, except as the enforceability thereof may be
affected by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally.
5.5 Other Agreements. The execution, delivery and performance of this
Agreement will not violate any provision of law or regulation (including,
without limitation, Regulations X and U of the Federal Reserve Board, relating
to loans secured by Margin Stock as defined therein) or any order of any
governmental authority, court, arbitration board or tribunal or the partnership
agreement of Borrower, or result in the breach of, constitute a default under,
contravene any provisions of, or result in the creation of any security
interest, lien, charge or encumbrance upon any of the property or assets of
Borrower pursuant to any indenture or agreement to which Borrower or any of its
properties is bound, except liens and security interests in favor of CNB.
5.6 Litigation. There is no litigation, investigation or proceeding in any
court or before any arbitrator or regulatory commission, agency or other
governmental authority pending, or threatened against or affecting Borrower, any
Guarantor or any of their respective properties, which, if adversely determined
would have a material adverse effect on the business, operation or condition,
financial or otherwise, of Borrower or any Guarantor.
5.7 Financial Condition. Borrower's most recent financial statements,
copies of which have heretofore been delivered to CNB, are true, complete and
correct and fairly present the financial condition of Borrower, including
operating results, as of the accounting period referenced therein. The financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied. There has been no material adverse change in
the business, operations or conditions, financial or otherwise, of Borrower
since the date of such financial statements. Borrower has no material
liabilities for taxes, long-term leases or long-term commitments, except as
disclosed in the aforementioned financial statements.
5.8 No Violations. Borrower is not in violation of any law, ordinance, rule
or regulation to which it or any of its properties or any Eligible Mortgage is
subject.
5.9 Collateral.
5.9.1 Borrower owns and has the right and power to grant a security
interest in the Collateral;
5.9.2 The Collateral is genuine and free from liens, adverse claims,
setoffs, defaults, prepayments, defenses and encumbrances except those in favor
of CNB, and any liens secured by the same Property as is the Eligible Mortgage;
and
5.9.3 The principal place of business and chief office of Borrower is at
the address specified in Section 10.6. Borrower has no other offices or places
of business and will not establish any other offices or places of business
except upon thirty (30) days' prior written notice to CNB and will not without
the prior written consent of CNB, which consent will not be unreasonable
withheld, maintain its books and records at any other place other than the
address set forth in Section 10.6.
5.10 Use of Proceeds. Borrower shall use the proceeds of the Revolving
Credit Loans solely for the funding of mortgage loans or mortgage investments or
working capital needs arising in the ordinary course of its business.
5.11 ERISA. Borrower is in compliance in all material respects with all
applicable provisions of ERISA. No Reportable Event (as defined in ERISA and the
regulations issued thereunder [other than a "Reportable Event" not subject to
the provision for thirty (30) day notice to the Pension Benefit Guaranty
Corporation ("PBGC") under such regulations]) has occurred with respect to any
benefit plan of Borrower nor are there any unfunded vested liabilities under any
benefit plan of Borrower. Borrower has met its minimum funding requirements
under ERISA with respect to each of its plans and has not incurred any material
liability to the PBGC in connection with any such plan.
5.12 Consents. No consent, license, permit, approval or authorization of,
exemption by, notice to, report to, or registration, filing or declaration with,
any governmental authority or agency is required in connection with the
execution, delivery and performance by Borrower of this Agreement or the
transactions contemplated hereby or thereby.
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5.13 Regulation U. Borrower is not engaged principally, or as one of its
principal activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations U or X of
the Federal Reserve Board). No part of the proceeds of the Loans will be used by
Borrower to purchase or carry any such margin stock or to extend credit to
others for the purpose of purchasing or carrying such margin stock.
5.14 Environmental Matters. The operations of Borrower comply in all
material respects with all applicable federal, state and local environmental,
health and safety statutes, regulations and ordinances and fully comply with all
terms and conditions of all required permits and licenses.
6. AFFIRMATIVE COVENANTS. Borrower agrees that until payment in full of all
Obligations, Borrower shall comply with the following covenants:
6.1 Books and Records. Borrower shall maintain, in accordance with sound
accounting practices, accurate records and books of account. Borrower shall not
change the accounting methods used without notification to CNB. Borrower shall
permit any representative of CNB, at least once a year and at any other
reasonable time, to inspect, audit, examine and make extracts from or copies of
all books, records and other data, to inspect any of Borrower's properties and
to confirm balances due on Collateral by direct inquiry to Mortgage Debtors, and
shall furnish CNB with all information regarding the business or finances of
Borrower promptly upon CNB's request.
6.2 Collateral. Borrower shall, if requested by CNB, mark its records in a
manner satisfactory to CNB to show CNB's security interest therein. Borrower
shall execute and deliver to CNB any instrument, document, financing statement,
assignment or other writing which CNB may deem necessary or desirable to carry
out the terms of this Agreement, to perfect CNB's security interest in any
Collateral for the Obligations, or to enable CNB to enforce its security
interest in an of the foregoing.
6.3 Financial Statements. Borrower shall furnish to CNB on a continuing
basis:
6.3.1 Within sixty (60) days after the end of each quarterly accounting
period of each fiscal year, a copy of Borrower's Form 10-Q, or in lieu thereof,
a financial statement consisting of not less than a balance sheet, and income
statement, reconciliation of net worth and statement of cash flows, with notes
thereto, prepared in accordance with generally accepted accounting principles
consistently applied, which financial statement may be internally prepared;
6.3.2 Within one hundred twenty (120) days after the close of each fiscal
year, a copy of Borrower's Form 10-K, or in lieu thereof, a copy of the annual
audit report for such year for Borrower and the Subsidiaries including therein a
balance sheet, income statement, reconciliation of net worth and statement of
cash flows, with notes thereto, the balance sheet, income statement and
statement of cash flows to be audited by an Acceptable Accountant, and certified
by such accountants to have been prepared in accordance with generally accepted
accounting principles consistently applied and accompanied by Borrower's
certification as to whether any event has occurred which constitutes an Event of
Default, and if so, stating the facts with respect thereto;
6.3.3 As soon as available, if prepared, any written report pertaining to
material items with respect to matters involving Borrower's internal controls
submitted to Borrower by Borrower's independent public accountants in connection
with each annual or interim special audit of the financial condition of Borrower
made by such accountants;
6.3.4 Contemporaneously with each annual review report required by (Section
6.3.2) above, a copy of the representation letter from Borrower to its
independent public accountants, confirming in writing the oral representations
made by Borrower to the accountants during the review process;
6.3.5 As soon as available, a copy of a letter from Borrower's independent
public accountants to Borrower, in form and substance satisfactory to CNB,
setting forth the scope of such accountants' engagement; and
6.3.6 Such additional information, reports and/or statements as CNB may,
from time to time, reasonably request.
6.4 Financial Statement of Guarantor Redwood Mortgage Corp. Within one
hundred and twenty (120) days after the close of each fiscal year, a copy of the
annual audit report for such year for Guarantor Redwood Mortgage Corp. including
therein a balance sheet, income statement, reconciliation of net worth and
statement of cash flows, with notes thereto, the balance sheet, income statement
and statement of cash flows to be audited by an Acceptable Accountant, and
certified by such accountants to have been prepared in accordance with generally
accepted accounting principles consistently applied.
6.5 Financial Statement of Guarantor Michael Burwell. Not later than ninety
(90) days after Borrower's fiscal year end of each year, Borrower shall provide
CNB with the financial statement, in form and substance satisfactory to CNB, of
Guarantor Michael Burwell, certified by such Guarantor to be true and correct.
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6.6 Borrowing Base Certificate. Within thirty (30) days of the end of each
month, a Borrowing Base Certificate accompanied by a master list of all real
estate loans owned wholly or in part by Borrower, irrespective of whether such
real estate loans constitute Eligible Mortgages.
6.7 Taxes and Premiums. Borrower shall pay and discharge all taxes,
assessments, governmental charges and real and personal property taxes, owed or
required to be paid by Borrower, including, but not limited to, federal and
state income taxes, employee withholding taxes and payroll taxes, and all
premiums for insurance required hereunder prior to the date upon which penalties
are attached thereto.
6.8 Insurance. Borrower, or its general partner, Redwood Mortgage Corp., on
behalf of Borrower, shall maintain with responsible companies, at its own
expense, a liability insurance policy, a blanket fidelity bond and an errors and
omissions insurance policy (if such errors and omissions policy is available at
a commercially reasonable premium), with broad coverage on all officers,
employees or other persons acting in any capacity requiring such persons to
handle funds, money, documents or papers relating to the Collateral. Any such
fidelity bond and errors and omissions insurance shall be in the form of the
Mortgage Banker's Blanket Bond and shall protect and insure the Borrower against
losses, including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of all officers, employees or other persons acting in any
capacity requiring such persons to handle finds, money, documents or papers
relating to the Collateral. Such fidelity bond shall also protect and insure the
Borrower against losses in connection with the release or satisfaction of a
Mortgage Loan without having obtained payment in full of the indebtedness
secured thereby. No provision of this Section 6.8 requiring such fidelity bond
and errors and omissions insurance shall diminish or relieve the Borrower from
its duties and obligations as set forth in this Agreement. Upon the request of
CNB a certified true copy of such fidelity bond and insurance policies and a
statement from the surety and the insurer that such fidelity bond and insurance
policy shall in no event be terminated or materially modified without thirty
(30) days prior written notice to CNB.
6.9 Notice. Borrower shall promptly advise CNB in writing of (a) the
opening of any new places of business, the closing of any of its existing places
of business, each location at which Inventory is or will be kept, and of the
change of Borrower's name, trade name or other name under which it does business
or of any such new or additional name; (b) the occurrence of any Event of
Default or Potential Event of Default; (c) any litigation pending or threatened
against Borrower or Guarantor where the amount or amounts in controversy exceed
$500,000.00; (d) any unpaid taxes of Borrower, or Guarantor, which are more than
fifteen (15) days delinquent; and (e) any other matter that might materially or
adversely affect Borrower's or Guarantor's financial condition, operations,
property or business.
6.10 Fair Labor Standards Act. Borrower shall comply with the requirements
of, and all regulations promulgated under, the Fair Labor Standards Act of 1938
(29 U.S.C. Code ss. 201 et seq.).
6.11 Partnership Existence. Borrower shall preserve and maintain its
partnership existence and all of its rights, privileges and franchises necessary
or desirable in the normal course of its business.
6.12 Compliance with Law. Borrower shall comply with all requirements of
all applicable laws, rules, regulations (including, but not limited to, ERISA
with respect to each of their benefit plans and all environmental or hazardous
materials laws), orders of any governmental agency and all material agreements
to which they are a party.
6.13 Financial Tests. Borrower shall maintain:
6.13.1 Minimum Partner's Capital of at least $42,000,000.00 until September
30, 2000, and $45,000,000.00 thereafter;
6.13.2 Net Income of at least $2,000,000.00 for each fiscal year; and
6.13.3 Net Income of greater than zero for each fiscal quarter.
7. NEGATIVE COVENANTS. Borrower agrees that until payment in full of all
Obligations, Borrower shall not do any of the following without CNB's prior
written consent:
7.1 Borrowing. Create, incur, assume or suffer to exist any Debt, except
(a) Debt to CNB, (b) Subordinated Debt, and (c) Debt incurred in the ordinary
course of business.
7.2 Sale of Assets. Sell, lease or otherwise dispose of any of Borrower's
assets, other than in the ordinary course of business.
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7.3 Loans. Make loans or advances to any Person except credit extended to
employees or to customers in the ordinary course of its business.
7.4 Contingent Liabilities. Assume, guarantee, endorse, contingently agree
to purchase or otherwise become liable for the obligation of any Person
including Borrower, except (a) in the ordinary course of business, and (b)
contingent liabilities in favor of CNB.
7.5 Investments. Purchase or acquire the obligations or stock of, or any
other interest in, any partnership, joint venture or corporation, except (a)
direct obligations of the United States of America; and (b) investments in
certificates of deposit issued by, and other deposits with, commercial banks
organized under the United States or a State thereof having capital of at least
One Hundred Million Dollars ($100,000,000.00).
7.6 Mortgages, Liens, etc. Mortgage, pledge, hypothecate, grant or contract
to grant any security interest of any kind in any property or assets, to anyone
except in the ordinary course of business or to CNB.
7.7 Involuntary Liens. Permit any involuntary liens to arise with respect
to any property or assets including but not limited to those arising from the
levy of a writ of attachment or execution, or the levy of any state or federal
tax lien which lien shall not be removed within a period of thirty (30) days,
except those liens which arise in the ordinary course of Borrower's business.
7.8 Mergers and Acquisitions. Enter into any merger or consolidation, or,
acquire all or substantially all the assets of any Person.
7.9 Event of Default. Permit a default to occur under any document or
instrument evidencing Debt incurred under any indenture, agreement or other
instrument under which such Debt may be issued, or any event to occur under any
of the foregoing which would permit any holder of the Debt outstanding
thereunder to declare the same due and payable before its stated maturity,
whether or not such acceleration occurs or such default be waived.
8. SECURITY AGREEMENT.
8.1.1 Grant of Security Interest. To secure all of Borrower's Obligations
hereunder as well as other Obligations to CNB, Borrower hereby grants and
transfers to CNB a continuing security interest in all Eligible Mortgages. This
grant of a security interest shall apply which respect to all Eligible Mortgages
irrespective of whether a particular Eligible Mortgage is included within the
Borrowing Base.
8.1.2 Release of Security Interest. Concurrently with a payment of
principal by or on behalf of a Mortgage Debtor, CNB shall release its security
interest in the Eligible Mortgage, provided that such release shall not cause
the amount of Revolving Credit Loans outstanding to exceed the amount CNB has
agreed to lend under Section 2.1.
8.2 CNB's Rights. CNB shall have the right to record any assignment held
with respect to an Eligible Mortgage and to notify any Mortgage Debtor to make
payments thereon directly to CNB, to take control of the cash and noncash
proceeds of any Eligible Mortgage, which right CNB may exercise at any time upon
the occurrence of a Potential Event of Default or an Event of Default has
occurred hereunder or whether Borrower was theretofore making collections
thereon. Until such time as CNB elects to exercise such right, Borrower is
authorized on behalf of CNB to collect and enforce the Eligible Mortgages. Upon
the request of CNB, Borrower shall deliver to CNB for application in accordance
with this Agreement, all checks, drafts, cash and other remittances in payment
or on account of payment of any Eligible Mortgage on the Business Day following
the receipt thereof, and in precisely the form received, except for the
endorsement of Borrower where necessary to permit collection of the items, which
endorsement Borrower hereby agrees to make. Pending such delivery, Borrower
shall not commingle any such checks, cash, drafts and other remittances with any
of its other funds or property, but shall hold them separate and apart therefrom
expressly in trust for CNB. All such remittances shall be accompanied by such
statements and reports of collections and adjustments as CNB may from time to
time specify.
8.3 CNB's Appointment as Attorney-In-Fact. Upon the occurrence of an Event
of Default, CNB or any of its officers is hereby irrevocably made the true and
lawful attorney for Borrower with full power of substitution to do the
following: (a) to endorse the name of Borrower upon any and all checks, drafts,
money orders and other instruments for the payment of moneys which are payable
to Borrower and constitute collections on Eligible Mortgages; (b) to execute in
the name of Borrower any schedules, assignments, instruments, documents and
statements which Borrower is obligated to give CNB hereunder; (c) to receive,
open and dispose of all mail addressed to Borrower; (d) to notify the Post
Office authorities to change the address for delivery of mail addressed to
Borrower to such address as CNB shall designate; and (e) to do such other and
further acts and deeds in the name of Borrower which CNB may deem necessary or
desirable to enforce any Eligible Mortgage or other Collateral. The powers
granted CNB hereunder are solely to protect its interests in the Collateral and
shall not impose any duty upon CNB to exercise any such powers.
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9. EVENTS OF DEFAULT.
9.1 Events of Default. The following shall constitute Events of Default for
purposes of this Agreement:
9.1.1 Borrower shall fail to pay when due any installment of principal or
interest or any other payment payable hereunder;
9.1.2 Borrower shall fail to perform or observe any of the terms,
provisions, covenants, conditions, agreements or obligations contained in this
Agreement;
9.1.3 There shall occur the entry of an order for relief or the filing of
an involuntary petition with respect to Borrower or a Guarantor under the United
States Bankruptcy Code; there shall occur the appointment of a receiver,
trustee, custodian or liquidator of or for any part of the assets or property of
Borrower or a Guarantor; Borrower, or a Guarantor shall make a general
assignment for the benefit of creditors;
9.1.4 Any financial statement, representation or warranty made or furnished
by Borrower, or a Guarantor in connection with this Agreement should prove to be
in any material respect incorrect;
9.1.5 CNB's security interest in or lien on any portion of the Collateral
shall become impaired or otherwise unenforceable, unless such impairment does
not cause the Revolving Credit Loans to be in excess of the amount CNB has
agreed to lend under Section 2. 1;
9.1.6 Any person shall obtain an order or decree in any court of competent
jurisdiction enjoining or prohibiting Borrower or CNB or either of them from
performing this Agreement, and such proceedings shall not be dismissed or such
decree shall not be vacated within ten (10) days after the granting thereof;
9.1.7 Borrower shall neglect, fail or refuse to keep in full force and
effect any governmental permit or approval which is necessary to the operation
of its business;
9.1.8 All or substantially all of the property of Borrower, or a Guarantor
shall be condemned, seized or otherwise appropriated;
9.1.9 The occurrence of (a) a Reportable Event as defined in ERISA which
CNB determines in good faith constitutes grounds for the institution of
proceedings to terminate any pension plan by the PBGC, (b) an appointment of a
trustee to administer any pension plan of Borrower, or (c) any other event or
condition which might constitute grounds under ERISA for the involuntary
termination of any pension plan of Borrower, where such event set forth in (a),
(b) or (c) results in a significant monetary liability to Borrower;
9. 1. 10 Any general partner of Borrower, who is a Guarantor, resigns or
otherwise ceases to act as a general partner of Borrower;
9.1.11 Russell Burwell or Michael Burwell, no longer control one-hundred
percent (100%) of the stock of Redwood Mortgage Corp.; or
9.1.12 Any Guarantor shall have revoked his or its Guaranty or such
Guaranty shall have become otherwise unenforceable with respect to future
advances.
9.2 Notice of Default and Cure of Potential Events of Default. Except with
respect to the Events of Default specified in Paragraphs 9.1.3 or 9.1.5 above,
and subject to the provisions of Section 9.4, CNB shall give Borrower at least
ten (10) days' written notice of any event which constitutes or, with the lapse
of time would become an Event of Default, during which time Borrower shall be
entitled to cure same.
9.3 CNB's Remedies. Upon the occurrence of an Event of Default, at the sole
and exclusive option of CNB, and upon written notice to Borrower, CNB may (a)
declare the principal of and accrued interest on the Loans immediately due and
payable in full, whereupon the same shall immediately become due and payable;
(b) terminate this Agreement as to any future liability or obligation of CNB,
but without affecting CNB's rights and security interest in the Collateral and
without affecting the Obligations owing by Borrower to CNB; and/or (c) exercise
its rights and remedies hereunder and under the Guaranty or any security
agreement or deed of trust securing the Obligations, and in addition to the
rights and remedies given it by this Agreement, all of the rights and remedies
of a secured party under the Code and other applicable laws with respect to all
of the Collateral.
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9.4 Additional Remedies. Notwithstanding any other provision of this
Agreement, upon the occurrence of any event, action or inaction by Borrower, or
in the event any action or inaction is threatened which CNB reasonably believes
will materially affect the value of the Collateral, CNB may take such legal
actions as it deems reasonably necessary under the circumstances to protect the
Collateral, including but not limited to, seeking injunctive relief and the
appointment of a receiver, irrespective of whether an Event of Default or
Potential Event of Default has occurred under this Agreement.
10. MISCELLANEOUS.
10.1 Costs, Expenses and Attorneys' Fees. Borrower shall reimburse CNB for
all costs and expenses relating to the administration or documentation connected
with this Agreement, including, but not limited to, audits and collateral
examinations, operational reviews, reasonable attorneys' fees and expenses
(which counsel may be CNB employees), expended or incurred by CNB (including
CNB's in-house counsel) in collecting any sum which becomes due CNB under this
Agreement, the Guaranty or any other agreement delivered hereunder or in
connection herewith, irrespective of whether suit is filed, or in the
protection, perfection, preservation or enforcement of any and all rights of CNB
in connection with this Agreement, the Guaranty or any other agreements
delivered hereunder or in connection herewith, including, without limitation,
the fees and costs incurred in any out-of-court workout or a bankruptcy or
reorganization proceeding.
10.2 Dispute Resolution.
10.2.1 Mandatory Arbitration. At the request of CNB or Borrower, any
dispute, claim or controversy of any kind (whether in contract or tort,
statutory or common law, legal or equitable) now existing or hereafter arising
between CNB and Borrower and in any way arising out of, pertaining to or in
connection with: (1) this Agreement, and/or any renewals, extensions, or
amendments thereto; (2) any of the Loan Documents; (3) any violation of this
Agreement or the Loan Documents; (4) all past, present and future loans; (5) any
incidents, omissions, acts, practices or occurrences arising out of or related
to this Agreement or the Loan Documents causing injury to either party whereby
the other party or its agents, employees or representatives may be liable, in
whole or in part, or (6) any aspect of the present or future relationships of
the parties, will be resolved through final and binding arbitration conducted at
a location determined by the arbitrator in City and County of San Francisco,
California, and administered by the American Arbitration Association ("AAA") in
accordance with the California Arbitration Act (Title 9, California Code of
Civil Procedure Section 1280 et. seq.) and the then existing Commercial Rules of
the AAA. Judgment upon any award rendered by the arbitrator(s) may be entered in
any state or federal court having jurisdiction thereof.
10.2.2 Powers and Qualifications of Arbitrators. The arbitrator(s) will
give effect to statutes of limitation, waiver and estoppel and other affirmative
defenses in determining any claim. Any controversy concerning whether an issue
is arbitratable will be determined by the arbitrator(s). The laws of the State
of California will govern. The arbitration award may include equitable and
declaratory relief. All arbitrator(s) selected will be required to be a
practicing attorney or retired judge licensed to practice law in the State of
California and will be required to be experienced and knowledgeable in the
substantive laws applicable to the subject matter of the controversy or claim at
issue.
10.2.3 Discovery. The provisions of California Code of Civil Procedure
Section 1283.05 or its successor section(s) are incorporated herein and made a
part of this Agreement. Depositions may be taken and discovery may be obtained
in any arbitration under this Agreement in accordance with said section(s).
10.2.4 Miscellaneous. The arbitrator(s) will determine which is the
prevailing party and will include in the award that party's reasonable
attorneys' fees and costs (including allocated costs of in-house legal counsel).
Each party agrees to keep all controversies and claims and the arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the parties or by applicable law
or regulation.
10.3 Cumulative Rights and No Waiver. Each and every right and remedy
granted to CNB hereunder or under any other document delivered hereunder or in
connection herewith, shall be cumulative and no one such right or remedy shall
be exclusive of any other. No failure on the part of CNB to exercise, and no
delay in exercising, any right or remedy shall operate as a waiver thereof, nor
shall any single or partial exercise or waiver by CNB of any right or remedy
preclude any other or future exercise thereof or the exercise of any other right
or remedy.
10.4 Applicable Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted and construed in
accordance with the laws of the State of California and venue and jurisdiction
with respect hereto shall be with any court of competent jurisdiction located in
Los Angeles County, State of California.
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10.5 Lien and Right of Setoff. Borrower hereby grants to CNB a continuing
lien for all Obligations of Borrower to CNB upon any and all moneys, securities
and other property of Borrower and the proceeds thereof, now or hereafter held
or received by or in transit to CNB from or for Borrower, whether for
safekeeping, custody, pledge, transmission, collection or otherwise, and also
upon any and all deposits (general or special) and credits of Borrower with, and
any and all claims of Borrower against CNB at any time existing. Upon the
occurrence of any Event of Default, CNB is hereby authorized at any time and
from time to time, without notice to Borrower or any other person, to setoff,
appropriate and apply any or all items hereinabove referred to against all
Obligations of Borrower whether under this Agreement or otherwise, and whether
now existing or hereafter arising.
10.6 Notices. Any notice required or permitted to be given shall be given
in writing and shall be deemed to have been given when deposited in the United
States mail certified, return receipt requested, with first-class postage
prepaid and properly addressed. For the purposes hereof, the addresses of the
parties hereto shall, until further notice given as herein provided, be as
follows:
CNB: City National Bank
San Francisco Financial Center Commercial Banking Center
351 California Street
San Francisco, CA 94104
Attention: Roger Shelton, Senior Vice President
with a copy to: City National Bank
Legal Department
400 North Roxbury
Beverly Hills, California 90210-5021
Attention: General Counsel
Borrower: Redwood Mortgage Investors VIII
900 Veterans Blvd., Suite 500
Redwood City, CA 94063
Attention: Michael Burwell, General Partner
10.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
10.8 Indemnification. Borrower shall, at all times, defend and indemnify
and hold CNB (which for the purposes of this Section shall include the
shareholders, officers, directors, employees, representatives and agents of CNB)
harmless from and against any and all liabilities, claims, demands, causes of
action, losses, damages, expenses (including, without limitation, reasonable
attorneys' fees, [which attorneys may be employees of CNB, or may be outside
counsel]), costs, settlements, judgments or recoveries arising out of or
resulting from (a) any breach of the representations, warranties, agreements or
covenants made by Borrower herein; (b) any suit or proceeding of any kind or
nature whatsoever against CNB arising from or connected with the transactions
contemplated by this Agreement or any of the documents, instruments or
agreements to be executed pursuant hereto or any of the rights and properties
assigned to CNB hereunder; and/or (c) any suit or proceeding that CNB may deem
necessary or advisable to institute, in the name of CNB, Borrower or both,
against any other person, company or entity, for any reason whatsoever to
protect the rights of CNB hereunder or under any of the documents, instruments
or agreements executed or to be executed pursuant hereto, including attorneys'
fees and court costs and all other costs and expenses incurred by CNB (or
allocable to CNB's in-house counsel), all of which shall be charged to and paid
by Borrower and shall be secured by the Collateral. Any obligation or liability
of Borrower to CNB under this Section 10.8 shall not be imposed with respect to
any gross neglect or willful misconduct on the part of CNB and shall survive the
expiration or termination of this Agreement and the repayment of all Loans and
the payment or performance of all other Obligations of Borrower to CNB.
10.9 Assignments. The provisions of this Agreement are hereby made
applicable to and shall inure to the benefit of CNB's successors and assigns and
Borrower's successors and assigns; provided, however, that Borrower may not
assign or transfer its rights or Obligations under this Agreement without the
prior written consent of CNB.
10.10 Headings. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of the Agreement for any purpose or be given any substantive effect.
10. 11 Definitional Provisions. Any of the terms defined in this Agreement
may, unless the context otherwise requires, be used in the singular or the
plural depending on the reference.
10.12 Accounting Terms. All accounting terms not specifically defined in
this Agreement shall be construed in conformity with, and all financial data
required to be submitted by this Agreement shall be prepared in conformity with,
generally accepted accounting principles applied on a consistent basis, as in
effect on the date hereof, except as otherwise specifically prescribed herein.
343
10.13 Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction, shall be, only as to such jurisdiction,
ineffective to the extent of such prohibition or unenforceability, but all the
remaining provisions of this Agreement shall remain valid.
10.14 Complete Agreement. This written Agreement, is intended by CNB and
Borrower as a final expression of their agreement and is intended as a complete
statement of the terms and conditions of their agreement.
IN WITNESS WHEREOF, CNB and Borrower have caused this Agreement to be
executed on the date and year first written at the head of this Agreement.
"Borrower" Redwood Mortgage Investors VIII,
a California limited partnership
By: /s/ Michael R. Burwell
--------------------------
Michael R. Burwell, General Partner
"CNB" City National Bank, a national
banking association
By: /s/ Roger Shelton
---------------------
Roger Shelton, Senior Vice President
344
FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This First Amendment to Credit and Security Agreement is entered into as of
December 29, 2000 by and between Redwood Mortgage Investors VIII, a California
limited partnership ("Borrower") and City National Bank, a national banking
association ("CNB").
RECITALS
A. Borrower and CNB are parties to that certain Credit and Security
Agreement, dated as of June 27, 2000 (the "Credit Agreement").
B. Borrower and CNB desire to supplement and amend the Credit Agreement as
hereinafter set forth.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms used in this Amendment without definition
shall have the meanings set forth in the Credit Agreement.
2. Amendments. The Credit Agreement is amended as follows:
2.1 Section 1.2 of the Credit Agreement is stricken and replaced with the
following:
"1.2 `Borrowing Base' shall mean:
1.2.1 For Wholly-Owned Eligible Mortgage, fifty percent (50%) of the net
principal amount owed by the Mortgage Debtor on the Eligible Mortgage; plus
1.2.2 For Fractional Eligible Mortgage, Borrower's interest in the
Fractional Eligible Mortgage times twenty five percent (25%) of the net
principal amount owed by the Mortgage Debtor on the Eligible Mortgage.
Provided, however, no Eligible Mortgage as to which has occurred a Loss of
Collateral Value shall be included within the Borrowing Base.
In no event shall (i) the portion of the Borrowing Base composed of
Fractional Eligible Mortgages exceed twenty five percent (25%) of the portion of
the Borrowing Base composed of Wholly-Owned Eligible Mortgages, or (ii) the
Borrowing Base exceed the lesser of (x) thirty-three percent (33%) of Partner's
Capital or (y) the Revolving Credit Commitment."
2.2 Section 1.15 is stricken and replaced with the following:
"1.15 `Guarantors' shall mean Redwood Mortgage Corp., Gymno Corporation and
Michael Burwell. Only a Guarantor shall have personal liability hereunder
irrespective of any Persons status as a general partner of Borrower."
2.3 Section 1.27 is stricken and replaced with the following:
"1.27 `Revolving Credit Commitment' shall mean, CNB's commitment, in
accordance with the terms of this Agreement, to make Revolving Credit Loans in
the aggregate principal amount at any one time of up to Twenty Million Dollars
($20,000,000.00)."
2.4 Section 6.13.1 is stricken and replaced with the following;
"6.13.1 Minimum. Partner's Capital of at least $51,000,000.00 until June
29, 2001 and $60,000,000.00 thereafter;"
3. Existing Agreement. Except as expressly amended herein, the Credit
Agreement shall remain in full force and effect, and in all other respects is
affirmed.
345
4. Conditions Precedent. This Amendment shall become effective upon the
fulfillment of all of the following conditions to CNB's satisfaction:
4.1 CNB shall have received this Amendment duly executed by Borrower; and
4.2 CNB shall have received a separate Continuing Guaranty executed by each
of the Guarantors guarantying repayment of all Obligations of Borrower to CNB.
5. Counterparts. This Amendment may be executed in any number of
counterparts, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
6. Governing Law. This Amendment and the rights and obligations of the
parties hereto shall be construed in accordance with, and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
"Borrower" Redwood Mortgage Investors VIII, a
California limited partnership
By: /s/ Michael R. Burwell
-------------------------------
Michael R. Burwell, General Partner
"CNB" City National Bank, a national
banking association
By: /s/ Roger Shelton
--------------------------------
Roger Shelton, Senior Vice President
346
SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Second Amendment to Credit and Security Agreement is entered into as
of July 2, 2002, by and between Redwood Mortgage Investors VIII, a California
limited partnership ("Borrower") and City National Bank, a national banking
association ("CNB").
RECITALS
A. Borrower and CNB are parties to that certain Credit and Security
Agreement, dated as of June 27, 2000, as amended by that certain First Amendment
to Credit and Security Agreement dated as of December 29, 2000 (collectively,
the "Credit Agreement").
B. Borrower and CNB desire to supplement and amend the Credit Agreement as
hereinafter set forth.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms used in this Amendment without definition
shall have the meanings set forth in the Credit Agreement.
2. Amendments. The Credit Agreement is amended as follows:
2.1 Section 1.8 of the Credit Agreement is stricken and replaced with the
following:
"1.8 "Commitment Fee" shall be $25,000.00.
2.2 Section 1.15 is stricken and replaced with the following:
"1.15 "Guarantors" shall mean Redwood Mortgage Corp., and Michael Burwell.
Only a Guarantor shall have personal liability hereunder irrespective of any
Persons status as a general partner of Borrower."
2.3 Section 1.30 is stricken and replaced with the following:
"Termination Date" shall mean July 10, 2004, unless the Revolving Credit
Commitment shall have been renewed for an additional term by CNB giving Borrower
prior written notice of such renewal, in which event the Termination Date shall
mean such renewed maturity date of the Revolving Credit Commitment, as set forth
in the notice. Notwithstanding the foregoing, CNB may, at its option, terminate
this Agreement pursuant to Section 9.3 hereof; the date of any termination under
Section 9.3 shall thereupon become the Termination Date as that term is used in
this Agreement.
2.4 Section 2.1.1 is stricken and replaced with the following:
Interest on Revolving Credit Loans. The Revolving Credit Loans shall bear
interest on the principal amount thereof from time to time outstanding until
repaid at an annual fluctuating rate equal to the Prime Rate, from time to time
in effect, per annum. Interest on the Revolving Credit Loans shall be payable
monthly in arrears on the last day of each month, and on the date such Revolving
Credit Loans are paid in full.
347
2.5 Section 2.1.2.1 is amended by adding the following:
"2.1.2.1.5 Copy of the appraisal page reporting the appraised value of the
Property, and
"2.1.2.1.6 Copy of the page of the title insurance policy issued with
respect to the Eligible Mortgage showing the encumbrance on the Property created
by the Eligible Mortgage."
2.6 Section 2.1.2.2 is amended by adding the following:
"2.1.2.2.5 Copy of the appraisal page reporting the appraised value of the
Property, and
"2.1.2.2.6 Copy of the page of the title insurance policy issued with
respect to the Eligible Mortgage showing the encumbrance on the Property created
by the Eligible Mortgage."
2.7 Section 6.13.1 is stricken and replaced with the following:
"6.13.1 Minimum Partner's Capital of at least $75,000,000.00;
2.8 Section 10.6 is amended by designating CNB's address as following:
CNB: City National Bank
San Francisco Financial Center CBC
150 California Street, Thirteenth Floor
San Francisco, CA 94111
Attention: Roger Shelton, Senior Vice President
3. Existing Agreement. Except as expressly amended herein, the Credit
Agreement shall remain in full force and effect, and in all other respects is
affirmed.
4. Conditions Precedent. This Amendment shall become effective upon the
fulfillment of all of the following conditions to CNB's satisfaction:
4.1 CNB shall have received this Amendment duly executed by Borrower; and
4.2 CNB shall have received a separate consent to this amendment executed
by each of the Guarantors.
5. Counterparts. This Amendment may be executed in any number of
counterparts, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
348
6. Governing Law. This Amendment and the rights and obligations of the
parties hereto shall be construed in accordance with, and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
"Borrower" Redwood Mortgage Investors VIII, a
California limited partnership
By: /s/ Michael R. Burwell
------------------------------------
Michael R. Burwell, General Partner
"CNB" City National Bank, a national
banking association
By: /s/ Roger Shelton
-------------------------------------
Roger Shelton, Senior Vice President
CONSENT OF GUARANTORS:
The undersigned have previously guaranteed the indebtedness of Redwood
Mortgage Investors VIII, a California limited partnership, owed to CNB. The
undersigned confirm that their respective guaranties and the security given in
connection therewith, if any, will continue in full force and effect and that
each such guaranty will be a separate and distinct obligation and apply to the
indebtedness arising from the Loan Agreement, as amended herein, subject to the
overall limitation as to the amount guaranteed.
By: /s/ Michael R. Burwell
- --------------------------------------
Michael R. Burwell
Redwood Mortgage Corp., a California corporation
By: /s/ Michael R. Burwell
- ---------------------------------------
Michael R. Burwell, President
349
Exhibit 23.1
CONSENT OF COUNSEL
TO REDWOOD MORTGAGE INVESTORS VIII
We hereby consent to the use in the Registration Statement on Form S-11,
and any amendments or supplements of our form of opinions in respect to certain
tax and ERISA matters and legality as to the issuance of securities, and to any
reference to our firm included in or made part of the Registration Statement. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required under the Securities Act of 1933, as amended,
or the Rules and Regulations promulgated thereunder.
/s/Cox Castle & Nicholson LLP
- -----------------------------
Cox Castle & Nicholson LLP
San Francisco, California
April 21, 2004
350
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO REDWOOD MORTGAGE INVESTORS VIII
We hereby consent to the use of our reports accompanying the balance sheet
of the general partner, Gymno Corporation, the balance sheet of the general
partner Redwood Mortgage Corp., and the financial statements of the partnership,
Redwood Mortgage Investors VIII, in the prospectus, and any supplements thereto,
and in the Registration Statement filed on Form S-11 for Redwood Mortgage
Investors VIII. We also consent to the reference to our firm under the reference
"experts" in the prospectus and Registration Statement.
/s/ Armanino McKenna, LLP
- --------------------------------
Armanino McKenna, LLP
San Ramon, CA
April 21, 2004
351
Exhibit 99.1
Table VI
Description of Open Loans of Prior Limited Partnerships
(unaudited)
Three Year Summary of Loans Originated by Prior Limited Partnerships.
During the three-year period ending December 31, 2002, loans were made by prior
programs with investment objectives similar to those of the partnership. The
following table provides a summary of the loans originated for the three-year
period as of December 31, 2002. The last column of the following chart reflects
total outstanding loan balances on all loans for each prior program including
those which originated prior to the three (3) year period ending December 31,
2002.
- ----------------------------------------------------------------------------------------------------------------------------
Name of partnership Number of Estimated Total Amount of Outstanding Loan Balances Total Outstanding Loans
Loans Loans Made 01/01/00 to Originated 01/01/00 as of 12/31/02
12/31/02 to 12/31/02
- ----------------------------------------------------------------------------------------------------------------------------
CMI 13 $1,645,942.87 $861,471.10 $1,180,343.82
- ----------------------------------------------------------------------------------------------------------------------------
RMI 10 $919,631.39 $709,910.61 $714,572.56
- ----------------------------------------------------------------------------------------------------------------------------
RMI II 6 $575,214.97 $310,461.22 $347,354.77
- ----------------------------------------------------------------------------------------------------------------------------
RMI III 27 $3,114,596.38 $1,038,379.17 $1,221,191.54
- ----------------------------------------------------------------------------------------------------------------------------
RMI IV 18 $5,604,065.66 $3,245,097.99 $5,016,578.96
- ----------------------------------------------------------------------------------------------------------------------------
RMI V 18 $2,793,554.65 $951,155.63 $1,722,579.92
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 92 $14,653,005.92 $7,116,475.72 $10,202,621.57
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Name of partnership Number of Estimated Total Amount of Outstanding Loan Balances Total Outstanding Loans
Loans Loans Made 01/01/00 to Originated 01/01/00 as of 12/31/02
12/31/02 to 12/31/02
- ----------------------------------------------------------------------------------------------------------------------------
RMI VI 31 $8,129,727.32 $4,570,719.32 $5,183,097.81
- ----------------------------------------------------------------------------------------------------------------------------
RMI VII 33 $13,014,476.69 $4,088,712.90 $6,423,983.60
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 64 $21,144,204.01 $8,659,432.22 $11,607,081.41
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Name of partnership Number of Estimated Total Amount of Outstanding Loan Balances Total Outstanding Loans
Loans Loans Made 01/01/00 to Originated 01/01/00 as of 12/31/02
12/31/02 to 12/31/02
- ----------------------------------------------------------------------------------------------------------------------------
RMI VIII 102 $141,569,404.15 $71,481,739.16 $83,650,455.19
- ----------------------------------------------------------------------------------------------------------------------------
352
A further breakdown of these loans according to the type of deed of trust,
the location of the property securing the loans, and the type of property
securing the loan is provided below:
For Prior Private Partnerships:
Loans
First Trust Deeds $10,035,012.69
Second Trust Deeds $4,176,529.82
Third Trust Deeds $441,463.41
------------------
Total $14,653,005.92
==================
Location of Loans
San Francisco County $3,343,160.87
Alameda County $3,272,692.90
Santa Clara County $3,003,886.02
San Mateo County $2,873,875.00
Stanislaus County $891,311.90
Contra Costa County $699,079.23
Tuolomne County $209,000.00
Marin County $210,000.00
San Joaquin County $150,000.00
Total $14,653,005.92
==================
Type of Property
Owner Occupied Homes $3,227,250.00
Non-Owner Occupied $2,361,661.05
Commercial $7,439,370.58
Land $91,463.41
Apartments $1,533,260.88
------------------
Total $14,653,005.92
==================
353
A further breakdown of these loans according to the type of deed of trust,
the location of the property securing the loans, and the type of property
securing the loan is provided below:
For Prior Public Partnerships:
Loans
First Trust Deeds $14,441,619.34
Second Trust Deeds $5,620,642.41
Third Trust Deeds $1,081,942.26
------------------
Total $21,144,204.01
==================
Location of Loans
San Francisco County $6,812,573.70
Santa Clara County $5,241,356.25
Alameda County $2,941,987.09
San Mateo County $2,316,575.00
Contra Costa County $1,362,500.00
Stanislaus County $989,896.52
Los Angeles County $375,000.00
Placer County $323,065.45
Marin County $300,000.00
San Joaquin County $176,250.00
Tuolomne County $170,000.00
Sacramento County $135,000.00
Total $21,144,204.01
==================
Type of Property
Owner Occupied Homes $3,706,450.00
Non-Owner Occupied $6,341,525.49
Commercial $9,590,551.69
Land $979,426.83
Apartments $526,250.00
------------------
Total $21,144,204.01
==================
354
A further breakdown of these loans according to the type of deed of trust,
the location of the property securing the loans, and the type of property
securing the loan is provided below:
For Redwood Mortgage Investors VIII
Loans (1)
First Trust Deeds $78,141,904.33
Second Trust Deeds $56,048,405.49
Third Trust Deeds $7,379,094.33
------------------
Total $141,569,404.15
==================
Location of Loans
San Francisco County $43,517,432.88
Santa Clara County $29,881,213.35
San Mateo County $28,247,075.42
Alameda County $12,671,320.01
Napa County $8,160,500.00
Los Angeles County $5,345,000.00
Contra Costa County $4,150,000.00
Marin County $3,733,500.00
Riverside County $1,500,000.00
Stanislaus County $1,292,427.94
El Dorado County $900,000.00
Placer County $760,934.55
Lake County $708,000.00
San Diego County $270,000.00
Sonoma County $250,000.00
Merced County $182,000.00
Total $141,569,404.15
==================
Type of Property
Owner Occupied Homes $23,702,313.50
Non-Owner Occupied $55,284,747.54
Commercial $55,059,733.35
Land $4,982,609.76
Apartments $2,540,000.00
------------------
Total $141,569,404.15
==================
(1) These amounts include loans made by the partnership in its prior
offerings aggregating $125,000,000
355